SAVINGS
steps to take for personal wealth
13 surefire savings strategies
Go online for high yields
How to ladder CDs
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SAVINGS
steps to take for personal wealth
Building personal wealth is a goal for all Americans
because it allows them to live out their dreams. At all
stages of life, there are goals to be achieved. When you’re
just starting out, owning a home is the top priority. Once
you have children, raising them and educating them
becomes a long-term commitment. And all through your
adult life, you need to be putting money away for your
well-deserved retirement.
cd or money market account?
But saving money is just the beginning. If you invest X amount
at a low interest rate, it won’t grow the way you need it to, no
matter how long you have it invested. Your savings need to be
invested so that they grow without your intervention.
Find out which type of investment is right for you and
your investing horizon.
In this guide, “Savings: Steps to Take for Personal Wealth,”
you’ll learn about certificates of deposit and money market
accounts, which are the most popular ways to save (Page 4).
And you’ll see the best strategy for investing in CDs—with
real results to back up the method (Page 5). If you want access
to your money, though, you’ll want to consider money market
accounts (Page 8).
Investing in CDs with different terms can produce the
best results. Here’s how to do it.
Besides choosing ways to save, you also have choices for
where to save. It used to be that everyone used local banks.
Not anymore. Internet banks offer high rates on CDs and money market accounts. We show you the advantages of online
banks (Page 9).
Finally, we know it’s difficult to find extra money in the budget to save, so we’ve got 13 tips to help you. If one of the tips
jump-starts your savings, you’ll be on your way to fulfilling the
American dream.
Page 4
a ladder to savings
Page 5
rainy-day savings
Money market accounts earn interest but still allow you
access to your money when you need it.
Page 8
go online and save
Bankrate research shows that Internet banks offer the
lowest fees and the highest returns.
Page 9
13 surefire savings strategies
Can’t find money in your budget for saving? These tips
may do the trick.
Pages 10
© 2007 Bankrate, Inc. Illustrations by Paul Zwolak
3
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cd or money market account?
Certificates of deposit and money market accounts are
popular ways to save. Which one you choose depends on
your needs and your time frame.
Two of the most popular vehicles for investing savings are
certificates of deposit and money market accounts. They both
pay interest, but differ in significant ways. To figure out your
best choice, it pays to learn about each of them.
A certificate of deposit (CD) is an excellent way to save
money and earn a higher interest rate than you get with most
money market investments. The drawback is that CDs are not
liquid; you’re tying up your funds for a period of time, and if
you cash out early, you’ll lose interest and possibly principal.
CDs are most often issued by banks but can be purchased
through banks or brokerages. Some banks might require you
to come into the bank to open a CD account, others may let
you open one online.
Typically, you invest a fixed amount of money for a predetermined amount of time called the term, and you’re guaranteed
your principal plus a fixed amount of interest, which you receive periodically throughout the term.
CDs can be purchased for terms of almost any duration, although the most popular are between three months and five
years. Almost always, the longer you allow the bank to use
your money, the higher your interest rate. It’s not a good idea
to buy a CD with a term of more than five years. The interest rate situation could change dramatically during that time,
potentially saddling you with a long-term, low-rate CD.
A money market account (MMA) is a savings account that
generally pays a higher interest rate than a passbook or statement savings account. For example, in mid-August the national average for money market accounts was 3.71 percent.
Bankrate’s 2007 Passbook/Savings Study, conducted in the
spring, found that the top five banks in the 10 major markets
had an average yield of 0.35 percent for statement savings
and 0.44 percent for passbook accounts.
MMAs are a good choice because they are liquid and allow access to your savings. This means you can withdraw the money
at any time. The interest rates on MMAs vary widely, so if you
want to get the highest rate, be prepared to shop for it. Another advantage of an MMA is that you can automate deposits to
simplify saving.
When the term expires you can cash out the principal and
interest, or roll over the CD for another term. You can opt to
withdraw the interest payments as they are received.
MMAs have some downsides, too. They may require more
money to establish than traditional savings accounts. There
may be fees if an account dips below a minimum balance or if
there are too many transactions.
certificate of deposit at a glance
money market account at a glance
B Earns higher interest rate than money market accounts.
