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Alicia (Viscomi) Williams '09
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- Saving and Investing
Saving and Investing
Most banks offer both checking and savings accounts as a way to deposit money with their institution. Both types of accounts allow individuals to save money in the bank while still being able to access it whenever they want or need to for their own use. These accessible funds are known as liquid assets because you have immediate access to the funds on an as needed basis without waiting for the holder of the funds to sell off or cash in your investment for real cash.
The ease of access and convenience of using the account, such as for paying bills or writing checks, differs between the two types of accounts and each bank or credit union has its own minimum balance requirements, fees for the use of the account, etc.
A checking account is a convenient account designed to allow you to put money in the bank and it allows you to gain immediate access to your money whenever you need it. Checking accounts allow you to write checks directly from the account to pay for items. They also generally have a debit card associated with them that allows you to pay for items when making a retail purchase and get cash from an ATM. Very few checking accounts benefit from interest accruing (making money on the money you have laying in the checking account). If your bank doesn't have an earn interest program for your checking account, you might want to consider keeping the minimum amount of cash you can here for your monthly expenses and to meet any minimum banking requirements from your bank so you don't incur any fees and placing the rest in some other vehicle for savings.
Be sure you know what your bank requires for a monthly minimum amount to be kept in the account to avoid paying unnecessary fees. Additionally, check with your bank to find out what other fees or penalties you might be charged for using an ATM out of your network, writing checks, etc. Ask your bank if they have any programs where fees would be waived; for instance, if you direct deposit your paycheck in to the account, can you avoid paying a fee if you fall below the monthly minimum.
Savings accounts are designed for long- or short-term savings, not for frequent use. Savings accounts may have an ATM card associated with them, especially if you also have a checking account with the same bank. However, withdrawals from savings accounts may be limited, and an ATM card associated with a savings account usually can't be used at stores or online to pay for purchases.
INTEREST AND FEES
Both savings and checking accounts can earn interest, depending on the bank and the specific type of account. Savings accounts generally earn more interest than checking accounts do, operating under the idea that the individual will be storing the money in the account for a long period of time. Fees for savings and checking accounts also vary. Banks offering savings accounts generally have few or no fees associated with these accounts. Checking accounts often have a variety of fees, including monthly service fees, fees for ATM or debit card use and fees for any other services the bank might attach to that account.
Savings accounts are usually easier to get than checking accounts. Most banks issuing checking accounts will look up the individual's checking account history through the ChexSystems electronic system, which operates similarly to a credit check for checking accounts. Any history of fraudulent or bounced checks in the applicant's past could cause a rejection. Savings accounts do not generally go through this process, so opening one is a fairly simple process.
Why Should I Consider Investing or Planning for Retirement Now?
It's good practice if you can start thinking about and preparing to meet your long-term goals or later years now. If you begin disciplined saving and investing now, it will help you meet your long-term goals like saving for a home. Also, many people think they can plan on spending less on expenses later in retirement since they'll become less active as they age. But if their health declines, they may actually shift spending from discretionary items to medical costs rather than reduce it. Saving something, even a small amount, will get you in to the habit of "paying yourself" first before you spend your discretionary income (money you have to spend after you meet your monthly expenses). Even if you tuck only a small amount away now, you will be thankful to have it later.
An investment account is an account that allows you to buy investments like stocks, bonds, and mutual funds. Investment accounts are available through online stock brokers, banks, mutual fund companies, and full service stock brokers.
Investment accounts generally offer no tax breaks. These accounts are financed with after-tax money, while interest income, dividend payments and capital gains earned may also be taxed.
Retirement accounts, such as 401k plans, traditional Individual Retirement Accounts (IRAs) and Roth Individual Retirement Accounts (Roth IRAs), are structured to accommodate long-term investments concerned with retirement. In general, you cannot withdraw retirement account funds until age 59 1/2, without incurring severe tax penalties.
A 401k and IRAs are funded with pre-tax income which reduces your taxable income for the current tax year. Upon withdrawal, your 401k and IRA account balances are taxed as ordinary income. 401k plans may be offered as part of your employee benefits package, where you can select from a limited menu of mutual funds and employer stock as investments.
Alternatively, traditional IRAs are offered at various banks, brokerages and insurance companies. These IRA accounts provide access to the vast financial universe of stocks, bonds, mutual funds and certificates of deposit.
Roth IRAs are also offered at various financial institutions. Roth IRA's are financed with after-tax money, which grows on a tax-deferred basis. Upon withdrawal, no taxes are due on the account, because the original deposits were a part of taxable income.
How Do I Begin Financial Planning for My Future?
FIrst, determine what amount you have to use for future planning funds from your monthly income. Hopefully, you have developed your monthly budget plan and it works for you without leaving you strapped. Go back and reassess it to see where you might find some funds for your savings and investing plan. Once you know what you can afford to save long term each month begin shopping around for someone to give you good sound financial planning (saving and investing) advice. Check in with your bank because they often offer planning services; ask family and friends for references for private firms or investors. Lastly, don't be afraid to ask your planner lots of questions like how long they've been in the role, where have they worked previously, average number of clients and average amount of dollars they handle, etc. before you commit to becoming a client. Remember, it is your money you are placing in the trust of another!
Additional Information regarding Bank Accounts and Services is available on the Federal Reserve Website.