Thursday, April 17, 2008

Money saving: Keep your money safe

Savings are an important part of every ones financial life. However, the beast of inflation is attempting to take even them from you. If your money is held at home in cash or in your current account and does not accumulate any kind of interest, it is losing its value over time. Inflation cuts down your money's purchasing power and you must use at least some of these savings instruments to protect your money from inflation. And protecting your money from inflation is the primary objective in order for your savings to grow in time, instead of perish in the labyrinths of time.

Simple savings account

Since you already know about the importance of the emergency fund, you already have a savings account, and maybe even made an agreement with a bank so it transfer portions of money from your current account into this one. In this case, a savings account is probably the easiest way to store your savings in. However, savings account does not make make your money work for you.
It is essential to know the interest rate, when your are using a savings account.
You could earn somewhere from around 0.5% to 5% or more, it all depends on your bank and kind of your savings account. However, banks tend to offer higher interest rates to accounts with bigger amounts of money in them. It might even be so, that the interest rate does not cover inflation and you lose some of the purchasing power your money has.
Probably the best thing savings accounts has, is their liquidity. Liquidity is quite an important factor when it comes to savings, as you can get back your money from the bank almost instantly. It does not require for you to wait days to lay your fingers on your money, you can just access your savings account online and transfer your money from savings to current account at grab them at cash dispensers, or just visit a local branch.

Certificates of Deposit

There are various other places to put your savings in to earn a little something, one of them is a certificate of deposit. It is a good place to save your money in. Certificates of deposit are insured, just like your savings account and are generally risk-free. The difference from savings accounts is that the certificates of deposit has a fixed amount of time or term (from three months for up to five years), and, usually, an interest rate that is also already fixed. After that fixed amount of time is over and certificate of deposit reaches its maturity, the money you invested can be withdrawn with the interest it has accumulated. Usually, the longer the term you have agreed to invest your money the higher the interest you will get paid by the bank.
Certificates of deposit tend to be far less liquid than savings accounts, since your money is required to stay invested for the fixed amount of time, so this means that your money is less accessible than in the savings account. If an emergency occurred and you need the money, however you can take back your money before the maturity of the certificate, but you will have to pay a penalty which can easily remove all the money you earned from the interest so far.

Money markets and money market funds

An alternative to a simple savings account are money markets and money market mutual funds. You can choose using money market bank accounts or money market mutual funds. Even though they have quite a similar name, they are not the same. A money market fund is some type of mutual fund (an investment company), where as money market bank accounts are
issued by banks. Money market accounts work very similarly to your normal account, however there are more restrictions, such as having a higher balance or having a number of money withdrawals limited per month.
Investment companies offer money market mutual funds. You need to create a new account in the company to become a part of a money market mutual fund. To have a quite good interest rate These funds invest in a wide range of short-term investments. The downside of money market mutual funds is that, your money does not have insurance, unlike in money market bank account. Money market accounts usually net higher interests than savings accounts, but their liquidity tends to suffer quite a bit, due to restrictions they have.

Treasury securities

There are other choices for your savings such as treasury securities. Treasury securities are bills, notes and bonds issued by the Government of the U.S. Similar to certificates of deposit, treasury securities have a fixed maturity term. The maturities differ from 1 to a whopping 30 years, depending if it is a bill, a note or a bond.
Like with certificates of deposit, liquidity is an issue with treasury securities. But this problem can be effectively solved, as there are highly active and liquid secondary markets where you can easily sell your treasury securities.

What should i do?

As regards savings, there is pretty much no difference on which savings method to choose, as long as they cover inflation, and does not let your money lose value. Everything after that depends on your own needs. If your savings are just those in an emergency fund, then probably a simple savings account would be the most convenient. However if your savings are larger and you intend to save for something big, and it would take months or years to save, your best bet would probably be at looking for better interest rates in certificates of deposit, money markets or treasury securities.
Usually these savings instruments are just a part of investors portfolio. There might be some stocks for some higher yield, maybe some precious metals or other investment instruments. However, the bottom line is that you do not let your money sit in your sock and lose its value due to inflation. Inflation can easily kill your money and you definitely don't want that, do you?

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