When it comes to saving money, there are dozens of different ways you can do it. You can hoard bricks of cash under your mattress, keep it all in a checking account, gold, or stocks, to name a few different methods. Each method of saving will suit a different person's situation and needs. In short, there's no right or wrong way to store your money. However, certain methods are more effective than others. In this article, I’ll be talking about a few popular ways you can use to save, and even grow, your money.
Quick warning, this article did get a bit longer than normal. I’ll summarize it here so you can get an idea of what's ahead.
Savings accounts: Great if you don't want to lock up your money, want quick access to cash, and don't mind low-interest rates
Certificate of Deposits: Good if you don't mind locking up your money for a specific period of time in return for higher interest rates. Not great if you need access to cash quickly/randomly
Brokerage accounts: Perfect if your goal is to grow money rather than simply storing it, more risk for more potential profit, and significantly higher historical profit. You can invest in stocks, funds, etc. However you will need to conduct more research and devote more time to this account, and take on more risk depending on the assets you buy.
If your main goal is to preserve your money, ensuring it stays safe and accessible, cash is probably the best medium of saving for you. You can store cash in a few different ways. A savings account is great if you have a medium-term (5-15 year) goal for your money, or if you're saving for a rainy day/emergency.
So, if you're planning on purchasing a home and are saving for a down payment, or you're planning on buying your first car in cash (this is probably more realistic for my readers), a savings account is probably right for you. You can open one pretty easily at your local bank (Chase, Bank of America) or credit union.
The biggest benefits to this kind of account include the fact that your money is pretty accessible, meaning you can go and withdraw it whenever you need it with very little delay. It's important to note that while your money is relatively accessible when compared to other kinds of assets/accounts if you regularly need to access the cash in your savings account, a checking account would likely serve your needs better.
Your money is also safe, and your account value won’t fluctuate like if you had your money in certain assets. Additionally, the costs to store your money are low, and you’ll probably have to pay a small flat-rate fee.
However, because your money is entirely in cash, you’ll receive little to no profit (low-interest rates). If you're interested in more details, I’ve dedicated an entire article to savings accounts here.
Savings accounts are good if you:
Plan on needing cash in the future (down payment, large purchase, etc)
Don’t like the risk or volatility of investing in assets
Don't want your money to be locked up/inaccessible
They're not so great if you:
Want easy access to spendable cash (a checking account would be better)
Let’s say you don’t need your money in the future, and you don’t mind “locking” it up for a bit in return for some profit. In this case, a certificate of deposit, or CD, would suit your needs. CDs are essentially inverse loans, like bonds. You give the bank money, as a loan, and the bank will pay you interest in return for letting them use your money.
You might be thinking, “That's the same as a savings account”. Well, CDs require you to “lock-up” your money, meaning you cannot access it for a certain amount of time. Much like bonds, CDs have a time frame, with different maturity periods.
A maturity period is the amount of time your money will stay with the bank without you being able to access it. Maturity periods range from 6 months to many years. The longer your money is locked up, the more the bank will pay in interest. If you purchase a fixed-rate CD, there's nearly no risk, as your interest rate is guaranteed to remain the same, and the value of your CD won't change like bonds do. You can purchase a CD at your local bank or credit union.
CDs are great if you:
Don’t mind locking up your money for a certain period of time
Want a low-risk asset that will provide profit
CDs probably aren't for you if:
You need to access money often and need liquidity
Have goals in the near future for your cash
I’ll dedicate a coming article to CDs.
A third alternative to these accounts is a brokerage account. This can be in the form of a tax-advantaged account, like a Roth IRA, or in the form of a taxable brokerage account. If you have a ton of time (generally those who are younger), don't need access to your money quickly, and are willing to on more risk, brokerage accounts may be a good choice for you.
In a brokerage account, you can hold a ton of different assets, ranging from regular company stocks, to index funds, ETFs, and futures. Brokerage accounts are an excellent way to grow your money, however, they do come with additional risk depending on the assets you purchase. Certain assets have high risk, but also the potential for high return.
Brokerage accounts should not be used instead of a regular savings account, as theres a chance you can lose everything. Additionally, accessing the money in your brokerage account is difficult, so in the case of an emergency, you won't be able to get cash quickly. Like I said, this is for those who are willing to take on more risk and those who are alright with having the money somewhat "locked up".
Other assets, like index funds or certain ETFs, tend to have lower risk associated with them, but can also have more moderate returns.
However, if you select a well-researched, safe portfolio of assets, like funds that track the overall US stock market or specific US stock indices, historically speaking, your account will grow in the long run, providing singing profit over many years.
It's important to note that depending on the type of brokerage account you hold assets in, you may have to pay capital gains tax on any profit you make. You may also have to pay commissions to buy/sell assets.
In short, brokerage accounts are useful if you:
Don't mind holding assets for a long time
Don't mind taking on the additional risk of potentially losing your money
Don’t mind doing the research needed to select assets
Are willing to take on more risk for higher potential profit
They're not great if you:
Need quick access to cash
Don't want to take on any risk
Don't want to spend time selecting/managing investments
Phew, that was a long one. My apologies if you fell asleep halfway :P.
Let's run through a quick recap. If you want quick access to cash and no risk, a savings account is for you. If you don't need quick access to cash, and want higher rates, certificates of deposit are for you. If you'd rather grow your money, and take on more risk for more potential profit, a brokerage account is for you.
In short, the way you save money will change according to what your goals are. Different ways will have different pros and cons. Take a look at your situation and see what suits you best. Thanks for reading, and I’ll catch you in the next one!