Savings and Checking Accounts

With all the emphasis placed on high return yielding investments in recent years, traditional savings accounts haven't been given their due. Read on to understand why, of all the many choices of investment vehicles, these types of bank accounts are crucial to successful financial planning.

Traditional savings accounts (or "passbook" accounts as they were commonly called for years because your deposits, withdrawals and interest were recorded in a passbook) are available from banks and credit unions. The minimum deposit required to start an account is usually pretty low ($100 or less). Your money earns compounded interest.

The federal government, through the Federal Deposit Insurance Corporation (FDIC), guarantees bank accounts for amounts up to $250,000. Most of these types of accounts allow you to withdraw and deposit funds without penalty. Another government entity, the National Credit Union Administration (NCUA), provides similar protection for deposits in credit unions.

Emergency funds. The drawback of savings accounts is that the interest they earn is so low compared to other investments and bank accounts that it is difficult to reach your goals over the long-term if you use only this vehicle. However, a vital part of anyone's financial planning is that they must have an emergency savings fund, and this type of account is the perfect place for it. It's preferable to stuffing your money under the proverbial mattress because you have immediate access to your funds, it's insured by the federal government and your money earns compounded interest, albeit at low rates, which means your money is still working for you.

Financial Calculators Use this emergency savings fund calculator to determine how much you should set aside to cover periods during which you have reduced or no income The value of your savings can be affected by both inflation and taxes. Use this Savings, Taxes and Inflation Calculator to help you determine how much your savings will be worth with these two important variables in mind. Click the "View Report" button to get more information and a year-by-year savings schedule.

A great way to have your emergency fund money earn interest for you is to find a bank or credit union that offers checking accounts that earn interest. Most of us still find traditional checking accounts to be a necessity, and if you can earn compounded interest on the account it will really be to your benefit. With the advent of online banking, you can shop around nationally for the best rates and still have instant access to your funds electronically

We should mention, however, that you must have the discipline not to touch the amount you have earmarked as "savings" just because it's in a checking account. Some of us still need the mental barrier of a traditional account labeled as savings to resist the temptation of spending our savings. If you even suspect you'll succumb to this temptation, separate your checking and savings accounts, or find a bank or credit union that lets you open separate savings and checking accounts and earn interest on both. This usually requires that you keep a certain amount in combined accounts on a monthly basis.

Interest earned on savings and checking accounts is considered income for tax purposes.