Most folks around the world understand the concept of saving more; you can only increase savings when you either increase income or decrease spending. However if instead of investing, what if one were to put the money into savings? Where should they put it? That’s what I’d like to explore.
When considering where to put your savings there are two main factors: Risk of Inflation, and Risk of the Need for Capital.
Risk of Inflation:
When you put money into savings there’s not really a real risk of losing your money to a drop in the stock market. That’s a good thing. But the risky part is that with slower interest and growth on your money, you’ll have a harder time keeping up with inflation. Often the savings interest won’t even be enough to cover the different.
Therefore with saving there is always a risk your purchasing power can do down.
Risk of the Need for Capital:
What if you put money in a CD (Certificate of Deposit) and find out a few days later that you need the money for an emergency?
First, at least some of your money should have been in a liquid asset for emergencies. But secondly, if you have to take the money out, a CD will usually penalize you. So you should always be aware of the chance you’ll need the money and what you’ll do if you do.
With those to risks in mind, the need for capital and inflation, let’s explore the options for saving:
Conventional Saving Accounts
These usually command the lowest interest rates because of the relative liquidity of funds.
Online Savings Accounts
These are online accounts that you set up in which you usually receive higher rates of interest because there isn’t any brick and mortar building to maintain.
Certificates of Deposit
These are the best for funds you’re sure you won’t need for a short period of time. For example if you know you’re going to purchase a car in 3.5 months, then maybe taking out a 3 month certificate of deposit isn’t a bad idea if it gives you are larger return of interest.
Conclusion:
Decide your reason for saving and how much liquidity you’ll need. If you can stomach tying up your money for months or even a year at a time, maybe a T-Bill or CD is worth it. Otherwise, consider a regular bank account or Money Market.