The Power of Savings: A Guide to Building Your Financial Future

Savings is money you put aside for safekeeping. Whether you are saving for a specific purpose or building an emergency fund, understanding how savings accounts work and how interest is earned is one of the best ways to increase your wealth. Let’s explore how you can make savings work for you.

Why Should I Save Money?

Currently, only about 48% of families have liquid savings equal to three or more months of expenses, and just 27% have more than six months. If you are among those struggling to build a financial cushion, it helps to remember why saving—even in small amounts—is vital.

You may earn money just by having your money in the right account.

You may earn money simply by having your money in the right account. The higher the interest rate and the longer you leave your savings untouched, the more you earn.

Achieve short-term goals

Saving for travel, holiday gifts, or home improvements can significantly improve your quality of life and reduce financial stress.

Avoid unnecessary debt

Life happens. Having money set aside for car repairs, home maintenance, or medical expenses can ease the pressure if income is interrupted.

Reach long-term milestones

Buying a home or a car becomes more manageable when you have a clear savings plan and the right accounts in place.

Plan for your ideal retirement

Experts recommend saving about 80% of your current annual income for each year you plan to be retired. Starting early makes this future goal more achievable.

How Much Should I Save Each Month?

A common and effective budgeting method is the 50-30-20 rule:

• 50% of income on Needs (housing, groceries, utilities)
• 30% of income on Wants (hobbies, dining out, entertainment)
• 20% of income on Savings or debts

What Are My Savings Options?

Research shows that “earmarking” and separating funds into different accounts can increase savings rates. Below are common savings options and how they work.

High-Yield Bank Accounts

A savings account that typically offers a higher interest rate but may require a large initial deposit and limit access to funds.

Certificates of Deposit (CDs)

These accounts hold a fixed amount of money for a set period, known as the maturity period. Interest rates are higher, but access is limited, and early withdrawals usually result in penalties.

Money Market Accounts

Bank accounts that usually require a minimum balance. They offer more accessibility than CDs, though interest rates are often lower.

Money Market Funds

Available through investment companies, these funds invest in safer assets and may offer higher returns, but they are not government-insured.

Bonds

A debt investment where you lend money to an issuer. Bonds pay back the original face value plus interest over a specific period.

Savings Accounts for Kids

Developing strong financial habits early encourages responsible decision-making later in life. Most banks and credit unions allow minors to open savings accounts with an adult.

Minor Accounts

These accounts provide minors with a banking account option, but the account is technically still jointly owned by the minor and their parent or guardian. Sometimes these accounts are set up so that the minor must receive authorization from their parent or guardian to make withdrawals. The adult account holder may set up alerts to be notified when a minor uses the account, and the account details and fees may change when the child reaches the age of 18.

Custodial Accounts

A parent or guardian opens and manages these accounts on behalf of a minor. The funds in these accounts legally belong to the minor, so the custodian cannot use the money, other than for withdrawals or investments for the minor’s benefit. Once the minor becomes an adult, they take full ownership of the account.

529 Plans

A 529 Plan is a special savings plan sponsored by states or educational institutions. These plans provide tax advantages and allow you to open an account to save for someone’s education costs, be it tuition in secondary and primary school, books and supplies at a college or university, or even tuition credits at in-state public colleges and universities.

Why Is Interest Important?

When you deposit money into a savings account, you are essentially lending it to the bank. In return, the bank pays you a percentage of your balance, known as interest.

Over time, the interest you earn can grow to exceed the amount you originally deposited. This powerful effect is called compound interest.

Five Steps to Opening a Savings Account

1. Do your research: Choose the savings option that best fits your financial goals.
2. Visit your financial institution: Explore options online or in person at your bank or credit union.
3. Bring two forms of identification: Common examples include a driver’s license, passport, birth certificate, or Social Security card.
4. Provide personal details: Make sure your address, phone number, and email are accurate.
5. Bring your first deposit: Cash or a check is typically required, and some accounts have minimum opening balances.

Key Takeaways

• Understand your options: Savings accounts vary in rules for withdrawals and minimum balances.
• Savings provide security: Setting both short- and long-term goals helps keep you financially prepared.
• Interest matters: Higher rates and longer timeframes allow your savings to grow more effectively.

Next Steps

• Set savings goals: Set goals for the short term, long term, and major life events such as retirement, education, or emergency savings.
• Create a budget: Create a budget to identify how much money you can realistically set aside for savings.
• Consider your options: Consider opening a savings account that aligns with your personal financial goals.
• Learn what’s available: Talk with a representative at your financial institution to learn more about the savings options available to you.