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Budgeting & Saving

How to Choose a Savings Account After College

Once you've graduated from college and are making a consistent income, it's time to think about putting some money away for your emergency fund and other financial goals, such as buying a car, moving into your own apartment or even buying a house.

Some of these goals may still be a ways away, but it's worth considering where the best place to put that money might be. The right savings method will make things easier—and can even earn you some cash.

Why Do You Need to Save Money After College?

Whether you've just landed your first professional job or are driving for Uber while you job-search, you're probably making more money than you did in college. Now's a great time to learn the importance of saving—not only to help make sure all your bills get paid, but to prepare for the future.

Why start a savings account? If you have an unexpected setback—like a $2,000 car repair or you lose your job—a savings account serves as an emergency fund to cover expenses.

In addition to an emergency fund, you also might want to save to:

  • Buy a car: You'll need a down payment to purchase a vehicle—usually at least 10% of the purchase price.
  • Put a deposit on an apartment: Landlords frequently require first and last months' rent, cleaning deposits and other one-time payments when you move in.
  • Make a down payment on a home: It's never too soon to start putting money away to buy your own place.
  • Finance your wedding: If you're engaged, saving can help you afford the wedding (or honeymoon) of your dreams.
  • Take a vacation: Putting a little bit aside every month can really take you places.

How Do You Choose a Savings Account?

Savings accounts have a few big advantages over putting your savings in a checking account. These accounts keep your savings separate from your checking account so the funds can't be spent as easily, but they'll still be accessible in an emergency. There are several kinds of savings accounts to choose from.

Traditional Savings Account

A savings account is an interest-earning account at a financial institution, such as a bank or credit union. The Federal Deposit Insurance Corporation (FDIC) insures savings accounts for up to $250,000 per account holder, so your money is safe up to that limit. There's usually no minimum deposit required to open a savings account; if there is, it's typically about $25 or $50.

You can access your savings by transferring money to your checking account or withdrawing cash. However, since savings accounts are meant for saving, not spending, you can't write checks on a savings account or use one to pay your bills. Withdrawals are limited to six per month; if you withdraw money more often, the bank will charge you a fee and may even convert your savings account into a checking account.

Unlike checking accounts, savings accounts earn interest, but it's generally minimal. As of June 2020, the national average annual percentage yield (APY) on a regular savings account was 0.06%, according to the FDIC.

Pros: No minimum deposit; easy setup; easy to access money

Cons: You won't earn much interest

High-Yield Savings Account

Some credit unions, banks and online banks offer high-yield savings accounts. The difference between these and regular savings accounts is that high-yield savings accounts earn higher interest rates; as of June 2020, APYs of 1% or higher were common. High-yield savings accounts are primarily offered by online banks, though you might be able to find one at a brick-and-mortar location.

Pros: Higher interest rates than regular savings accounts

Cons: Primarily offered by online banks

Money Market Account

Do you have a larger amount of savings to start with and want to earn interest on it? If so, consider a money market account. Unlike regular or high-yield savings accounts, funds in a money market account are invested in multiple financial instruments for a higher interest rate than regular savings accounts. As of June 2020, the average interest rate for a money market account was 0.09%.

Money market funds are a bit more versatile than other savings accounts. Although you're limited to six withdrawals per month, you can write checks from the account and may be able to use a debit card or make electronic transfers.

You'll generally need to meet a minimum deposit amount to open a money market account and may have to maintain a certain balance to avoid ongoing fees. If you don't have a chunk of money to open your account or may be emptying your account from time to time, a money market account may not be for you.

Pros: Higher interest rates than regular savings accounts; can write checks

Cons: Minimum deposit and minimum balance required

Certificate of Deposit (CD)

Certificates of deposit have interest rates higher than standard savings accounts and sometimes higher than money market accounts. However, they also have more restrictions. To buy a CD, you must deposit a minimum amount and leave the money in the account for a set period—for example, six months or one year. When the CD matures at the end of the period, you can either withdraw your money or roll it over into another CD.

Unlike savings accounts, high-yield savings accounts and money market accounts, which have variable interest rates, the interest rate on a CD is fixed, so you're guaranteed a certain rate of return. The larger your deposit and the longer the CD term, the higher your interest rate will be. For example, as of June 2020, the average interest rate for a three-month CD was 0.10% and 0.51% for a five-year (60-month) CD, according to the FDIC.

