Personal Finance Tip #2 - High Yield Savings Accounts

In America, we have been experiencing a gradual decline in the savings rate since the early 1980s even falling to a negative savings rate in 2005. A negative savings rate occurs when one spends more than they earn which usually means getting into debt (loans or credit cards) or dipping into savings. Although it does not mean Americans do not have savings, it does imply that savings are declining. Without savings, one can have real long term and short term problems. With the uncertain future of Social Security, savings become even more important as it will probably make up the bulk of your retirement income. In the short term, savings help to protect you during unexpected emergencies such as unforeseen medical expenses, job loss or emergency home/car repairs. With the current economic environment, savings should be one of your highest priorities for achieving financially stability and independence.

There are two ways to help boost your savings. The first obvious way is to cut down on your spending. There are many ways to reduce spending but the easiest and one of the most effective methods is to cut down on unnecessary daily expenses. According to Bankrate.com the Top 10 Money Drains are (along with my recommendations):

1. Coffee - make your coffee at home and bring it in a reusable cup/thermos
2. Cigarettes - stop smoking, it is bad for your health anyway
3. Alcohol - try to limit your drinks when at outside venues
4. Bottled Water at Convenience Stores- buy bottled water in bulk or refill with boiled water
5. Manicures - cut down on manicures or attempt to do them yourself or with a friend
6. Car Washes - self wash your car
7. Eating out on Weekdays - pack your own lunch and save your money for weekends out
8. Vending Machine Snacks - buy in bulk and bring your snacks from home
9. Interest Charge on Credit Card Bills - don't get into credit card debt - read Personal Finance Tip #1
10. Unused Gym Memberships - switch to cheaper gym memberships (YMCA or city-subsidized recreation centers). Learn about ways you can effectively work out without the use of a gym.

The second way to increase your savings is to place your savings in high yielding accounts. Take advantage of the power of compounding interest and make your money work for you. Many people I know have all their money in checking accounts, regular savings or money market accounts that yield very little or no interest for their money. Others place them in Certificates of Deposit (CDs), which are fine, but have early withdrawal penalties. With the advent of Internet banking, most institutions provide high yielding savings and money market accounts for online users. The interest on these accounts is usually higher than those of traditional accounts and CDs without the illiquidity. With increasing competition in the high yield savings industry, there are many options with high interest rates that have no minimum balance requirements, no monthly fees and no online transaction requirements. For those already using Internet banking, this is a no-brainer since opening an account is easy and transferring money between accounts is old hat. For those uncomfortable with the Internet banking or the Internet in general, I recommend that you familiarize yourself with Internet transactions because it is here to stay and will be the future standard. I am not aware of any traditional high yield savings accounts that do not require large initial deposits, a high minimum balance, limitations on transactions in and out of accounts or other requirements or restrictions.

Before you open your high yield savings account, do your due diligence. Make sure you know what the standard rate will be (rate after the introductory rate expires) and if the bank is FDIC insured. Also check to see what the minimum balance required will be and if there are inactivity or maintenance fees.

Open an online savings account NOW and begin the road to wealth building and financial independence.

Seemingly Useless Commentary - Today's low savings rate has been a function of both the housing boom in 2005 and easy credit from credit card and mortgage lenders. This increase in debt and decrease in savings makes many Americans vulnerable to unexpected situations (medical bills and job losses) causing a rise in both foreclosures and bank defaults. When people default on loans, it is dangerous for banks because a main part of a bank's business is to entice you to deposit your money in their bank with a promise of interest payments and lending your money out to others at higher interest rates. If many loans go into default paired with a panic withdrawal of funds due to fear of insolvency, banks can actually run out of money and go out of business ("bank run"). If there are enough bank runs, an economic recession can occur. This will cause a general tightening in credit since there will be less lenders willing to lend. Businesses and people with no credit or not good enough credit will not be able to get loans or get them at extremely high rates thus slowing down the growth of the economy. So next time you want to spend your full pay check on something nice, think about the economy and put some of that aside in a high yield savings account.

Useful Websites:
Bankrate High Yield Money Market and Savings Account Rates