SAVINGS ACCOUNTS

Now that we have an understanding of what to look for in a checking account and how to use it, the other pillar of financial security is a savings account, where you have no risk of losing a penny and the bank will pay you for keeping your money on deposit.

There are various types of savings vehicles and they go by different names, depending on whether you open a savings account at a bank, a mutual fund company, or at a brokerage firm. For example, a money market deposit account (MMDA), which is also commonly referred to as a money market account (MMA), that is opened with a brokerage firm is basically an account within an account—meaning that you open a brokerage account and within it is a place to hold and save your money. The brokerage account that houses the money market account provides you with more options than just saving; it allows you to buy various investments, be they stocks, bonds, mutual funds, CDs, or even gold. A simple savings account opened at a bank typically doesn’t afford you any of these other investment options.

For the purposes of this chapter, I am using the term money market account to include money market deposit accounts, since they are essentially the same thing.

Know the Difference Between Checking
and Savings Accounts
I want to be very clear about one thing: A checking account is not a savings account, and a savings account is not a checking account. I want you to have both types of accounts, but it is crucial that you understand they have different uses. As we just saw, your checking account is where you keep money you need to cover your monthly spending. Whether it be cash you take out at the ATM, or checks you write to cover bills, your checking account is where that money comes from. It is the ultimate in banking convenience; you can withdraw money at any time—be it by check or ATM—though the trade-off for that convenience is that you rarely can find a checking account that also pays you a good interest rate on your balance.

A savings account can be a bit less convenient than a checking account—there can be some restrictions on the number of withdrawals you can make or a minimum withdrawal amount, for example—but the bank will pay you a higher rate of interest on your money than it does on its typical checking accounts. Those small restrictions should not be a problem, because your savings account isn’t for your day-to-day spending; you’ve got that covered with your checking account.

How a Savings Account Will Help You Save Yourself
A savings account is where you build up a sum of money so when a big unexpected bill arrives, you have the security of knowing you can handle it without having to borrow money or fall back on your credit card (or bounce a check on your checking account).A savings account is where you get the $700 to pay the mechanic after your car conks out. It is where you come up with the $1,000 to cover your health insurance deductible when your child needs some special tests that aren’t covered by your plan. Your emergency cash fund is also the safety net that keeps you from panicking if you are unexpectedly laid off, because you know you have enough in your savings account to cover your basic living costs until you get a new job. And a savings account is what makes it possible for you to move out of a bad relationship and into your own place. If you keep “emergency money” in your checking account, you are making a costly mistake. You can earn a lot more interest by keeping your emergency fund in a savings account.

Understand How Interest Works
When I refer to earning money on your account, I am talking about what the financial institution pays you for keeping your money on deposit with them. That payment is calculated as a percentage rate. The percentage rate goes by a few different names: interest rate, yield, and annual percentage yield (APY) are the most common. They are all slightly different versions of the same essential concept: how much money you will make on the money you keep deposited in your account. Keeping to my promise of simplicity, I am not going to insist that you learn the nuances of every term. Instead, I want you to focus on just one: annual percentage yield (APY).Whenever you look at an ad or get a sales pitch for a savings account, you want to focus on the annual percentage yield. This is the best measure of what you will really earn. If you are comparing different accounts at different financial institutions, always ask for the APY so you will be comparing apples to apples.

Get the Highest APY
As I mentioned, most “interest-bearing” checking accounts pay a small rate of return—less than 1 percent typically. What you get in convenience you give up in earning power. By comparison, some online savings accounts had an APY of about 5 percent as of the start of 2007.

I know percentages can be a bit numbing, so let’s convert all of this to dollars. If you have a checking account with a balance of $2,000 and the APY is 1 percent, you will be paid a total of $20 over the course of the year in interest. Now let’s say that instead you kept that $2,000 in a savings account and you earned the 5 percent APY. That comes to $100 in interest. Big difference, right?

Bottom line: Your checking account should have only the money you need to cover your monthly bills and cash outlays. Money you want to have for emergencies belongs in a savings account where you can earn money. Power comes not just from saving money, but from saving your money in an account that pays you the most you can get.

A Savings Account of Your Own
Every woman should have her own savings account that is completely separate from any other savings account shared with a spouse, partner, parent, child, et cetera. There is no need to hide this account from anyone. There is nothing shameful or suspicious in establishing your own savings. It goes back to what we discussed in the earlier chapters of this book:Taking care of yourself is not secondary to everything else and everyone else. You deserve to have financial security that is all yours, that you know you can always rely on in a personal emergency.

I believe in this principle so passionately that I have news of an incredibly special offer for the readers of this book— one that puts into action all these words and provides an unprecedented incentive that is nearly impossible to refuse. See the box on page 85 for details.

What You Need to Save
A savings account that serves as an emergency cash fund should be large enough to cover at least eight months of living expenses; this applies to both couples and single women. I am being very careful here to protect you from major financial setbacks. For example, the more advanced your career, the longer it can take to find a job comparable in salary to the one you left. A big savings account is also protection against unexpected medical bills; the sad truth is that one of the major reasons for personal bankruptcies in the United States is unpaid medical bills.