Most CDs allow you to withdraw funds early in an emergency, but you'll pay a penalty fee. Because they are less flexible than other types of savings accounts, CDs are best if you want to earn interest on your money but won't need access to it for the term of the CD. You might, for example, use a three-year CD to save money for a down payment on a home.

Pros: Potentially higher interest rates than other savings options; fixed interest rate means guaranteed return

Cons: Withdrawing money before maturity incurs a penalty fee

What to Consider When Opening a Savings Account

To find the best savings account for your needs, do some research and compare the following:

  • Interest rates: How much will you earn? Is the interest rate fixed or variable?
  • Minimums: Are there minimum deposit or minimum monthly balance requirements?
  • Fees: Are there ongoing fees or fees triggered by certain actions?
  • Accessibility of funds: How quickly can you get money from the account?
  • Account features: Does the account include ATM access, electronic funds transfer or the ability to write checks?
  • Mobile app: How convenient is the mobile app? Does it offer all the features of online banking?

Should your savings and checking accounts be at the same bank? Using one bank for all your accounts makes it easier to transfer money from one account to the other (usually the same day). But using the same bank might mean you're missing out on a good deal elsewhere.

If quick transfers might tempt you to withdraw from savings too often or you're drawn to the perks on accounts offered elsewhere, consider opening accounts at different banks. You could also set up a checking account and short-term savings account at one bank, and a true emergency savings account at another. Just remember that transferring between accounts at different banks might take a few days.

Saving Money for Retirement

In addition to your emergency fund and other savings, you should also think about saving for retirement. The sooner you start, the more time your money will have to grow.

Many employers offer 401(k) plans, which allow you to contribute pretax dollars to an investment fund or funds of your choice. Some employers also offer to match a percentage of your contribution. For example, if your employer makes a 50% matching contribution on up to 6% of your salary and you put 6% of your salary into your 401(k) account, your employer will contribute the equivalent of 3% of your salary. This is essentially free money, so don't miss out.

If you don't have a 401(k) at work, you can start saving for retirement by opening an individual retirement account (IRA) with a bank or other financial institution. Whether you use a 401(k), an IRA or both, experts recommend putting 15% of your pretax income into some type of retirement savings account.

How to Find Room in Your Budget for Savings

Having an emergency fund, vacation savings account or retirement fund is great, but it doesn't do you much good unless you're regularly contributing to these accounts. No matter how much (or how little) you're earning as a new grad, making a budget can help you take charge of your spending and build up your savings accounts.

There are many ways to make a budget and tools for doing so, but they all boil down to the same basic steps:

  1. Figure out your monthly take-home pay (if it varies, use the past three to six months' income to come up with an average).
  2. Add up your monthly expenses and break them into categories. These might include housing (such as rent, utilities and internet), debt payments (such as student loans, car payments and credit card payments), living expenses (such as health insurance and groceries) and discretionary spending (fun stuff like eating out, new clothes or video games).
  3. Track your spending for a month to see where your money is going. You'll probably find that you're spending more than you thought on several of your categories.
  4. Use what you learned from tracking your spending to identify places you can cut spending and create extra money for savings.
  5. Keep tracking your spending and adjusting your budget.

When trying to figure out how much money to save each month, a common rule of thumb is to allocate 50% of your take-home pay to essential expenses, 30% to nonessential expenses and 20% to your financial goals—such as retirement, paying off debt and building up savings. And remember there's always room for adjustment if this doesn't fit your situation.

When prioritizing your financial goals, a common approach is to put half of your savings money toward retirement and half toward other objectives. Focus on building your emergency fund first, aiming to cover at least three months' worth of essential expenses, before you start saving for your other goals, like a vacation or new car.

Finding the Right Savings Account

You have plenty of options for choosing a saving account, and each may be appealing in different ways. Whichever type of savings account you decide to open, the key is to choose one you're comfortable using as you start putting aside some savings. The earlier you develop the habit of budgeting and saving money on a regular basis, the better you'll be able to achieve your financial goals and enjoy a bright future.

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