The concept of saving is not a particularly tough one to grasp. We all know the importance of having an emergency fund for sudden large expenses and saving long-term for retirement. Execution, on the other hand, can be a bit more difficult. After all, the American personal saving rate is currently a paltry 3.6 percent.
There are intricacies to saving that many consumers may not consider in their plans. Here are three misconceptions that, once understood, could make your 2013 resolution to save that much easier:
1. Having a large savings balance is all that matters. The sum of what you have stashed away is undoubtedly important for providing clear benchmarks along the way towards savings goals. However, it's not the only thing you should be concerned about. The interest rate you're earning on that balance is also a crucial part to saving money.
Interest is the primary reason for depositing cash into savings rather than a checking account or stowing it under the mattress. Every effort-free dollar earned via interest is a dollar you won't have to earn the hard way: working. Plus, the effect is compounded the longer you leave the money set aside.
So when shopping for a new bank, the yields they offer should be a major factor to consider. Rates these days are shockingly low, with nationwide average yields below 0.10 percent for basic savings, and just above 0.80 percent for 5-year certificates of deposit. Hardly any are keeping up with inflation, so to not seek the best-paying account means you'll be losing money each year in real terms. Even those who are happy with their savings rate at the moment should be actively on the lookout for future rate cuts.
2. CDs are too risky thanks to early withdraw penalization. Certificates of deposit are indeed a much longer-term savings option, as they require you hold the account without withdrawals for a specified period of time. Early withdrawal will almost always result in some sort of penalty, but if you're able to find a CD with a deserving yield, this potential penalty may pale in comparison to your earnings.
One example is the 5-year CD at Patelco Credit Union in California. This account earns 1.50 percent APY--well above national averages--and includes an early withdrawal penalty of 180 days of interest (or the total interest earned, if that amount is less). This means that, should you find yourself needing to withdraw at year four instead of year five, you will still have earned significant interest (with an adjusted APY of about 1.3 percent). Such penalties can be more or less severe, however, so make sure to verify with your bank or credit union before opening a new CD.
Some banks also offer special CD options for seniors, who may be concerned about medical or other unexpected expenses. For example, First State Bank in Indiana offers a Senior Saver CD, which allows for early withdrawals of up to half of the original balance without fees or penalties.
All this said, you should never choose a CD with the intent of withdrawing early. Those uncertain about their need to access the extra funds in a pinch would be better off with another account option like a savings or money market account, or a shorter-term CD.
3. Every spare penny should go directly into a savings account. You may think you're ahead of the game by dutifully stashing away the remainder of your monthly paycheck into a savings account, but it can actually put you at risk for bank fees. The United States Federal Reserve regulates how various types of bank accounts are categorized. One specification that directly affects most consumers is the monthly withdrawal limit on savings and money market accounts. The Fed allows at maximum six withdrawals per month from these types of accounts, with additional withdrawals incurring a fee. Typically, this fee is somewhere around $10, which could easily wipe out a chunk of interest earnings.
What this means is using your savings account like a checking account, transferring money out whenever you need it, is risky business. Instead, you should maintain a reasonable balance in a checking account (allowing unlimited withdrawals) to cover regular monthly spending plus some extra for unexpected expenses. The rest can--and should--be stored in an interest-bearing account.
John Gower is an analyst at NerdWallet, a website dedicated to providing unbiased financial information and helping consumers find the best high yield savings accounts, checking accounts, credit cards, and more.