As I mentioned, those of you in a relationship need an additional savings account that is just in your name. Your separate account should have enough money in it to cover at least three months of living expenses. I never want any woman to stay in a relationship because she feels financially trapped; that savings account of your own is your freedom account. I hope you never need to use it, but power is knowing you have it just in case.

So if it costs you $3,000 a month to live and you are single, you need to have at least $24,000 in a savings account as an emergency fund. If you are in a relationship, your family account would be $24,000, and your personal account would be $9,000.

With respect to how to juggle funding both accounts I would do this by equally dividing what you have to save 50/50. So if you have $200 to save every month, $100 goes into your own emergency fund, and $100 goes into the family fund. I know that might sound selfish, but it is important to know you have money that is just your own. It does not mean that you do not love your family; it is just something that you need to do for yourself. And every couple needs to create a system for having separate money. In the chapter entitled “The Commitments,” I will explain why couples also need to make sure that after meeting all their joint financial obligations they split any extra money left at the end of the month and give each other the freedom to spend or save their share as they please. My recommendation is that women—especially stay-at-home moms—use their share of the extra money left at the end of each month to build their own emergency cash fund. This is not about trust; this is about what is needed for you to feel truly independent—truly powerful in your life.

Now, I realize that many of you may not even have eight weeks saved up, let alone eight months. Don’t be discouraged. The key is to commit to starting to save as much as you can each month. It may take you a year, or three years, or more to reach your goal. As long as you do your best to put money away consistently, you are acting powerfully.

Save on Autopilot
The best way to build a savings account is to set up a system where you authorize the bank where you have your checking account to automatically transfer money each month from that account into a savings or money market account. It doesn’t have to be at the same bank. Using an auto-transfer system takes it out of your hands, and let’s face it, that’s probably a very smart move. You don’t have to remember to put money in your savings account, and you are not able to give yourself a free pass one month when you feel like spending rather than saving. By setting up an automatic electronic monthly transfer, you are forcing yourself to save.

You can choose the auto-deposit option when you sign up for a savings account. If you already have an account, contact customer support and ask how to establish this service. It is very simple to put into place. You typically need to provide the institution where you have your savings account two pieces of information: the account number on your checking account and the “routing number” for the bank where you have your checking account. Your bank’s routing number is the first nine numbers on the lower left portion of your check. Or just call up your bank and ask for the routing number. With those two pieces of information, both institutions will be able to talk to each other and get this automatic recurring transfer set up for you.

Whatever you can afford to put away each month is the right amount for you. Only you can know for sure how much you can afford to save. All I ask is that you respect yourself: Don’t let yourself off with the excuse that you can’t afford to save anything. It may take some sacrifice, but if you want to gain financial security by building a large savings account, you must be willing to take a serious look at your spending and see where you might find areas to scale back so you have money for your savings account.

For tips on how to find more money for savings, go to my website.

And don’t think it has to be a lot of money each month.

If you put this and your account has an APY of 5%,
much in your you will have this much saved up:
savings account
each month . . . In one year In three years In five years In ten years
$50 $614 $1,938 $3,400 $7,764
$100 $1,228 $3,875 $6,801 $15,528
$200 $2,456 $7,751 $13,601 $31,056

On my website I have a calculator where you can input your expected monthly savings and the APY you can currently earn, to estimate how your savings account will grow over time.

How to Size Up a Savings/Money Market Account
A good savings/money market account charges no fees and the APY you earn is as high as possible. The trick is knowing what’s a good rate.

Follow the Fed
The APY on a savings/money market account is not set in stone. In financial terms, the rate floats rather than being fixed (permanent). A financial institution can offer any rate, and the rates can vary widely from bank to bank. But all banks tend to follow the lead set by the Federal Reserve. The Federal Reserve is our government’s big bank. It has all sorts of power and sets all sorts of policy, but the one and only thing you should know is that the head honchos at the Fed meet eight times a year and decide if they want to raise, lower, or leave unchanged a key interest rate known as the Federal Funds Rate. Banks follow the Federal Reserve’s lead: When the Federal Funds Rate rises, you typically see interest rates on savings/money market accounts rise. When the Federal Funds Rate falls, so too will the rates. Some financial institutions react instantly; others may make the adjustments monthly or quarterly. The point is that if you know what the Fed Funds Rate is—it’s always news when the Fed announces its moves and is easy to find in the business section of most newspapers or online—you know a good savings rate should be right around that rate.

For example, at the end of 2006, the Federal Funds Rate was 5.25 percent. So a good savings rate should be between 4.5 and 5 percent. At the same time, though, plenty of places offered savings accounts with APYs of just 2 percent or 3 percent. Sticking with a low-paying savings account is crazy. If your account is more than three-quarters a percentage point (0.75) below the Federal Funds Rate, I think you should move your money to an account with a higher yield.

