Alright, last week we talked about side hustles to help cushion our income! So today I thought we could discuss what to do with that extra money. Because I’m sure the thought has crossed your mind. Should you celebrate and spend it all? Or put it in a savings account? Try paying off your debts? Start investing? My answer is quite simple actually. No to the first question. Yes to all of those other things.
But the real question is this. Which one should you do first? Now, Dave Ramsey’s worshippers will tell you to build an emergency fund. And that is totally fine! But is it always the first thing you should do? No. Sometimes you have a more pressing debt to handle. Maybe you’ve fallen behind on a payment. Or the interest rate is so high, you can’t seem to get ahead. By all means, worry about that first!
As long as you form a solid plan and stick to it, then I support it. If you need to pay that credit card down before you build savings, then go for it. This is your financial journey after all. Just make a plan that you can work at every day. You can also use my free financial planner to help you get started! But once your finances become more stable, you’ll need to work on increasing your savings account.
When You Say Savings Account...
It is totally fine to use your checking account to save money. But I highly recommend looking into savings accounts. Although, that’s only if you want to seriously put back some cash. Mainly because having all of your money in one account can be overwhelming. There are going to be way too many transactions happening in one place. So you won’t be able to keep track of it all. It’s like having all of your school notes in a binder with no tabs. My anxiety could never. So you’ll need to pick which savings account is right for you and utilize it!
Which Savings Account Should I Pick?
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There are a few options out there, so we need to break them down! But first I want to discuss the difference between a bank and credit union. Because there are differences that you need to consider.
Banks vs Credit Unions Savings Accounts
Many people will start the argument by stating that typically banks are for profit and credit unions are not for profit. While that is accurate, I think it has implications. By that, I mean people tend to believe not-for-profit businesses make no profit. But that is not the case at all. A business must make a profit in order to stay in business. So what does not-for-profit mean? Simply put: a nonprofit organization must donate a portion of their profit to charity. Along with following a few other rules. In doing so, they are able to maintain a tax-exempt status with the IRS. And I don’t say this to sway you from using credit unions. I just don’t want anyone to be surprised that the CEO of some nonprofit organization lives in a mansion.
So What Are The Differences?
- Account holders are customers
- They usually have higher fees
- Interest rates are usually lower for savings accounts
- Tend to have higher interest rates on loans
- Usually have more service options
- Typically have better technology for mobile users
- Customer service is generally worse
- Usually have more branches and ATMs available
- Account holders are members
- Tend to have lower fees
- Have higher interest rates on savings accounts
- Tend to have lower interest rates on loans
- Usually have less service options
- Less advanced technology for mobile users
- Customer service is typically better
- Usually have less branches and ATMs available
Both banks and credit unions insure your money up to $250,000. But banks tend to be more convenient. And credit unions tend to save you more money over time.
As for me, I personally use a bank for my checking accounts and savings accounts that I use regularly. For example, we put back a small amount for our emergency fund. And we like to save for things like vacations. That way, they’re more readily available in a pinch. But we have a savings account at a credit union for our daughter to get when she’s 18. We never allow ourselves to withdraw money from it, so inconvenience is not an issue.
Traditional Savings Account
In a traditional savings account, the funds are more readily available. And usually without having to pay fees to withdraw your money. Unfortunately, they offer lower interest rates than other savings accounts. Essentially, traditional savings accounts are typically better for smaller savings. Particularly one you might need access to quickly. Such as an emergency fund.
Certificates of Deposit
A certificate of deposit is a savings account you deposit a fixed amount of money into for a specific period of time. The account will accrue a fixed or variable rate of interest over that term length. When the term is over, you can withdraw your money, plus the interest earned. The term lengths can vary, but tend to start at 6 months. Unfortunately, if you need to withdraw your money early, you have to pay a fee. These accounts are great to do once you already have an emergency fund saved in a traditional savings account.
High-Yield Savings Accounts
A high-yield savings account is one that earns a significantly higher interest rate than traditional savings accounts. Usually only online banks offer high-yield savings accounts due to competition. Unfortunately, these interest rates are variable rates. So they are subject to change over time. But you could still earn way more than with a traditional savings account. These accounts usually require a minimum balance and you may have to pay monthly or annual fees. But you can withdraw your money as needed. These types of savings accounts are great when you’re saving for a vehicle or a down payment on a house.
Money Market Accounts
A money market account is a savings account that also offers the same features a checking account has. This could include a debit card and/or a checkbook. These accounts usually have higher interest rates than traditional savings accounts. But they also have higher minimum balance requirements. While your money is readily available, you are only allowed a certain amount of transactions each month. This could be great if you want a slightly higher interest rate with limits to how many transactions you can do. That could help prevent you from depleting your savings while still having access for emergencies.
Speciality Savings Accounts
Now, I’m lumping all these together. Mainly because they usually have the same features. They just have different names. These types of accounts could include: vacation savings, holiday savings, wedding savings, or even student savings accounts. They all involve having a certain goal. You must select a specific term length for the account. For example, one year. In exchange, you earn a higher interest rate than a traditional savings account over that time. Much like with certificates of deposits. Unfortunately, if you withdraw your money before the term is up, you may not receive the higher interest rate. Or you may be required to pay fees. These types of accounts are great if you struggle to save money, but have an upcoming goal.
Now that we’ve covered the different types of savings accounts, which one would you choose? Would you prefer a bank or credit union? Let us know by commenting below!