B Earns less than certificate of deposit accounts.
C FDIC insured up to $100,000 ($250,000 on retirement
C Deposits may be insured up to $100,000 by the FDIC for
accounts).
nonretirement accounts.
D Hands-off investment until CD matures.
D Automatic deposit available.
E Early cash-out has penalties with interest and possibly
E Check-writing and money transfer privileges (often have
principal implications.
minimum requirements, limitations and fees).
F Interest payments may be withdrawn as they are received.
F Some online banking institutions offer high-yield MMAs.
G Time-based fixed income.
G Minimum balance required; minimum may be higher than a savings account requires.
H Available through banks, brokerages and online banking
institutions.
4
H MMAs are available at most banks or credit unions.
For more information about Savings: Steps to take for personal wealth, go online to www.bankrate.com/wealth
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a ladder to savings
Making an investment in certificates of deposit with
different maturities can boost earnings.
“Consider what would have happened to two hypothetical
investors who invested $50,000.” (See tables.)
Savvy investors keep a portion of their portfolios in fixedincome investments where it’s not subject to the ups and
downs of the stock market. Many of these investors opt for
the rock-solid security of certificates of deposit. But that can
be a problem when rates vary for a prolonged period.
Investor A bought a $50,000 one-year CD and reinvested in
one-year CDs every year thereafter at the various rates. Investor B bought $10,000 each of one-, two-, three-, four- and fiveyear CDs in May 2001 and then invested $10,000 in a five-year
CD as each CD matured. The CD rates ranged from 5.45 percent to 7.2 percent.
Laddering a CD portfolio is a lot like dollar-cost averaging
when you buy stocks. You don’t invest all your CD money at
one low rate of return. You also are never more than a year
away from at least some of your money.
Here’s how laddering CDs works:
You go to the bank with $25,000 and buy a $5,000 one-year
CD, a $5,000 two-year CD and so on until your last $5,000 buys
you a five-year CD. Each year is a rung on the ladder. When the
one-year CD matures, you reinvest that money in a five-year
CD because by that time your five-year CD has four years left
until it matures. As each year’s CD comes due, you roll it into
a five-year CD.
Jason Flurry, a Certified Financial Planner and president of
Legacy Partners Financial Group in Woodstock, Ga., has put
together an example of how laddering is better than putting
all your money into one particular maturity.
“The laddered CD program helps give you more liquidity
while offering a more stable source of income,” says Flurry.
“The laddered-CD plan (Investor B) returned $3,435 more
interest income during the six-year period,” says Flurry. “The
plan also provided a steadier stream of income. Investor A’s
income fluctuated as much as $1,250 between the best and
worst years, whereas Investor B’s income only fluctuated as
much as $230. In a normal yield curve, CDs with longer-term
maturities will typically have higher yields than shorter-term
maturities.”
By always replacing the longest maturity, which is the top
rung of the ladder, you’re reaping the benefit of earning the
highest interest rates. If interest rates happen to be in a slump
one year, you’re only reinvesting a portion of your investment
when yields are low. And you don’t have to try to guess when
rates are at their highest because you are constantly reinvesting. It all evens out.
To compare the latest CD rates from institutions around the
country, visit Bankrate.com. Bankrate also surveys the 100
highest-yielding CDs each week.
investor a: reinvestment plan
Year
Rate
Initial purchase
End of year 1
End of year 2
End of year 3
End of year 4
End of year 5
5.85 %
6.10 %
5.60 %
5.05 %
6.50 %
4.00 %
investor b: laddered portfolio
Initial investment
At maturity, buy . . .
