It’s often reported in the news that Americans are not saving as much as they should. Some estimates have shown that nearly 70% of Americans have less than $1,000 in their savings account, and nearly 30% of Americans older than 55 have no retirement savings.
That’s deeply terrifying, and if you are among those folks, it’s time to get serious.
Playing Catch Up
You can absolutely catch up on savings, even if you are approaching retirement age. But it may require some bold financial moves. The scope of this article assumes that you have regular income and that you are looking for the most effective way to build up your savings account.
If you have a traditional savings account, then you are likely earning a paltry interest rate. We’re talking .01% earned. That means that if you have $10,000 in the bank, after a year you’ll have earned a whole dollar.
Enter the high-interest savings account. These specialized accounts exist to reward you for saving money. The interest rate could be anywhere from 1.35% to up to 2.10% depending on the bank and account type. Note that the high-yield rate may fluctuate.
Let’s say you find a high-yield account with an interest rate of 1.75% and put that same $10,000 in there. After a year with a traditional bank account, you earned a paltry one dollar. After a year in this account, you’ll have earned around $175.
The real difference comes when you start putting away money each month. Even if it’s just $100, or $1200 per year, the difference continues to grow and the benefits become fairly eye-popping. This growth incentivizes you to save more than a traditional savings account because you can actually SEE your money building.
What’s The Catch?
You may be wondering what the catch is because this sounds too good to be true. In a nutshell, you may be required to keep a minimum balance to earn a high-interest rate. You may also have monthly maintenance fees.
How to Choose a Bank
You’ll want to shop around and compare different banks before you settle on a high-yield account. Of course, be sure to confirm that the bank is FDIC insured to protect your money (up to $250,000).
Be sure to check for the minimum balance and be realistic. We recommend using high-interest accounts for your savings outside of your emergency fund. You should work on building 3-6 months of income before you start planning longterm, but some banks have very low minimums and it will make dipping into savings to pull yourself out of a hole that much easier.
How Much Should You Save?
Every financial situation is unique, so, unfortunately, there is no easy answer. In general, you’ll want to cut back on frivolous expenses and focus on saving every dime you can. If you are approaching retirement, this is more important than anything else.
If you are younger and have a ways to go before retirement, then be sure to budget in a little bit of fun. Moderation is a skill that can be developed, and there’s nothing wrong with eating out occasionally or catching a film at the cinemas as long as you have the big picture under control.