SAVINGS
the right path to personal wealth
Uncommon reasons to save
Savings vehicles demystified
High-yield ways to boost your portfolio
Sponsored by
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2007 Savings Guide
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9861 Bankrate.indd 2
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SAVINGS
the right path to personal wealth
Saving is easier than you think. You invest your money and
it grows slowly and steadily over a long period of time. It
seems simple. It is. Taking action now and developing a
savings strategy can transform your life and secure your
future.
When you have an emergency fund, you don’t fear the unexpected, such as an illness or the loss of a job. You know that
you can ride out the bad times because you have savings to
carry you.
Although retirement seems a long way off, saving now means
you won’t have to worry about drastically changing your lifestyle when you are no longer bringing home a salary. And
those savings will provide opportunities in retirement that
will make your post-work life rich and fulfilling.
In this magazine, you’ll learn the best reasons to save (page 4)
so that you can think about the big picture: how saving can
transform your life. We offer easy steps you can take to find
extra cash to save (page 5). Once you’ve got the money, we
explain the various savings vehicles that you can use (page 6).
Finally, we show you how to build a balanced portfolio (page
10) that takes advantage of high yields to make your money
grow faster.
For more information on savings, including interactive calculators and tools that let you project savings and compare
investments, go to www.bankrate.com.
Uncommon Reasons to Save
A look at how savings can change your life
Page 4
Jump-Start Your Savings
Easy ways to get a little extra cash each month
Page 5
6 Places to Stash Your Cash
The pros and cons of passbook savings accounts, money
market accounts and mutual funds, certificates of deposit,
and different types of bonds
Page 8
Take Advantage of High Yields
Building a balanced portfolio
Page 10
Use Your Tax Refund to Save
How to directly deposit a tax refund into up to three
accounts, including IRAs
Page 11
© 2007 Bankrate, Inc. Illustrations by Bruno Budrovic
3
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uncommon reasons to save
When it comes to saving money, there are two types of
people: those who save and those who wish they were
saving. If you’re one who isn’t saving, perhaps it’s time to
think about some of the best reasons to save. One of them
may get you started.
Desire to retire
“Retirement is what I call a long-term, long-term goal,” says
Frank Congemi, a Deerfield Beach, Fla., registered financial
gerontologist and investment adviser who helps clients with
retirement planning. It’s
somewhere out in the future,
and all too few think much
about it until it’s too late.
what will happen to the masses as they approach retirement.
“My sense is they’re going to be woefully unprepared for their
future,” says Harris.
“I see it as a train wreck,” says Congemi, who points out that
as baby boomers realize they haven’t saved enough for retirement, the next generation will have to be called upon to help.
And then that generation, of course, won’t be able to put away
enough for themselves.
Expect the unexpected
Because emergencies—job
loss, illness, car breakdowns
and home repairs—happen
to all of us, experts recommend building reserves for
a rainy day before funding
those sunny retirement days.
Having an emergency fund
brings the peace of mind
that you’ll be able to keep
up with the mortgage and
other regular bills for a few
months, should a financial
setback occur.
A 2005 Hewitt Associates report, “Your Future Financial
Security,” found that even
those participating in company retirement plans believe they should be saving
more: The ideal percent to
save, according to those age
59½ or older, is 19 percent
of their income, and those
younger see 15 percent as
the ideal. But actual savings is far below that, with
the older group saving 10
percent of their incomes for
retirement and the younger
group 6 percent.
Get smart
The goal of being able to pay
for a child’s education is why
some parents and grandparents save. Yet some financial
experts recommend saving
for retirement instead of
Are you saving as much as
for your child’s college. “My
saving promotes freedom
you can? Take a does-it-hurt
counsel has been: First set
test—make sure it hurts a
up an emergency fund, then
little bit, says investment expert Jeff Harris, co-founder of the
fully max out your retirement and only then put money into
Family Legacy Forum, an organization that helps families hancollege funds,” says Harris. “Retirement money works for you
dle the emotional and psychological aspects of money.
at a younger age.”