1 year @ 5.85 %
5 years @ 7.10 %
2 years @ 6.40 %
5 years @ 6.20 %
3 years @ 6.70 %
5 years @ 5.95 %
4 years @ 6.90 %
5 years @ 7.20 %
5 years @ 7.10 %
5 years @ 5.45 %
income comparison: reinvesting vs. laddered portfolio
Year 1
Year 2
Year 3
Year 4
Year 5
This year
Total income
Investor A $2,925
$3,050
$2,800
$2,525
$3,250
$2,000
$16,550
Investor B $3,295
$3,420
$3,400
$3,190
$3,325
$3,355
$19,985
For more information about Savings: Steps to take for personal wealth, go online to www.bankrate.com/wealth
savings_rev4_new updates.indd 5
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5.14%
5.14
%
APY*
Money Market
APY*
5.20
1.85%
APY**
National
Average
Discover
Bank
%
APY*
Certificate of Deposit
Discover Bank offers high-yield CD and Money Market accounts with interest rates that consistently exceed
national averages.** But great rates are just the beginning. Beyond our FDIC insured savings, you’re backed
by our 96-year tradition of service, convenience and trust. Start counting on higher yields and more.
1-888-728-3230 | Discoverbank.com Please reference Offer Code NI0109.
**Annual Percentage Yield (APY). Rates based on a $10,000 Money Market account balance and a $2,500 CD account balance. A penalty is charged for early CD
withdrawal. Fees could reduce earnings on the account. All rates shown are valid as of July 11, 2007. CD rate applies to five-year term. Money Market rates may change
after the account is opened.
**Based on averages reported through BanxQuote.com as of July 11, 2007.
©2007 Discover Bank, Member FDIC
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Count on
higher yields.
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13 surefire savings strategies
Although everyone knows you should be saving, it’s often
hard to find money in your budget to do so. These tips
may do the trick.
overs. Remember, getting slapped with the bill later is a real
buzz kill.
E Leave the credit cards at home.
Saving for emergencies doesn’t have to be about painful cutbacks or drastic spending measures. Sometimes we get so
focused on where to find extra money that we can’t see that
setting up good savings strategies is the key. Follow these tips
to save money without even trying.
B Autopilot savings and bill pay.
Have your savings automatically deducted from your paycheck before it even hits your
checking account. It’s easy—most
banks will let you set it up online
in a matter of minutes.
Set your fixed bills to be deducted
as well, either through automated
debit or online bill pay, so you’re
not tempted to touch the money.
The added bonus is you’ll never
get hit with late or missed payment penalties.
Spending surveys have found that people spend between 12
percent and 50 percent more when using a credit card versus cash. To see how much money you’ll save by ditching the
cards, Ruby Payne, an educator, researcher and author of “A
Framework for Understanding Poverty,” recommends leaving
your credit card at home. Then every time you don’t make a
purchase that you normally would have charged to a credit
card, note the amount. At the end of the month, tally your
“potential” purchases to see how
much you’ve saved. Then pat yourself on the back for your willpower
and shift that money to savings.
F Plan ahead, budget for fun.
All work and no play is no way for
anyone to live, so be realistic when
planning your spending. To make
your savings strategy work, you’ll
need to budget for fun. Allotting
a specific amount for entertainment each month will help keep
C After paying off debt, keep
you from going overboard when
paying yourself.
the fun-itch strikes. Setting aside
Maybe your finances are tight due
10 percent of your discretionary
to a big car loan or credit card
income—the money left over afwatch your savings grow
payments. Once you’ve paid off
ter your expenses—for fun is Epthese debts, shift those payments to your emergency fund
person’s rule. That way you know how much money you have
“bill,” says Sharon Epperson, author of “The Big Payoff: 8 Steps
to play with.
Couples Can Take to Make the Most of Their Money—and Live
Richly Ever After.” Otherwise, she says, “You know you’ll probG Make things interest-ing.
ably just spend it.”
Close the no-interest checking accounts and move the money into high-interest savings.“Most Americans keep too much
Because you’re already used to living without the money, you
money in checking accounts that earn zero percent interest,”
can use the “extra” funds to build up an emergency buffer to
says Epperson. “That money’s just wasting time.”
keep yourself from getting into debt again.
H Reward yourself.
Enforce
24-hour
rule
on
impulse
buys.
D
Allow yourself little extra perks for reaching savings goals.
Maybe splurging sounds like a good idea in the moment, but
Rewards sweeten the medicine, retraining you to take the
will you feel the same way the next morning? There aren’t
smart but tough steps that will ensure your financial future.
many things we truly can’t live without and waiting 24 hours
While the perks cost something, that will be outweighed by
before making a purchase will help you avoid shopping hangyour new money-saving habits.
