Savings accounts can be opened for a number of specific purposes. The most important reason is to build an account for emergencies. Financial advisers recommend that an emergency account have enough money in it to take care of all your monthly bills for at least three months, and preferably six months.
In case of illness or the loss of a job, this money will prevent you from having to go into debt. Savings accounts can be earmarked for future expenditures, such as buying a major appliance, remodeling your kitchen or bathroom, or taking a vacation. Rather than pay interest on a credit card or loan for such items, build up a cash reserve in a savings account before making the expenditure.
Special Types Of Savings Accounts
A Coverdell Education Savings Account is a special type of savings account that was designed to aid parents and students in saving money to pay for college. The Internal Revenue Service sets specific rules for this type of account. For example, the yearly contribution to the account cannot exceed $2,000, and there is no tax on the money withdrawn as long as it is less than the education expenses at an eligible institution. Another special type of savings account is the Health Savings Account, which is an alternative to traditional health insurance. According to the U.S. Department of the Treasury, “Health Savings Accounts enable you to pay for current health expenses and save for future qualified medical and retiree health expenses on a tax-free basis.” Again, there are certain rules which must be followed.
Annuity Savings Accounts
Annuity savings accounts are specific accounts designed for saving for retirement. These are established for working groups, such as teachers within a state, and regular contributions are typically made by the employer. There are strict legal rules regarding these funds, contributions to them and distributions.
Insured Savings Accounts & Interest Rates
The Federal Deposit Insurance Corp. advises confirming that money in a savings account is protected in case of failure of the bank or institution. While most banks have FDIC-insured savings accounts, not all institutions that offer savings accounts online and through the mail have protection against a loss of funds. Ask the institutions if they are backed by the FDIC before opening a savings account. Compare interest rates. Online savings accounts may pay a slightly higher interest rate, but they may require minimum contribution amounts and enforce restrictions on withdrawals.
Keep Bank Costs Down
The FDIC also notes that to keep bank costs down, find out if your accounts have a minimum balance and if a penalty is incurred if the balance falls below that amount.
Growing Your Savings Account
Growth of your account will come from making regular contributions. This requires discipline on your part. Because you can deposit any amount of money into a savings account at any time, you can contribute as little as $5 or $10 a week. The amount you deposit is important, but the real key to successful growth is to make consistent deposits. If you do not have at least one savings account, open one. Postponing can cost you hundreds of dollars in the future in the lost of interest you could have earned or in having to put a major expense on a credit card, where you will be charged interest for borrowing the money.