Frugal Savings Options – Does An Interest Rate Really Matter?
If you're new here, you may want to subscribe to my RSS feed. Thanks for visiting!
As a person who aspires to be frugal, I understand that spending less money is only part of the equation. Another piece of the frugal puzzle is to do more with what we already have, and that includes money. The why is easy enough to understand, but the how is another story altogether. Should I start sticking money under my mattress? Should I put it all into "growth" funds in the stock market? For me (and most people, I would suspect), the answer lies somewhere between these two extremes.
The key to making your own personal and frugal choices for what to do with the money you already have is to understand the concept of risk and how it relates to you. Everyone has their own unique perspective when it comes to risk and what kind of risk they are willing to put up with for potential return. My own risk tolerance is very... low. Because of that, many of my choices include strategies that guarantee some return, but the return is much lower than potential return on something with more risk. This is an individual decision, and I recommend that you consult with a financial planner that you trust in determining what your own risk tolerance is.
Although it is important to understand and make choices for savings over the long term, today I'm just going to talk about short term strategies. And by short term, I mean anything that isn't classified as "retirement". I have a three-tiered approach when looking at my immediate money in savings: my local (home) bank, a "high-interest" savings account, and certificates of deposit (commonly known as CDs).
The first is my local bank. This is the bank I have my checking account in. I have a savings account from the same bank directly linked to this account, and I can transfer money between them instantly. This is important to me, for I keep my emergency fund in it. This savings account doesn't pay a very high interest rate, but I have immediate access if needed.
The second tier is a high-interest savings account. I use ING Direct, but there are many different ones available (Jim at Bargaineering compiled a nice list with reviews here). This pays out more in interest, but I have slower access to my money (it takes a few days for transfers to my home checking account to go through). In this I put money I am saving for a specific purpose (like our new-to-us car fund) and eventually when I have a better emergency fund, part will go here.
The final tier is CDs. CDs can pay even more in interest, but are locked in for a specific period of time (this can be broken but you pay a penalty). I admit, this tier for me right now is still on paper. Once we have paid off all our debt and are establishing a large emergency fund, a portion of that will go into CDs to earn us more in interest. This carries the risk that we would need the money before the period of the CD is through, but can be mitigated through having multiple CDs or "laddered" on a schedule (where different ones expire at different times).
Consider your savings strategies - are you maximizing your reward with consideration to your own personal level of risk? You don't have to settle for the 0.25% interest rate common to many local "brick and mortar" banks if you don't want to. Even when your risk tolerance is admittedly very low. 
Want more like this post? Read on!
- Should An Emergency Fund Always Be In Cash? Many economic counselors recommend having an emergency fund available for basic ...
- How I Saved Over $1000 On My Taxes! With tax day just around the corner, I wanted to...
- Frugal funny Some say that debt can be a good thing if ...
- Five Secrets to Maximizing Your Coupon Savings Five Secrets to Maximizing Your Coupon Savings, a guest post...
- Self-Discipline One of the problems with trying to get out of...
One Response to “Frugal Savings Options – Does An Interest Rate Really Matter?”
February 6th, 2009 at 9:05 am
thank you very kindly for this information! we’re in our 2nd month of snowballing and are meeting our goals. it’s nice to start researching where we’re going to put our ‘extras’ when our snowball is over!
Leave a Comment