Banking Your Savings

Before you walk, you must learn to crawl. Before you invest, you must learn to save. Luckily, saving money is quite a bit easier to do than investing it. Finding the cash to save is not always easy, but banking your savings is fairly straight forward.

When you are able to earn more income than your expenses, you will eventually start accumulating cash. For some, this comes easier than for others. The key usually involves living below your means and adopting a frugal lifestyle. Alternatively, you can focus on maximizing your income potential, but that can be difficult in an economic downturn. The best strategy for saving is usually the conservative approach of managing your expenses.

What should you do with your cash savings? Some of the basic options to store your cash include:

  1. Your wallet/mattress
  2. Basic checking account
  3. Interest bearing checking account
  4. Savings account
  5. Money market account
  6. Certificate of Deposit (CD)

The key differences with the above options include security, accessibility, rates of return, minimum deposit requirements, and fees. An optimal strategy for most will likely utilize a blend of several of the above options.

I personally like to keep cash in my wallet for just a few days worth of expenses or what I think a minor emergency might cost, since I can usually rely on my ability to use my credit card or access an ATM. When I travel to less familiar and more rural areas, I tend to increase my cash on hand just a bit to be safe and to avoid fees.

The next place my cash goes is to my checking account. Actually, this is usually the first place my salary and business earnings go. I like to maintain about a full month’s worth of expenses as my minimum balance buffer in this account. The key aspects I look for in a checking account include no fees, electronic bill paying, electronic transfers, and easy access to free ATM withdrawals.

The next place I store cash is in a savings account. FDIC insurance is a must. The account should also be easy to link to my checking account, so transfers are painless to do. After that, I’m most interested in the highest sustainable yield I can find. I include the word sustainable, since I’d rather avoid opening new accounts all the time to chase the highest yield. I’d rather find a savings account that consistently provides a better than average yield than one that briefly provides the best rate but then underperforms. Online savings accounts have provided some of the best higher yield options in recent times.

After I’ve built up about three month’s worth of savings, I start moving my cash into longer term options. If I’m saving for a particular item or event, I utilized CDs to store cash until I need it. CDs often give you a higher rate of return than savings accounts, but the drawback is that your money is often tied up in them for a certain time period. CDs come in all sorts of durations, starting with periods as short as 30 days and all the way up to 5 years.

If I don’t have any specific plans to use a block of cash within the next five years and my emergency savings account is fully funded, I then move my cash to the money market account at my brokerage firm. Money market accounts typically pay higher interest rates than savings accounts. Sometimes they require higher minimum balances. You also need to be a bit more careful with money market accounts, because some are not FDIC insured. Recently some money market accounts “broke the buck” and went down in value temporarily. The money market account at my brokerage is a convenient place to store cash until I find a suitable investment opportunity.

How do you manage your savings? Share you thoughts on banking basics in the comments section below.

6 thoughts on “Banking Your Savings

  • April 9, 2009 at 10:45 pm

    Excellent article, very timely though the subject matter is really timeless.

    My take is to strive to have no debt, other than a home mortgage. And to have an “emergency fund” or “rainy day fund” equal to 6 month’s living expenses stashed in a separate savings or money market account. Many recommend 3 or 6 months. I vote for 6 months if a household has only one source of full-time income.

    Just my two cents.

  • April 9, 2009 at 11:21 pm

    Hi John, I really appreciate your feedback on this article. It has been a while since I’ve discussed personal finance on my blog, but the topic is becoming important at my house. My wife has rejoined the workforce and it has been having a big positive impact on our finances. I’m having to make all sorts of changes, so I’ll likely touch on personal finance a bit more over the coming weeks.

    Your take on debt and “emergency funds” is very similar to my own. It makes me feel confident that I’m on the right path, especially since I respect your opinion highly.

  • April 10, 2009 at 10:08 pm

    George, for many years I wouldn’t establish an emergency fund because I didn’t like the idea of having that much money in an account not making much. And even losing money in periods with super low rates and inflation probably higher than official stats.

    But I learned, in ways that I won’t go into here. I’ll just stress that, in many ways, an emergency fund benefits you emotionally as much as financially. And during times like this — with investment accounts down and employment issues everywhere — it certainly reduces stress.

  • March 18, 2015 at 9:43 am

    Staying out of debt is number one thing. What I personally find very useful is caring very little cash in my wallet. This way I am less tempted to spend money on something that I don’t really need. Interest rates on savings accounts are very low, I keep an emergency fund in savings though. The rest goes to more profitable but riskier investments.

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