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Comparing Savings Plans

Instructor: Yuanxin (Amy) Yang Alcocer

Amy has a master's degree in secondary education and has taught math at a public charter high school.

Everybody saves money in one way or another. Some people save money on a temporary basis so they can go on vacation while others save up for retirement. Read this lesson to see what kinds of savings plans you can choose from.

Saving Money

Everybody saves money. You might be saving up to buy those $200 shoes you've been wanting. Your friend might be saving up to go on a cruise next year. Your parents might be saving up for their retirement or even your college tuition. Whatever the case may be, you have choices when it comes to how to save your money. We will look at some options in this lesson.

Savings Accounts

The first one we will look at is a savings account. This is an interest bearing account that is offered to you when you open up an account at your local bank. As of 2016, the interest on these savings accounts is generally not very high compared to other ways of saving money. You might get an account with an interest rate of 0.65 percent, which means that every year you will earn 0.65 percent on the money you have in your account. That's right, that's not even 1 percent! Most banks disburse this interest on a monthly basis. The money you would earn in a year is split into 12 months to figure your monthly payout. For example, if you have $5,000 in a savings account with an interest rate of 0.65 percent, at the end of the first month, the bank will give you ($5,000 * 0.0065) / 12 = $2.71. Your balance at the end of the first month is now $5,002.71. Each month you will earn more and more interest. The more money you put in, the more you can earn. It's not much, but something is something.

Checking Accounts with Interest

Your bank may also offer you a checking account with interest. Most checking accounts won't pay you interest. But some banks offer a checking account that pays you interest. The interest you earn is comparable to the savings account. The only difference between a savings account and a checking account with interest is that you can write checks with the checking account. You can't write checks with a savings account.

Both the checking account with interest and the savings account are meant to earn you money and at the same time, give you easy access to your money.

CDs

If you can stand to part with your money and not touch it for a time, then a certificate of deposit, or CD for short, may be a better option for you to save your money. A CD is like a timed deposit. You agree to keep your money in the bank for a set period of time in exchange for a certain interest rate. The longer you can stand to part with your money, the higher the interest rate will be. Also, the more you put into the CD, the higher your interest rate will be. For example, you can choose 3 month CDs, 6 month CDs, 1 year CDs, 18 month CDs, 2 year CDs, 3 year CDs, or 5 year CDs. The longer the term, the higher your interest rate. As of 2016, you can get a 3 month CD with an interest rate of 0.55 percent with a minimum deposit of $1,500 or you can get a 5 year CD with an interest rate of 2.08 percent with a minimum deposit of $1,000.

Most CDs will charge a penalty fee if you withdraw your money prematurely. For example, if you purchased a 5 year CD and you withdraw at year 3, you will be charged an early withdrawal penalty.

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