There are two ways to get wealthy: Make a boatload of money all at once or consistently save a portion of what you earn. Most people dream and struggle (but mostly dream) about getting rich with the first method. You must be EXTREMELY motivated and EXTREMELY lucky for that to happen. You pretty much have to give up whatever you’re doing right now, and devote your blood, sweat and tears to make this happen. Now, most people are not willing or able to do this, so the second path to wealth is much more attainable. Saving a portion of what you make is not only much more attainable for most people, it is downright EASY compared to forming a million dollar business.
Having a good savings account is essential on the path to wealth. Scratch that, having an AWESOME savings account is even better. In an ideal situation, savings should be a mix of short and long term savings. Short term savings includes funds that might have to be used within a year or sooner. Examples would be an emergency fund or saving for the newest Xbox which you can smash in front of all those people waiting in line on Black Friday (have secretly wanted to do this). Long term savings include retirement accounts and college savings accounts. It’s mainly for stuff that is very important when the time comes, but it is a while away.
A savings account is a great place to store short term savings. Whether they know it or not, pretty much everybody has access to a savings account. Most people who have a checking account are able to sign up for a savings account with the same bank. But not all savings accounts are created equal. In fact, some of them are not really that useful. Here are some things to look for in a savings account:
-Make sure it is separate from your checking account. Many people focus on interest rates when it comes to savings accounts. They are important, but not nearly as important as having your savings account at a different bank from your checking account. Having it at the same bank would actually defeat the purpose of having a savings account altogether. Your emergency fund, for example, should be easy to tap in case you need to, but not so easy that you can transfer money out of there in a second. You want to think about it for a second when you withdraw something from savings. Having it at a different account gives you about 2-3 business days to think about it.
Having your savings account separate from your checking also makes it easier to save automatically. Just set up an automatic withdrawal from your checking to your savings every month, and it’s like you never see the money. This is the key to building up your savings and avoiding lifestyle inflation because if you see the account all the time, you start to think that you can spend it whenever you like.
-Choose one that allows you to easily make sub-category accounts. Piling your money into a savings account is definitely a good move, but most people have different short term savings needs. There can be an emergency fund, saving for a laptop, vacation etc. Being able to make separate savings accounts and have separate goals for each can make it crystal clear how much you have to save. If you want to save $1,000 for a vacation next year, just set up a vacation account and put in $100/month. Anything that makes your financial decisions easier and more automatic is a great thing. Surprisingly, not all savings accounts are able to do this, so find out before you sign up for one.
-Interest rates should be taken into consideration as well. While rates are not as high as they have been in years past, you should still try to get the best rate you can. Online savings accounts almost always have better rates than big banks. According to the Bank of America website, their regular savings account has an interest rate of 0.01%. That’s literally almost nothing! It would be foolish to use an account like this when you can find an online savings account with rates around .5% (That’s 50 times better). Because interest rates are at a relative low point, jumping around from account to account to snag the best interest rate is most likely a waste of time. Find an account you are comfortable using that has a good rate and stick with it.
-Be on the lookout for fees as well. The Bank of America account I mentioned has a $5 monthly fee and some hoops to jump through to get rid of it. Don’t bother with that as there are plenty of savings accounts with no minimum deposit requirements or hoops to jump through. One thing to keep in mind though is that many account limit the amount of withdrawals you can make per month. If you go past that number, you can be hit with a penalty. Since you’re saving for things in the future, you shouldn’t have a problem with this.
So does your current savings account have all of these features? If not, it might be time to switch. From reading my previous posts, you can probably tell I’m a huge fan of online banking. Savings accounts are no exception. In fact, online savings accounts are light years ahead of big bank savings accounts in terms of ease of use and interest rates. Do yourself a favor and switch to an online savings account. I’ve had CapitalOne 360 Savings (formerly ING Direct) for years and absolutely love it. It makes saving super easy and automatic, which is the most important factor.