10
For more information about Savings: Steps to take for personal wealth, go online to www.bankrate.com/wealth
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go online and save
Surveys have shown that Internet banks have lower fees
and higher-yielding accounts.
Internet banks continue to proliferate, offering high-yield sav-
ings accounts, CDs, money market accounts and other banking services. If you’re looking for a place to put your savings,
you should research Internet options. According to various
Bankrate surveys, it may pay off.
As of mid-August, the national average yield for statement savings accounts was 0.46 percent. The top 10 banks in Bankrate’s
survey of the 100 highest-yielding savings accounts had an
average yield of 5.30 percent in mid-August. Many of the
banks that rank in the top 100 are online banks.
Internet banks have always had a large advantage in the yield
department, and that continues to be the case, according to
the Bankrate Fall 2006 Checking Study.
The average yield at Internet banks is 2.25 percent, compared
with the paltry 0.34 percent at traditional banks. (See top
chart.) But, unlike traditional banks, where the rising interest
rate environment has had no impact on checking account
yields, Internet bank yields have consistently ratcheted higher
after bottoming at 0.84 percent in 2004.
comparison of average yield
2.50%
2.00%
1.50%
1.00%
0.50%
0.00%
Online banks
Traditional banks
balance requirement
$3,000
Minimum to avoid fees
While traditional banks require a staggering $2,660 on average to avoid fees on an interest checking account, online
banks have a significantly lower threshold, averaging $571.
(See middle chart.)
Monthly service fee, interest-bearing accounts
The average monthly service fee on interest-bearing checking accounts at traditional banks is more than $10. At Internet
banks, the average is consistently lower, coming in at less than
half that amount. The average at Internet banks is $4.31. (See
bottom chart.)
$2,500
$2,000
$1,500
$1,000
$500
$0
Online banks
Traditional banks
service fees for interest checking
$12.00
$10.00
$8.00
Bounced-check fee
Bouncing checks will cost you, no matter where you bank. The
average nonsufficient-fund fee at Internet banks is $25.77 and
$27.40 at traditional banks.
$6.00
$4.00
$2.00
$0
Online banks
Traditional banks
Looking for high yields? Check online banks on Bankrate.com.
For more information about Savings: Steps to take for personal wealth, go online to www.bankrate.com/wealth
savings_rev4_new updates.indd 9
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rainy-day savings
If you want to earn interest but also want access to your
cash, high-yield money market accounts make good
liquid investments.
Everyone needs a liquid savings account—call it an emergency
or “rainy day” fund. Or if you’re saving for a specific goal, you’ll
want that cash to be easily accessible but working for you
until you need it.
For emergency funds, experts recommend saving three to six
months of living expenses to provide a safety net in the event
of an unexpected job loss or sudden car or home repairs.
This cash cushion can be a stress reliever, eliminating sleepless nights when you wonder, “What am I going to do?” It also
saves consumers from turning to high-interest credit cards in
the event misfortune befalls them.
Those who just need a parking place for their cash still want
to earn interest. Some are accumulating cash for impending
expenditures such as the down payment on a home or a newcar purchase. Others may have received a bonus or inheritance
and haven’t decided where to invest it for the long term.
So where is the best place to invest these funds now?
One place might be a money market deposit account. A
money market account (MMA) is a savings account offered by
banks and credit unions and insured by the Federal Deposit
Insurance Corp. that requires a minimum balance, usually between $100 and $2,500.
With yields on money market accounts offered by the largest
institutions at a low, it may seem that earning an attractive
return on this cash stash is impossible. Not so.
Opening an MMA at one of the institutions that offers high
yields could net $50 per year in interest for every $1,000
deposited, on average, while opting for the bank across the
street would earn less than $20 in interest, based on the
Bankrate.com national average.
While the national average from Aug. 1, 2006, to July 31, 2007,
was hovering around 0.80 percent, there are many banks currently offering yields of 4 percent or 5 percent on MMAs. To
find the top rates each week, log on to Bankrate.com and look
at the 100 highest-yielding money market accounts.
