Savings accounts and CDs can both help you reach your financial goals
After paying for all your monthly and day-to-day expenses, finding funds to save for the future or a “rainy day” can seem impossible. But having some money in savings is essential. A nest egg is necessary for building up a cash reserve to pay for large expenses, for example, a down payment on a house, a vacation, or an expensive – and unexpected– car repair.
Savings accounts and CDs are two common types of savings products that you can use to establish and grow your nest egg and help you reach your financial goals.
What is a savings account?
A savings account is a bank account where you can store your money until you need it. Your money is federally insured so it stays safe, plus you’ll earn some interest on your balance, so your money will grow while it is not being used.
A savings account offers liquidity, meaning you can access and withdraw your funds quickly if you need to. Keep in mind, however, that while savings accounts give you access to your money, they are not as liquid as checking accounts. With checking accounts, you can make unlimited transactions per month. Savings accounts are mandated by federal law to limit certain types of withdrawals and money transfers to six per statement cycle. While a checking account is necessary for your day-to-day and monthly expenses, a savings account can help ensure that you have some money reserved especially for large forthcoming expenses or emergencies.
You can deposit money into your savings account at any time. One of the simplest ways to grow your savings is through an automatic savings plan. With an automatic savings plan, an amount of money that you specify is automatically transferred from your checking account to a savings account on a regular basis (weekly, bi-weekly, monthly, etc.). Read more about how automatic savings plans work.
Having a savings account is important, but it is not the only type of savings product you should consider. Depending on your financial goals, a CD can be a good complement to a savings account.
What is a CD?
A CD, also known as a certificate of deposit or a time deposit, is a type of savings product that has an interest rate that is typically higher than a savings account. When you open a CD, you are agreeing to keep your money in the account for a specified amount of time, known as the “term.” Terms can vary but the most common fall between three months and five years. The longer-term CDs generally offer higher interest rates. Unlike a savings account, the interest rate is fixed so you will know exactly how much you will be earning. Savings accounts have variable interest rates meaning the rate can change at any time.
Once you choose your CD term, your money will be unable to be accessed without a penalty fee until the term is over (its maturity date). Penalty fees vary by financial institution but are usually equal to a few month’s interest.
A CD is a good choice if you have some money saved up and you know you won’t need access to it for a while. You’ll earn more interest than you would with a savings account and will be less tempted to spend the money. Your CD deposit is FDIC-insured and you are guaranteed a return. While a CD is a great option for stashing away funds for a down payment on a car or home or other long-term goal, it is not the best place to keep your emergency fund. In an emergency you will need quick access to your money.
Having both a savings account and a CD (or multiple CDs) can be a good savings strategy. Save money for your short-term goals in a savings account and keep adding to your account through an automated savings plan. Put money away for your long-term objectives in a CD that offers a high interest rate.
At Omni Financial, we understand that it can be difficult to save money when there are so many financial obligations to manage. If you are in a bind, we can provide you with funds when you need it most. Contact us anytime you need a financial helping hand.
The information provided in this blog post is for informational purposes only. It should not be considered legal or financial advice. You should consult with a financial professional to determine what may be best for your individual needs.
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