Savings
accounts are storage places for funds. Money
stored in a savings accounts can generally be accesses fairly
easy. Most banks offer customers access to their savings
through ATM machines. Because of this easy access,
savings accounts rates offered by banks are not that high.
Savings rates may only be one percentage point higher than
checking rates, and they are rarely higher than the inflation
rate.
Savings
accounts are good for storing money on a short-term basis, in
preparation for transferring that money to long term holdings
or for making a large purchase in the next few months.
Let's
say you want to buy into a stock mutual fund (long-term
investment), but you don't have the money for the required
initial investment. A good idea is to save money into
your savings account over the next few months until you build
up enough for the initial investment.
A
savings account also makes a great storage place for emergency
money. Emergency situations like unexpected car and home
repairs, family emergencies, etc. can all be smoothed over by
having some available funds in a savings account.
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Personal
checking
account at your local bank may not offer an interest rate, and
if it does it is likely very small. But that's o.k., checking
accounts are not supposed to be money makers (for the banks or
the customers). They are simply a tool. Banks use them to
attract customers and hope they'll put money in the long-term
savings, CDs, and money market accounts. We use them to hold
our paychecks and for paying reoccurring bills.
Because
they don't have an interest rate higher than inflation,
checking accounts should not be used to store money for
long-term expenses. The checking account should hold just
enough money to cover bills for the next month. No more, no
less. If you want to save up money for a swimming pool next
year, use a savings or money market account.
Keeping the checking account lean increases the risk of
having insufficient funds. You can protect yourself from this
in a few ways. One is to always keep your checkbook register
up-to-date. If you use your debit card at the gas station,
make sure that you update your register soon after. Some
people keep their debit cards in their checkbooks to remind
them to update it.
I'm
a big debit card user. I don't carry checks or credit cards.
However, sometimes I do forget to update my checkbook register
(on Microsoft Money). One way to protect against overdraft is
to have a checking account with overdraft protection -- when
banks will deduct the amount of the overdraft from your
savings account, while others automatically take out a loan
for the overdraft amount.
Those
are fine and dandy, but I prefer the phantom account method.
My actual checking account balance is always greater than what
I think it is. How? Just make a deduction in your checkbook
register for $50 or $100. That way, when you're checkbook
register says your balance is $0, you've really got that $50
or $100 in there. The rule is, you can never run you checking
account with that phantom money in mind. When your register
says $0, you've got to forget about the phantom money and stop
spending.
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