Successful Saving and Investing (2000)
A fact sheet explaining the differences between various types of savings accounts, how to open a savings account and what the basics of investing are.
Successful Saving
Savings accounts are designed to keep your money safe and to help it grow. When you deposit your money in a savings account, the bank pays you interest.
Interest is the cost of using money; your bank pays you when you leave your money on deposit. Interest is usually expressed as an annual percentage rate (APR)—the amount your money would earn if left on deposit for one year. Currently (2000), most banks pay 1%-3% interest on savings accounts. If you have $1,000 on deposit for a year, it would earn $10-$30.
Money in your bank account is safe from fire, loss or theft. Each account is insured by the federal government for up to $100,000. When you have a bank account, you don’t have to carry large amounts of cash around. You can make deposits into your account, and withdraw money when you need it.
Many financial planners say that money for short term goals should be kept in a savings account, where there is little risk of losing the money and where it is easily available when you need it.
After your savings start to grow, you may want to invest some of the money for long-term goals in a money market account, stocks, bonds or mutual funds. Such goals might include college for yourself or your children, a car, a home, a vacation or extra cash for holiday gifts.
Everyone should have a “nest egg” set aside for emergencies or achieving goals. However, if you are on public assistance, there may be limits to how much you are allowed to have in savings. For example, some programs set a limit of several thousand dollars on all your cash “assets” such as savings, stocks and bonds and life insurance. Before you start a savings program, check with your benefits counselor.
Opening a Savings Account
Most banks require two pieces of ID, one with a picture on it. You will usually need a Social Security number to open a bank account. If you are in the United States temporarily, you may obtain a non-work Social Security number from the Social Security Administration, a U.S. government agency. To find your closest Social Security office, look in the U.S. government section at the front of your white pages phone directory.
You must have some money to open an account. Some banks require only $1 to open an account—others ask for $50, $100 or $500. You may use cash or a check to open an account.
When you have chosen the financial institution, visit a branch so that you can sit down with a bank officer and open your account. At this point, the bank may verify your banking history with an account screening company, such as ChexSystems. If you’ve ever had a problem with an account, such as closing your checking account without enough money to cover all outstanding checks, you may be denied an account. (Such information is kept on file for five years.) If you are told you cannot open an account because of the information, you have rights. If you believe the information that the denial is based on is incorrect, ask the bank officer how to contact the account screening company. If the company has incorrect information on file about you, you have a right to dispute it.
If one bank won’t open an account for you, try another bank—different banks have different requirements.
Places to Save
- Banks. Today banks offer a wide range of financial services to help you save. These include savings accounts, Certificates of Deposit (CDs), money market deposit accounts, Individual Retirement Accounts (IRAs), consumer, business and real estate loans and trust and investment services. Accounts in Federal Deposit Insurance Corporation (FDIC) member banks are federally insured up to $100,000.
- Credit unions. These are nonprofit savings and lending organizations which provide services to members who have a common bond, such as working for the same company, living in the same community or belonging to the same church or union. Just like banks, credit unions offer savings accounts and investment services. Deposits in federal and state chartered credit unions are insured for up to $100,000 through the National Credit Union Administration (NCUA).
- Brokerage houses and mutual fund companies. These may offer a wide range of financial services, including savings and investment plans. Some accounts are insured, others are not. Many mutual fund companies waive the minimum deposit requirement if you agree to have a monthly amount (as little as $50) automatically transferred from your checking account each month.
Types of Accounts
- Regular savings accounts are sometimes called passbook accounts and usually have low opening deposit requirements. There may be limitations on the number of withdrawals. Savings accounts pay about 1%-3% (2000) depending on the institution. Credit union savings accounts may pay 3% or more.
- Certificates of deposit (CDs) also are known as time deposit accounts because you agree to leave your money in the account for a specified period in return for a higher rate of interest. The times vary from six months to 10 years. Some CDs do not allow additional deposits. Typically the funds are reinvested after the term is reached, unless you specify otherwise. There usually are penalties for early withdrawal. CDs pay from 4%-7% interest, depending on length and the institution.
- Money market accounts usually have high minimum deposit requirements ($1,000 or more) and allow access to your money. Some but not all money market accounts are federally insured—don’t forget to ask. You may be limited to a specific number of withdrawals per month. Money market accounts pay from 3%-6.5% (2000).
- U.S. Savings Bonds allow you ready access to your funds and they are not subject to federal or state income tax. You buy the bonds at a discount (a percentage of their value at maturity). Interest varies, but you are always guaranteed a minimum return.
- Some companies offer to match employees contributions to a retirement fund. After a specified number of months or years with the company you will be “fully vested” and will own the company’s contribution to your retirement fund. You may be allowed to invest up to 10% of your pre-tax income in a company retirement plan.
- Individual Retirement Accounts (IRAs) and Keoghs are retirement accounts that are tax-deferred until withdrawal, usually after you are 59 1/2. Contributions are tax deductible up to a specific amount each year, usually $2,000. There are tax penalties for early withdrawal. Roth IRAs are not tax deferred—they allow you to invest after-tax income and all returns are tax-free. Some retirement plans allow you to choose your own investments. If you are self-employed, you can also set up a Simplified Employee Pension (SEP) plan or a Keogh account which allows you to deposit up to a specified percentage of your income and deduct that amount from taxes.
Investing Your Savings
An investment is the use of money to create more money. Investments include stocks and mutual funds, bonds and annuities (a form of investment sold by insurance companies). The money you have to invest is sometimes called “capital.” Successful saving and investing depend on balancing several factors:
- Return. What interest rate will your money earn?
- Security. Is your money insured by the Federal Deposit Insurance Corporation (FDIC)?
- Risk. When you invest in stocks and bonds, your money is not covered by federal bank insurance. How much loss from investments could you live with? If the answer is none or very little, consider avoiding securities investments, such as stocks and bonds, which can lose some—or all—of their value.
- Liquidity. How easy is it for you to withdraw your money or use it for other investments?
It is unlikely that you will find a single investment which gives you the best of all three: high return, low risk and ease of access. For example, your savings account at a local bank is easy to access and very secure but fairly low in return (interest). Stocks offer a higher return but are also riskier and less accessible.
This brochure was originally created by the Community Service Center for the Disabled of San Diego, CA, with funding from Bank of America Consumer Education Fund (BACEF) and the Parker Foundation.
It has been revised by Consumer Action with funding from BACEF.
Published / Reviewed Date
Published: April 01, 2000
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Banking ♦ Investing ♦ Money Management ♦
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