College comes with a lot of expenses, but that doesn’t mean you can’t start saving money. As graduation approaches, so do your student loan repayments and possibly life on your own. Therefore, college is an important time to put away some money.
- Importance of saving in college
- Key features of a Savings Account
- Key features of a Certificate of Deposit
- Key features of a Money Market Account
There are a few options for students who want to save money and earn interest in the process. The simplest and most popular one is opening a savings account. It has very few limitations and is safe and easy to access.
Introducing Savings Accounts
Firstly, savings accounts come with an interest rate, which is deposited into your account each month. Because savings accounts are insured by the FDIC for up to $100,000 they are relatively risk free. There is also automatic transfer from your checking to your savings account, which will allow you to put money in and take it right back out when you need it.
However, savings accounts often come with opening and monthly maintenance fees, require a minimum balance and incorporate a maximum deposit. And though collecting interest sounds wonderful, savings accounts offer relatively minuscule rates when compared with other accounts. The current national rate for a savings account is .13%, compared to a Certificate of Deposit (0.83% for 12 months) and a Money Market Account (0.53% national average).
Locking Down A Certificate of Deposit
CDs have many similar qualities to savings accounts, but are aimed at longer term saving. They are easy to open, enforce balance requirements, accumulate interest and are FDIC insured.
CDs differ in their return rates and access to funds. You are pretty much guaranteed a higher interest rate than with a savings accounts because with a CD you will be locked into a time-frame during which you agree to not withdraw your money.
You can choose to lock down your money for a couple of weeks or up to ten years. In general, the longer the period, the higher the interest rate. This doesn’t mean your money disappears while it’s in the CD, but you will be heavily penalized if you withdraw it before its maturity date.
So why would a college student open a CD? Despite the limited access to your funds, CDs can be flexible in other ways.
Many people choose to open multiple accounts and “ladder” their CDs. Opening multiple accounts of three months, six months and one year allows you to collect interest at a higher rate, while still ensuring some money is always nearing liquidity. Furthermore, if the CD is expandable you will be able to add money to it. While CDs may not fit for every college student, if you have the money it may be worth it.
What About Money Market Accounts?
A slightly more advanced way of saving your money is through a Money Market Account (MMA). With an MMA, the bank will invest your money and give you a small portion of the return (plus your principle). For this reason, the interest rate for MMAs are higher than for standard savings accounts.
MMAs differ from CDs in that you can make a limited number of monthly withdrawals and the minimum balance is higher.
This option is often more attractive to investors who are looking to park cash between investments. It might be a better option for students with more cash to save and monthly bills to pay (rent, car).
Each student’s financial situation is different, but whether it’s opening a savings account, CD or MMA, it’s smart to start saving.
- College is a crucial time to begin saving.
- Savings accounts are the simplest way to save, but offer the least return.
- A CD is a great way to save if managed properly.
- Money Market Accounts are good for larger funds and managing bill payments, but usually after college.