8
MMA yields also outpace those of money market mutual
funds. MMAs offer complete access to funds and, unlike money funds, they are FDIC-insured. With money market mutual
funds and MMAs, the yields are not fixed; they fluctuate with
interest rates. However, the advantage of these MMA yields
has been sustained through both up and down movements
of interest rates.
Whether for an emergency fund or a temporary parking place,
the highest-yielding money market accounts eliminate the
opportunity cost—the foregone yield—of idle funds. Highyield money market accounts provide consumers with a competitive, risk-free rate of return, without sacrificing access to
their cash.
compare savings yields
2006
Aug. 1
Sep. 1
Oct. 1
Nov. 1
Dec. 1
2007
Jan. 1
Feb. 1
Mar. 1
Apr. 1
May 1
Jun.1
Jul. 1
0.0
MMA yield
1.0
2.0
Interest checking yield
3.0
4.0
6 mo. CD yield
For more information about Savings: Steps to take for personal wealth, go online to www.bankrate.com/wealth
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I Remove the temptation.
L Learn to save short-term splurges.
Do you have trouble controlling your spending when you
stroll through the mall? Do you stray from your shopping list?
If so, skip a trip to the mall and go to a specialty store to pick
up the item that’s actually on your shopping list. Or avoid window shopping altogether and take a walk in the park for diversion. In most cases the old adage “out of sight, out of mind”
rings true for impulse buys. Why put yourself in the position
to fail financially?
One trick that Bedda D’Angelo, a Certified Financial Planner in
Raleigh, N.C., recommends to her clients is deferring the latte
splurge until you’ve saved up enough for a bigger one, like
a massage. You’ll be retraining yourself from giving into immediate gratification to saving for your real desires. “It’s still
pleasure,” she says, “but now you’re saving for larger things.”
M Treat it like taxes.
Most people are used to having taxes deducted from their
paychecks, Payne points out. They accept both the mandaEpperson recommends keeping checking and savings actory nature and regularity of the contributions. So it might
counts at different institutions. This strategy makes your
be helpful to think of saving to your emergency fund as a tax
savings just slightly less accessible because of the waiting
that benefits you. Just as the government takes a portion of
time on fund transfers,
each paycheck, you should
and maybe that lag is just
figure out how much you
power of compounding
long enough to cool your
can afford for your “me”
spending impulse.
tax. Invest that money in
Total
savings:
$230,917
questions:
an
interest-earning vehicle,
Interest
Your age?
She points out that unsuch
as a money market
30
bundling your products
account
or a certificate of
Monthly savings?
gives you the opportunity
deposit.
100
to take advantage of highInterest rate?
yield accounts offered at
If you really hate taxes, it
8
online institutions, rather
may be more helpful to
Principal
Calculate
than the low-interestthink of your savings as a
30
42
53
65
paying brick-and-mortar
hassle-free insurance poliAges
bank where you keep your
cy. The insurance pays out
investment + interest + time = big savings
checking account.
when you need it most.
J Separate accounts.
K Enjoy compounding for a change.
N Save for a specific goal.
Being on the right side of compound interest is a rewarding
experience. What’s the right side? Negative compounding is
paying interest on interest, such as credit cards. Positive interest is when you invest a sum of money in an interest-bearing
vehicle. You can watch your money grow effortlessly.
Having a positive goal to work toward can be a powerful
motivator for saving. D’Angelo gives the example of a young
couple she worked with who planned to marry and were
committed to buying a house. Instead of telling them to give
up eating out and going to Starbucks, D’Angelo showed them
how they could save for a modest down payment. “When
they could see that there’s a possibility to get a house down
payment—and that’s a powerful encouragement—they were
willing to go through Draconian changes to get there.”
In the graph above, you can see that if you begin saving $100
per month at 8 percent interest at the age of 30, you’ll have
$230,917 when you hit 65. The amount you’ve contributed is
just $42,000; the rest is compound interest.
Start saving now—no excuses. Then when you’re not able to
save or not able to save much, your money will still be doing
the work for you. The key is to start early for maximum gains.
What is your goal? Once you see how you can afford to fund
your dreams, it sweetens the medicine. You’ll be saving for
something you truly want in the long run and won’t feel deprived in the short run. n
For more information about Savings: Steps to take for personal wealth, go online to www.bankrate.com/wealth
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