The shifting roles of savings accounts
Savings accounts have traditionally provided an excellent source of both security and income. With saving account interest rates near zero, the income-producing role of those accounts has become outmoded -- at least for the time being. However, given the absolute security of FDIC-insured savings accounts, they can still play several roles in your financial mix.
Here are five useful roles savings accounts can still play, even in today's low-interest-rate environment:
1. A starting point for savings
At the beginning of your career, the most important decision you can make about retirement saving is simply to start saving. There will be other decisions to make later, involving what targets to set and how to invest. However, the risk is that if you try to start with a comprehensive plan, it is too easy to get bogged down in all the decisions involved and put off starting to save. There is a tremendous amount of power in starting retirement saving early, and beginning with an ordinary savings account may be the simplest way of getting started.
2. Your financial distribution center
People tend to have their paychecks directly deposited into a checking account, but consider a savings account instead. Having your pay go into a checking account makes it easy to access, but not all of your income should be made available for spending. Having wages deposited into a savings account gives you a better base from which you can transfer a budgeted amount into checking, but also designate some money for investment and leave some reserve in savings.
3. The emergency fundAn emergency fund is supposed to meet unexpected needs, so a savings account is a good choice for this purpose. An alternative would be a CD, if you can find one with a low penalty for early withdrawal -- earning higher CD rates in the meantime can more than make up for a reasonable penalty. The typical stint of unemployment these days is about four months, so try building up a minimum of four months' worth of essential expenses in your emergency fund, and more if you can manage it.
4. A volatility bufferAs you build up your nest egg, the bulk of your assets should be in growth investments until you are close to retirement. However, there is always a need for some buffer against volatility, and with an FDIC guarantee behind them, savings accounts are as safe as it gets.
5. A liquidity sourceWhen you reach retirement and start drawing from your retirement savings, you should start investing more conservatively, but not completely unwind your growth investments. So that you do not disrupt growth investments at the wrong time, it is good to have a liquidity pool in a savings account from which you can make your regular withdrawals.
Select the service that is right for you!COMPARE ALL SERVICES
- $2.5+ million portfolio
- Large-cap and dividend focus
- Intraday trade alerts from Cramer
- Weekly roundups
Access the tool that DOMINATES the Russell 2000 and the S&P 500.
- Buy, hold, or sell recommendations for over 4,300 stocks
- Unlimited research reports on your favorite stocks
- A custom stock screener
- Upgrade/downgrade alerts
- Diversified model portfolio of dividend stocks
- Alerts when market news affect the portfolio
- Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
- Real Money + Doug Kass Plus 15 more Wall Street Pros
- Intraday commentary & news
- Ultra-actionable trading ideas
- 100+ monthly options trading ideas
- Actionable options commentary & news
- Real-time trading community
- Options TV