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  CDs and Investing Basics   Chapter 1: Building liquid savings
Why pay penalties to use your own money? Keep some liquid and even earn interest at the same time.
 
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Savings accounts

 

The most basic way to save money is in a savings account at your bank. Savings accounts come in two flavors, passbook and statement. You don't usually get to pick; most banks carry one or the other.

Passbook vs. statement savings account
With a passbook account you're given a booklet to enter deposits, withdrawals and interest. With a statement savings account you simply receive a statement, usually once a month, detailing transactions. These "deposit" accounts are insured up to $100,000 by the Federal Deposit Insurance Corporation (FDIC) or the National Credit Union Share Insurance Fund (NCUSIF) at a credit union.

At a glance
Savings accounts are liquid, meaning you can get your money out at any time. Federal regulations limit you to six electronic, telephone or preauthorized transfers per month and no more than three of them can be by check, draft or debit card. But, generally, you can make unlimited withdrawals by teller or ATM. There's always a caveat -- some banks allow only three free withdrawals per month unless you carry a high balance, i.e. $2500 or more. Be sure you understand the bank's policies before opening an account.

The minimum balance required to open a savings account is usually quite low, sometimes just $1 or $5, but don't let that fool you. Many institutions require a minimum balance of $100, $300 or more to avoid paying a monthly maintenance fee. Those fees can be stiff, $5 or even $10 a month, and will erode your money quickly.

The interest earned on a savings account is where you can make a big difference to the bottom line. Most traditional banks pay very little interest on savings accounts, a quarter of a percent is common. You can do much better by using one of the high-yield savings or money market accounts that, typically, are found online. High-yield money market accounts allow you to write checks, while high-yield savings accounts don't have that feature. However, some high-yield savings accounts let you link to your checking account to make deposits and withdrawals easier.

Opening an account online is easy but it may not be the way to go for everyone. Some people aren't comfortable putting confidential information online, some want a local branch that they can walk into and talk with someone face-to-face if there's a problem with their account. But it may be worth getting past some of the qualms if you have, or plan to build, a significant savings account.

Savings account

A savings account can be a great place to build and keep your emergency fund. Everyone should have enough cash on hand to see them through three to six months of unemployment. An emergency fund can also be used to see you through a true emergency: Getting your only car running again is an emergency, replacing a broken television is not.

-- Posted: May 1, 2006
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