You’ve probably heard the advice to save money before. It’s something you’ll hear a lot as a kid, in school, or even on the news. Is it, however, always the greatest option to save money? Isn’t there a drawback somewhere? There are some drawbacks to saving, as it turns out. But, before we go into it, let’s define the term “saving.”
We use the money for three different purposes. We bring money in, send it out, and keep it in our possession. Savings falls under the area of holding on to our money.
Simply explained, saving is when we put money aside in order to have it at a later date.
Interest Rates are Low
Savings accounts are known for paying out very little interest. Savings accounts at some banks pay as little as 0.01 percent per year. That means that if you have $100, you will receive one penny each year!
Savings accounts with a higher interest, known as high yield savings accounts, are a little better. The rates on these accounts fluctuate depending on the FED’s current rates accessible to banks (that is the central bank of the US). For example, the current interest rate is 0.5 percent (2021), yet it was as high as 2 percent just a few years ago. It just depends on the current exchange rate. However, you still gain practically nothing in terms of interest on money saved.
Inflation has a negative impact on you.
Not only is the money you get paid back low, but you’re also hurt by inflation’s second punch. Inflation is the loss of value of money over time, usually as a result of more money being circulated.
Every year, we see around a 2% to 3% increase in inflation. So if your money isn’t earning more than 3% interest, you aren’t making any money at all. In fact, if you don’t match your interest rate with inflation, you’re losing money! That 2% to 3% figure isn’t set in stone, so it might rise significantly. You will lose money in the long term if you are solely a saver.
It’s difficult to strike a balance between saving and necessary spending.
It’s really easy to stop spending money on things that are important to you once you get into the savings mindset. Some people, for example, go to great lengths to reduce their food spending. However, if you aren’t obtaining enough calories or nutrients, your health is jeopardized. Or you might forego a crucial doctor’s visit in order to save money. Spending less on these items can be harmful to your health in the long run.
Furthermore, saving should not take precedence over overspending on things that are important to you, such as visiting relatives or engaging in a cherished pastime. These are essential for your mental wellbeing. So how should you save so that you can get all the benefits? Here are some of the methods that experts want you to try.
Certificate of Deposit
Banks, credit unions, and internet financial institutions all provide CDs, which are time deposit accounts. A CD is a type of deposit that allows you to keep the money for a certain period of time while receiving interest.
Although a CD can be used to save money, it is not the same as a savings or money market account. You can, for example, withdraw up to six times each month from those accounts if necessary. CD accounts, on the other hand, are based on the presumption that you will not make any withdrawals until the CD matures. Creating a CD account is similar to opening a savings account in that you may be required to make a minimum initial deposit.
There are various reasons why you would choose to use a CD to help you achieve your financial objectives. Here are some of the most important advantages or benefits of saving money in a certificate of deposit account.
Ensure your safety.
CDs, along with savings and money market accounts, are among the safest ways to store your money. This is due to the fact that money held in a CD is insured.
If you buy a CD from an FDIC-insured bank, you’re protected in the event that the bank closes or goes out of business. The current coverage limit is $250,000 per depositor, per financial institution, for each account ownership category. The NCUA covers your money up to the same levels for federal credit unions and the majority of state-chartered credit unions.
Returns that are guaranteed
Because rates are often fixed for the whole term, it’s very easy to forecast how much interest you’ll earn over time with CD accounts. Calculators for certificates of deposits allow you to enter the amount you’re saving and the annual percentage yield to see how much your money will increase.
Higher Interest Rates
CDs have the potential to pay higher interest rates on deposits than savings or money market accounts. Because you agree to retain your money in the CD for a specific period of time, this is the case. The interest rate and annual percentage yield (APY) you earn are determined by the bank, CD term, and current interest rate environment.
Investing in dividend stocks
Every investor dreams of earning better returns and booking massive profits in the stock market. Every investor’s primary goal is to profit from the increase in the value of their stock.
However, in the stock market, that isn’t the only way to make money and profit. Dividend stocks have shown to be a reliable and simple approach to generating a regular and predictable stream of income.
If an individual is considering investing in dividend stocks, this article will assist them to understand why they should do so. Every investor dreams of earning better returns and booking massive profits in the stock market. Every investor’s primary goal is to profit from the increase in the value of their stock.
However, in the stock market, that isn’t the only way to make money and profit. Dividend stocks have shown to be a reliable and simple approach to generating a regular and predictable stream of income.
If an individual is considering investing in dividend stocks, this article will assist them to understand why they should do so.
Having both long term and short term investment
Long and short are relative terms, but short-term savings are normally money you’ll spend in the next six months to three years, while long-term savings are typically money you won’t touch for more than three years.
Every month, you can (and should) set aside money for both long-term and short-term expenses in your budget. You never know when you’ll need your savings, and having cash on hand can make the difference between a crisis and a minor annoyance.
Your Short-Term Savings Account: A Guide
Vacations, biannual auto insurance payments, and holiday gifts should all be put into this account. It could contain funds for purchases such as a new laptop or a down payment on a home. It’s also for unanticipated costs such as repairs, replacements, and low-cost medical emergencies and treatments.
An account for short-term savings should be conveniently accessible. That implies you should be able to withdraw cash from it or move funds to your bank account instantly through the internet.
You can estimate the cost of certain items, such as vacations and gifts, so you’ll know precisely how much to save. It is recommended that you save three months’ worth of costs in case of an emergency.
How to Make the Most of Your Long-Term Investment Account
Saving for a car, house repairs, or retirement plans that need funds beyond tax-sheltered account limits are examples of long-term ambitions. It could also include your emergency fund, which could be used to cover major medical expenditures, costly treatments, or savings in the event of a job loss.
Some long-term expenses, like short-term expenses, can be budgeted for, while others cannot. In addition to any other goals you’re saving for, you’ll want to have three months’ worth of ordinary costs saved in this account. Although you don’t need a second account for long-term savings, you can retain this amount in a taxable investment account to maximize your savings.
