Here’s a penny for your thoughts—40% of US adults say they don’t have enough funds on hand to cover a $400 emergency. From unexpected car expenses, to the ever discussed “rainy day fund” there’s as many reasons to save as there are places to keep the funds.
5 Important Types of Savings to Have
1. Emergency Fund
An emergency fund is for, well, emergencies. No matter how hard you plan, life is filled with surprises. Car in need of urgent repairs? Sudden illness requires a hospital stay? Unexpectedly get laid off at work? An emergency fund can be used to help you make ends meet if you incur unanticipated expenses.
An emergency fund is intended to be used at a moment’s notice. For the most part, you’ll hear that a healthy emergency fund should cover between three and six months worth of living expenses—which would include rent, mortgage, bills, food, and other essentials.
Since you never know when an emergency might happen, it’s best to keep your fund relatively liquid. That means emergency funds could live in a high-yield savings account or a money market. When an emergency happens, the last thing you should be worrying about is penalties around withdrawals.
2. Medical Savings Fund
This is money intended to cover a medical emergency, specifically something that might not be covered by health insurance. Depending on where you choose to keep these funds, these funds could potentially be factored into an emergency savings fund.
Once again, this type of savings should be liquid so you can get in it in the case of an emergency. Depending on the type of insurance you have, you might have access to an HSA, or health savings account.
Saving limits in 2020 for a HSA are $3,550 a year as an individual or up to $7,100 for families. There’s no penalty for using your HSA to cover medical expenses. If you don’t have access to an HSA, you could choose to keep your medical savings in a separate savings account.
3. Retirement Fund
We’ve all heard it before; it’s never too early to start saving for retirement. Even if you can only contribute a little bit every month, every deposit helps. However, understand that the money you invest towards retirement shouldn’t be touched until retirement.
If your company offers 401(k), consider using that, especially if they offer matching contributions. Companies often match employee contributions up to a certain percentage, and it’s worth taking advantage of the perk.
Every company is different so speak with an HR representative to see what your company offers. Another tax-advantaged saving option is an IRA.
But, don’t consider this money liquid, or in play until retirement. Withdrawing money from a 401(k) or IRA before retirement can lead to hefty tax penalties.
4. Children’s College Fund
If you have a child (or children), you’re probably already considering how to pay for college. Starting early and saving little by little can make a world of difference when those admission letters start rolling in.
While there are many ways to start saving for your child’s education, a 529 college savings plan is a speciality saving account where you can take advantage of tax benefits while saving for future schooling.
Typically, you contribute to a 529 post-tax, and can withdraw the earnings tax free, as long as they’re used to pay for a qualifying educational expense. Check with your specific state to see what specific tax benefits they offer, benefits may vary from state to state.
5. Personal Savings Fund
A personal savings fund is where your imagination can run wild. It’s not an emergency, medical expenses, or retirement. This fund is there to help you save up for your next big financial goal—that could mean a car, vacation, or perhaps a downpayment on a home.
Based on the rate at which you’re saving for this big purchase, you probably have an idea of when you’d need the funds by. That means something like a CD might be a fit, since you know exactly how long you have to let your money grow in the account. For other goals, a high savings account might be the best fit.
If you want to maximize the money you’re saving, you could consider keeping funds in different accounts. Based on how quickly you’ll need access to the money, as well as the amount of interest you want to earn, there are a variety of account options to consider for each of your savings goals.
With a savings account, you’ll earn interest from the bank, just for having your funds deposited there. The APY, or Annual Percentage Yield, is the rate of return from the bank you’ll receive.
Each banking institution offers a different interest rate on savings accounts, and some of them with caveats, including minimums or limits to the amount of interest you can earn in a year. There are also some restrictions when it comes to withdrawals.
Withdrawals completed online (like automatic bill pay or transfers between accounts) are limited to six per month under federal regulation, but there are no restrictions on the number of transactions that can be made in-person.
Savings accounts are typically the most liquid place to stash your cash—meaning you can get to it faster than the options below.
Money Market Accounts
Money market accounts offer similar benefits as high-yield savings accounts but typically have more requirements. You might need a certain balance to avoid monthly fees. In addition, some accounts require deposit minimums.
Money market accounts sometimes have limits on the number of withdrawals that can be made from the account in a month. However, access to cash is still relatively simple.
CDs (Certificates of Deposit)
CDs are similar to the above, but on average, they have higher interest. In exchange for competitive rates, you typically have to leave your money in a CD for an agreed on amount of time. In the event of an emergency, you can withdraw funds from a CD early, but not without incurring fees.
Save Simply with SoFi
While there are seemingly endless reasons to save, as well as places to put your hard-earned cash, earning interest on it doesn’t have to be complicated. Consider a cash management account with SoFi Money®.
With SoFi Money you can save, spend, and earn all in one place. With free P2P transfers and a debit card you’ll have easy access to your money wherever you go. And there are no account fees (subject to change), so you can start saving simply today.
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