Financial Education: Pay Yourself First

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Saving Options

Most people save money in a bank savings account or by purchasing investments. In a savings account, you make money by earning interest.

The bank pays you interest for borrowing your money. A bank savings account ensures your money is safe and you can access your money.

Savings in a financial institution are generally insured up to $100,000 by the Federal Deposit Insurance Corporation -- FDIC -- or the National Credit Union Association -- NCUA.

That means if your financial institution goes out of business, and it can't pay your money, the FDIC or NCUA will make sure you get your money.

Let's review the types of savings products available at most banks.

Statement Savings Account
A statement savings account is an account that earns interest. If you have a statement savings account, you will usually receive a quarterly statement that lists all of your transactions (withdrawals, deposits, fees and interest earned).

Passbook Savings Accounts
Passbook savings are similar to statement savings accounts. The difference is the record keeping. Instead of receiving a quarterly statement, all transactions are recorded in a passbook. You have to take your passbook to the bank when making transactions. The teller will update your account information when you go to the bank.

Club Account
A club account is a type of savings account you "join" to save money for a special reason, such as holidays or family vacations. Club accounts usually require you to make regular deposits.

Money Market Accounts
A money market account is one that usually pays a higher rate of interest than a regular savings account. Money market accounts usually require a higher minimum balance to earn interest, but they also pay higher rates for higher balances.

Certificates of Deposit (CDs)
CDs are accounts where you leave your money for a set period of time, such as six months, one, two or five years, called a term. You usually earn a higher rate of interest than in a regular savings account. The longer you promise to keep your money in a CD, the higher the interest rate. Be sure to think about your cash needs before opening a CD because you will pay a penalty if you withdraw your money early.

Let's review the savings and point out the differences.

Statement savings and passbook savings accounts are similar. They both earn interest. The difference is in the record keeping. Club accounts are for saving for a specific purpose, such as a vacation or a holiday.

CDs and Money Market accounts generally earn higher interest rates and require higher minimum balances. CDs are held for a fixed term. This means you cannot make deposits or withdrawals during the term. Money Market accounts do not have a fixed term. You can make deposits and withdrawals.

Always check your records and statements for accuracy. Banks are not perfect and can make mistakes.

Now that we have reviewed various savings options, you should know about some special accounts offered at some financial institutions.

Special Accounts: Frequently Asked Questions

Q. What is an Individual Development Account?
A. Individual Development Accounts (IDAS) are matched savings accounts. When an account is matched, it means another organization, such as a foundation, corporation or government entity agrees to add money to your account.

Q. Why would an organization do that?
A. Organizations will match the money people save in IDAs to encourage low-income families to save money on a regular basis. IDAs are based on the concept that asset building is necessary to break the cycle of poverty and to help families become financially independent. Asset building refers to people purchasing or holding items that will help them financially in the future. Organizations involved in IDA programs want to help low-income families achieve self-sufficiency.

Q. What can I use IDAs for?
A. If you open an IDA, the money must be used for a specific purpose. Allowable purposes include:

Ask local community action agencies, other community groups and bankers if they know of any programs in the area.

Q. What is an Electronic Transfer Account (ETA)?
A. An ETA is a low-cost account that provides federal payment recipients with the opportunity to receive their federal payments through direct deposit. The ETA is offered only through certain federally-insured banks, thrifts and credit unions.

Q. Who is qualified to open an ETA?
A. All federal payment recipients who receive any of the following can take advantage of an ETA:

• Social Security
• Supplemental Security Income (SSI)
• Veterans benefits
• Federal employee salary or retirement
• Railroad retirement payments

Q. How does an ETA work?
A. The ETA is a voluntary program for both the consumer and the financial institution. Banks, thrifts and credit unions that partner with the U.S. Treasury to provide the ETA offer an account that features:

• A monthly fee of $3 or less
• At least four cash withdrawals and four balance inquiries per month at no additional charge
• No minimum balance, except as required by state law
• Online point-of-sale transactions in the institution's network, for example, U.S. Post Office and grocery stores
• Monthly statements
• The same consumer protections as other account holders

Some banks offer more or better services for their ETA program than these minimum requirements. For example, some financial institutions might give the consumer the option to deposit other types of payments into the ETA account. Some institutions may also pay interest.

Q. How can I open an ETA?
A. Look for participating banks in your area. Access the Internet and check the following web site: http://www.eta-find.gov to find banks in your area. Participating banks and credit unions cannot refuse to open an account regardless of your credit history unless you have previously held an ETA that was closed because of fraud.

Q. What is Section 529 Plan?
A. A Section 529 Plan is a prepaid savings program for higher education. Any person can set up a plan for a child pursuing higher education. The money grows tax-deferred and is taxed at the child's rate when withdrawn for educational purposes. The donor may have state income tax breaks. The savings can be applied to any college in any state. Many plans can be started with only $25 a month. More information about state tuition programs can be found at: http://www.irs.gov.