Sunday, January 27, 2008

Starting with Savings Accounts

Savings accounts are a form of investment — a very safe form. Although many banks don’t pay interest on checking accounts, all banks pay interest on savings accounts. For the most part, interest rates offered for savings accounts differ only slightly from institution to institution. Prior to the start of banking deregulation in 1986, banks used to pay 5% daily interest on all savings accounts because federal regulation specified that amount. Unfortunately, 5% interest rates on savings accounts are history. Today, the average savings account earns about 2% daily interest.
Assume that you’ve made an initial investment of $100 and faithfully add $50 per month for the next five years.
Although the amount in your savings account reaches $3,262.88 — $162.88 more than the amount you actually contributed — the actual buying power of that investment is only $2,814.59, due to the rate of inflation. That’s $2,814.59 more than you would have had, had you not committed to socking away some money for the future. But as investments go, you wouldn’t want to rely wholeheartedly on a savings account because the return on your investment is so low. Of course, factors such as the interest rate and rate of inflation play a major role in how well your money does in this type of investment vehicle.
Web sites such as www.bankrate.com and financial magazines such as Money publish lists of the highest-paying savings accounts each month.
Some banks offer the incentive of earning additional interest on a savings account by using a tiered account system. This system enables you to earn higher interest if your account balance is consistently over an amount specified by the bank. This amount is usually at least $1,000, but it may be higher. Most banks charge a monthly or quarterly maintenance fee for a savings account. Some tack on an additional fee if your balance falls below a required minimum. In addition, you might be required to keep a savings account active for a specified time or face penalties.
What makes savings accounts such a safe investment? If the bank has Federal Deposit Insurance Corporation (FDIC) insurance, your savings account is backed by the full strength and credit of the federal government. If the institution fails, Uncle Sam sees that you get your savings back — up to $100,000. As with any other insurance, you may sleep better knowing that it’s there in the worst-case scenario. Although putting your money in a savings account has serious limitations if it’s your one and only investment strategy, having some of your money in a cash reserve makes sense.

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