Savings 101

There are a lot of ways you can save money and earn a return. Here are some examples of just a few. But first, here are two key terms you will want to know:

Rate of Interest (usually shown as your APY — Annual Percentage Yield). This is the rate of return on your investment. This is how much interest you will get paid for leaving your money on deposit with a financial institution.

Term of Deposit . This is how long you are willing to leave your money to earn a certain rate of return or APY. Typically, the longer your money is held by the financial institution, the higher the interest rate you'll earn.

Types of Savings Vehicles

Basic Savings Account
You won’t earn a lot of interest by keeping all of your money in a basic savings account, but this is a very safe way to store it. The good news is that you can keep as much money there as you want and take it out whenever you want.

• Your money is protected against loss — to at least $250,000 through December 31, 2009 — by the federal government (FDIC insurance for banks; NCUA f or credit unions).
• You have a low rate of return.
• You can easily access your money.
• Usually can be opened with a low balance or small deposit.
• It is the simplest way to save.

Money Market Account
This type of savings account will make you a little more money — has a higher rate of return — than a basic savings account.

• Your money is protected against loss — to at least $250,000 through December 31, 2009 — by the federal government (FDIC insurance for banks; NCUA for credit unions).
• Usually earns higher rates of return than a basic savings account.
• Has minimum balance requirements — you have to keep a certain amount in your account.
• You have easy access to your money, but there might be some restrictions or special requirements on this type of account. Check with your financial institution.

Certificate of Deposit (CD)
This is a savings account set up for a specific amount of time to earn interest, usually at higher rates than a regular savings account. You can only access your money after a certain amount of time. This is known as the maturity date. If you take your money out early, you usually have to pay a penalty.

• Your money is protected against loss — to at least $250,000 through December 31, 2009 — by the federal government (FDIC insurance for banks; NCUA for credit unions).
• You may choose the length of time to leave your money in the account. It's usually in six month increments — for example, 6 months, 12 months and 18 months.
• There's usually a penalty on interest earned if you withdraw your money early.
• Usually has a higher rate of return than a basic savings account or Money Market Account.

U.S. Savings Bonds
Bonds from the federal government, or government-issued bonds, might take a long time to mature, but they are just about risk-free and an excellent savings tool.

• Government-issued, but you can get them at your local bank or credit union.
• The interest earned at maturity is usually free from state and local taxes.
• Almost risk-free; backed by the federal government.
• Nontransferable — the bond is in your name and you can’t give it to someone else.

Retirement Savings

There are several different ways to save for really long-term goals like retirement.

• 401(K) This is a retirement account set up by your employer through an insurance company, an investment company, or the trust department at a financial institution. You can make regular tax- free contributions to this account from your pay check. Most employers will match a certain percentage of an employee's contribution to this account, although they are not required to do this. A 401(k) account is designed to be a LONG term account, so once you put money in there, leave it alone. There is an equivalent plan for employees of non-profits companies called a 403(b).
  
• Individual Retirement Account (IRA) This is an account you can set up at your financial institution to save for retirement. There are limits to how much you can contribute each year due to that fact that there are tax advantages to putting your money in an IRA. It is best to think of your IRA as a basket and there are lots of different eggs you can fill it with. For example, some financial institutions will let you fill your IRA (the basket) with only CDs (the eggs); others will let you invest your money in Mutual Funds or Bonds.

There are two types of IRAs — the Roth IRA and the Traditional IRA. The big difference between the two is when you pay taxes on the money.
● In a Roth IRA, you deposit money on which you have PAID taxes. In other words, the money you have left from your pay check after you have paid taxes is the money that you can put into a Roth IRA. The big advantage to this is, since you have already paid taxes on this money, you will not have to pay taxes on it when you finally withdraw the funds during your retirement years.
● A Traditional IRA lets you put money in before the taxes are taken out, so, you pay less income tax now. However, you will have to pay taxes on the money you put in and the interest it earned when you make withdrawals (distributions) during your retirement. Talk to your investment advisor to see which option would work the best for you at this point in your life.

There are also penalties for taking your money out of an IRA before you turn age 59 ½. These fees include a federal 10% tax plus whatever early withdrawal fee your financial institution charges you. So, be prepared to not see that money for a very long time. Think of it as a small child you send off to boarding school and don’t have any contact with until they return home as a wealthy businessperson to make your golden years more comfortable, while they quietly resent you for sending them away to be raised by strangers in an overly hostile and competitive environment, even if it did make them stronger and gave them the skills necessary to succeed in a dog-eat-dog world. (Sorry, we started ranting there for a second. Just kidding about the resentment part.)