|
 Conventional
wisdom suggests that we keep three to six months salary in
reserve for living expenses in the event of sudden job loss,
unexpected illness or other emergency.
This by no means suggests
that we should park our nest egg in a conventional, low-interest-bearing
savings account, however. More and more, consumers are breaking
out their savings into separate functional funds in order
to optimize their interest income while still providing peace
of mind.
In broad terms, here's how to do it:
Begin by estimating your monthly living
expenses. Next, depending on your resources and financial
stability, estimate how much you will need to weather an unexpected
financial setback. This is the peace-of-mind amount you want
to have in savings at all times.
Using that figure, decide what portion
of it you would like to have immediately available, no strings
attached. That amount might best go into a passbook or statement
savings account, again depending on your situation. Remember,
you want complete liquidity on this part of your savings.
Profitable
savings
The remainder may be more profitably saved in several ways.
You may want to put it into a money market account if the
sum meets minimum balance requirements and you want some access
to this money. You may want to put half in an MMA and the
rest in CDs, which will earn significantly higher interest,
if liquidity is not an issue. Or you may purchase several
relatively short-term CDs at weekly or monthly intervals so
that each matures on a scheduled basis, providing access to
those funds at a comfortable interval.
Regardless of which savings method or
methods you choose, start by discussing your savings needs
with your banker. Your total dollar investment in the bank
can open doors to a package of services that is right for
you.
The table below breaks
down the variety of savings vehicles you might want to consider.
| Comparing
savings vehicles |
|
Type of account
(features)
|
Advantages
|
Disadvantages
|
| Passbook
account -- Small ledger book is fed into a printer,
recording each transaction. |
- Bookkeeping is automatic. No need to remember or
justify transactions
- No or low minimum balance required.
- Money is readily available.
|
- Banking may be limited to branch transactions during
banking hours.
- Passbooks can be lost or stolen.
- Interest rates are low compared to other programs.
|
| Statement
account -- Customers receive by mail monthly or quarterly
statements detailing deposits, withdrawals and other account
information.
|
- No passbook needed; withdrawals normally only require
driver's license or other ID.
- Low or no minimum balance required.
- Accounts often offer ATM cards, making after-hours
banking possible.
|
- Customer must do some record keeping to know current
balance.
- Interest rates are only slightly better than passbook
accounts.
|
| Money market
account, including high-yield MMAs -- A liquid, FDIC-insured
account that offers higher interest than traditional savings
accounts but limits account activity |
- Best of both worlds: higher interest with continued
liquidity.
- Flexibility: banks often package MMAs with checking
accounts and CDs, resulting in lower initial deposits
and/or additional features such as free checking.
- Tiered MMAs provide higher interest earnings at
higher levels of deposit.
|
- Requires higher initial deposits and minimum balances
to avoid fees.
- Restricts withdrawals/transfers to six monthly,
three of which may be checks.
|
| Money Market
Mutual Fund -- Rates higher than traditional savings
and even higher than high-yield MMAs. |
- Fully liquid.
- Competitive rates
- Check writing and other privileges that come with
a traditional MMA.
|
- Not FDIC-insured.
- Rate is not fixed (but is traditionally consistent).
|
| Certificate
of deposit -- A non-liquid, FDIC-insured time deposit |
|
|
-- Posted: Oct. 29, 1999
|