One important caveat: I realize that some of you may have a good no-fee deal at your current bank because your combined balances on your checking and savings accounts are large enough. So if you pull out your savings, you may no longer qualify for the free checking. If that’s the case, be proactive and move your checking account at the same time you move your savings account. As I mentioned, www.bankrate.com is a great place to shop for no-fee checking accounts. You can also search for top
savings accounts.

Opening a new account can take you as little as ten minutes. As of late 2006, some of the banks offering the highest APYs are Internet banks. Here are a few of my favorites:
_ Emigrant-Direct: www.emigrant-direct.com
_ HSBC: www.hsbcdirect.com
_ ING Direct: www.ingdirect.com

Beyond Savings Accounts
A savings or money market account is all I insist you have, but I also want you to know that there are other good savings options, such as certificates of deposit (CDs) and money market mutual funds (MMMFs), both of which are available at banks, mutual fund companies, and brokerage firms.

If you are interested in learning about CDs and MMMFs, and when it makes to sense to add them to your savings strategy, go to my website.

A Word on Safety
Online banks, “bricks-and-mortar” banks—including savings and loans—and brokerage firms can all be part of the Federal Deposit Insurance Corp. (FDIC) program. The first thing you should check when looking into a financial institution where you want to keep your money safe is whether it is an FDIC member. Most banks are, and they love to let you know about it:You typically will see “FDIC” on the website homepage, or plastered on the bank’s front door and just about everywhere else they can think of. Credit unions have a similar insurance system. Look for a sign stating that your credit union is a member of the National Credit
Union Share Insurance Fund (NCUSIF) or is covered by a state operated insurance plan.

The FDIC is a federal agency that protects depositors (that’s you) at its member banks, brokerages, and S&Ls. If the institution runs into trouble and can’t pay you the money you have on deposit, the FDIC steps in and covers your deposits up to certain limits.
These rules apply at places that offer insurance:
_ $100,000 for individual accounts
Up to $100,000 of your combined deposits in checking and savings accounts is fully insured. This insurance is per institution. So if you have $100,000 at one institution and $100,000 at another, your combined $200,000 is fully insured. Please note: They must be entirely different institutions, or credit unions, not different branches of the same institution.
_ $200,000 for jointly held accounts
In addition to your individual coverage, you can also have a combined $200,000 in an account you own with someone else, such as a spouse or partner. That $200,000 breaks down into $100,000 of insurance for each of you.
_ $100,000 per each account with a designated beneficiary
You can also receive $100,000 of insurance for every account that you will give to someone else upon your death. That is, you sign an agreement that upon your death the money goes to the person listed on the account as your beneficiary. For example, if you have four grandchildren and set up four separate bank accounts at the same institution of $100,000 each, with each grandchild as the beneficiary of an account, all $400,000 is insured. Or you can set up one account for $400,000 and name each of the four grandchildren as beneficiaries, with each child receiving $100,000 of insurance coverage.
_ $250,000 for IRA accounts
If you have an IRA account at an insured bank or credit union, those retirement assets are covered for up to $250,000. (Again, this is per bank/credit union.) But please be very careful with this. The IRA insurance is only for certain types of accounts you can buy through a bank, credit union, or brokerage firm, such as money market deposit accounts (MMDAs) and certificates of deposit (CDs). It does not cover any stocks or stock mutual funds that you may have purchased through them.

What’s Not Covered by FDIC Insurance
Banking was a whole lot easier years ago when the only accounts offered were simple savings and checking accounts and CDs. But banks—and S&Ls and credit unions—are now able to offer all sorts of other types of investments, such as mutual funds. And you can even buy stocks through a bank subsidiary. In Month Three of The Save Yourself Plan I explain in detail what mutual funds and stocks are and how they work, but the important thing to understand right now is that mutual funds and stocks can lose value; that is, if you invest $1,000 in a mutual fund or a stock, you are not guaranteed that you will always have at least $1,000 in the account. If the stock market goes up, you will have more than $1,000. If the stock market goes down, you will have less than $1,000.That’s why they are called investments and not deposits. That’s a crucial difference. Deposits are insured. Investments aren’t. Even if you bought them at a bank and you get a statement from the bank, an investment is not eligible for the insurance I just described above.

Let’s review:
_ Insured: Deposit accounts, including checking accounts, savings accounts, as well as money market deposit accounts (MMDAs) and certificates of deposit (CDs).
_ Not Insured: Stock mutual fund, bond mutual fund, individual stock, individual bond, money market mutual fund. Pay particular attention to that last one: A money market mutual fund (MMMF) is not the same as a money market deposit account (MMDA). They look, smell, and behave the same in that both are designed to never lose a penny. But because an MMMF is a product created and run by a fund company—and not a bank—there is no insurance program. So in the extremely unlikely event that the mutual fund company runs into some sort of trouble—and I want to stress that this is highly unlikely to ever occur—there is a chance that you would not receive $1 for every dollar invested in an MMMF. Instead, your account might be nicked a few pennies for every dollar invested in the MMMF, whereas your bank MMDA would be fully insured as long as you meet the deposit limits described earlier.