Understanding Savings Account Options in your 20s
As a post-grad entering the workforce, you may be wondering about IRAs, bank CDS, money market accounts, checking accounts and other terms your co-workers are using in the office. While it’s tempting to go out and spend your new paycheck, your 20s are the perfect time to start saving for major (and minor) life events, including vacations, emergencies, buying a home, and retirement. But how do you know which savings account is right for your goals? Learn a little more about the standard and high-interest savings account options available in your 20s to decide where you want to start building your funds.
Standard savings account: When you’re managing your own money, a standard savings account is one of the most important elements of your financial portfolio. You may even want to open more than one to designate them for specific savings goals. Start by opening an emergency fund. The goal of this savings account is to set aside money to cover at least three months of expenses in case you find your income reduced or need to pay medical bills, etc. Once you have this established, open a rainy day savings account, perfect for setting aside money for a wedding, vacations, purchases to support your hobbies, birthday, wedding or Christmas gifts, and other short term goals. This ensures you don’t dip in to your emergency savings account, but gives you a place to grow funds with interest.
Goal-specific savings accounts: From an account that’s designed to help you save for a home to one that helps you plan your future children’s education, goal-specific accounts often offer unique rewards or benefits that align with your ultimate goal. Rewards could include additional funds to be used for tuition or a down payment, or a lowered mortgage interest rate, depending on the bank. Check with your financial institution to find out what they offer.
Individual Retirement Accounts (IRAs): More and more people are starting to save for retirement in their 20s in order to increase their overall funds for retirement. Even setting aside just a few dollars a month in an IRA is a great place to start. Often set up using money market accounts or bank CDs, Traditional and Roth IRAs are an opportunity for you to start saving for retirement in your 20s. They have a higher minimum balance than standard savings accounts, so you may need to use a different savings account option until you meet the opening balance requirement. Consider speaking to a tax advisor to fully understand the structure, features and benefits of Traditional and Roth IRAs.
High-interest savings accounts: Money market accounts and bank CDs (certificates of deposit) have higher interest rates than standard savings accounts and can help you save for short and long-term goals respectively. They also tend to have a higher balance requirement and come with withdrawal restrictions, so you may need to wait a few years before opening one. These restrictions can be beneficial though, as they encourage you to leave your funds untouched, allowing your savings to grow more over time.
You may want to consider a money market account to increase your savings for short-term goals like vacations, a down payment on a house, or a wedding. You can write checks from this account, and make a limited number of withdrawals each month. A bank CD, on the other hand, can be used for both short and long-term goals as they have varying terms available. Be advised, there may be a penalty for withdrawing before the term is up, so make sure you have more liquid savings elsewhere before opening a CD. With limited liquidity and a higher minimum balance, bank CDs may not be a viable option for you in your early 20s, but it’s still wise to explore the opportunity.
Set up direct deposit or automatic transfers to make saving easier
Even if you can only put aside a little bit a month, saving in your 20s is important to your future. Having a variety of savings accounts can help you structure your financial plan by goal, but it may also seem overwhelming to track. Consider setting up direct deposit with your paycheck or automatic transfers through your bank, to ensure each of your savings accounts gets a little love every month.