The train wreck ahead
Living your dreams
One thing certain about the future is its uncertainty, and in
an uncertain market the mantra is: Start early, save more. That
murky future, combined with low savings rates and the continual decline in the number of employers that offer definedbenefit pension plans, has financial advisers worried about
Everyone has goals and, aside from those that involve being
a wonderful person, many of them take money. Whether it’s
homeownership, a big wedding, a trip around the world or a
cabin at the lake, setting goals and working to achieve them
are the marks of happy and successful people. What’s more,
4
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For more information about Savings: The Right Path to Personal Wealth, go online to www.bankrate.com.
3/2/07 1:46:49 PM
the lifestyle and things you have to give up to make those
dreams come true are often insignificant and forgettable.
Let freedom ring
By saving, you can reap the benefits of feeling free and independent.“Living within our means is one of the hardest things
to teach,” says Harris. But that doesn’t mean one can’t become
a saver. Self-sufficiency can be seen as patriotic, too: When you
can take care of yourself, society won’t have to.
jump-start your savings
Many people say they have no extra money to put into
savings. Here are eight ways to find a little more each
month to get ahead.
Answering opportunity’s knock
We all envy those who are “in the right place at the right time.”
If you could build up your savings, you’d be in the right place,
just waiting for that knock on the door. Say a friend is starting
a new business and is looking for investors. “For $5,000 you
could be part of that and change your life,” Harris says. “There
are any number of folks who have had their lives changed
because an opportunity came along where they had some
funds and were able to put money into it.” Since opportunities often arise quickly, only a saver will have the freedom to
seriously consider them.
Building real character
B Set a clear goal. Break the savings concept into two categories: Saving is five years or less, investing is more than five years.
And remember to add money to each regularly.
In Harris’s 20-plus-year career, he has observed that those who
are disciplined enough to leave saved money alone—rather
than giving in to another spending temptation—are able to
grow and mature. That kind of discipline teaches self-respect
and earns the respect of others. Buoyed by that success, it
encourages further goal setting and the knowledge that you
can accomplish what you strive for. And it’s not just about you;
it can also be about opportunities to give of yourself. When a
family member or friend is in dire straits, savers may be able
to help the loved one financially, Harris says. “That really helps
you as a person, to realize you’ve been able to make a difference in a person’s life.”
C Use a jar. Dump all of your change from purses and pockets
It just plain feels good
G Tax
Most savers see the long-term rewards as worthwhile—and
not just financially. “The more you put away, the more you
want to put away,” says Peter J. D’Arruda, a financial educator,
author of “Financial Safari” and president of Capital Tax Advisory Group in Cary, N.C. “You start feeling good, and you get
a better feeling of self-worth when you’re saving.” And since
money (generally a lack of ) is a major source of relationship
problems, having savings can help alleviate stress and make
relationships more fulfilling.
into a quart-sized jar every day. When it’s full, deposit those funds
into savings.
D Do it yourself. Bring your morning coffee or lunch to work,
and bank what you would have spent elsewhere.
E Write down what you spend. Knowing where your money
is going is a powerful tool for saving.
F Cut your overhead. Almost every bill you have can be lowered. You may think of certain bills as fixed expenses—phone,
cable, cell phone, Internet service, etc.—but they’re not.
yourself. Every time you buy a nonessential, put 10
percent of the purchase price in an envelope. At the end of the
month, the contents go into savings.
H Make saving a family priority. Get kids in the habit of saving, too. Make it a rule that one-third of all income—allowance,
earnings or gifts—goes immediately into savings.
I Automate. Determine just how much you want to put away
every month and have that money automatically deducted from
your paycheck into a savings vehicle.
For more information about Savings: The Right Path to Personal Wealth, go online to www.bankrate.com.
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required to open the account. 5.26% APY for the first 60 days from the date the account is opened, regardless of the balance. After the first
60 days, the APY for the account will have two tiers: (a) a higher APY for accounts with balances of $10,000 or more (currently 5.26% APY);
and (b) a lower APY for accounts with balances of less than $10,000 (currently 0.60% APY).
© 2007 Wilmington Trust FSB. Member FDIC. WTDirect is a division of Wilmington Trust FSB, Baltimore, Maryland.
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6 places to stash your cash
If you’re ready to kick your savings plan into gear, there
are many ways to save. Some institutions allow customers
to open accounts at a brick-and-mortar site and access
them online or by phone, while other national, federally
insured institutions operate exclusively online. To help
you choose the best way to save, here are the pros and
cons of the most common vehicles.
B Passbook savings
Savings accounts operate as they always have. How much interest you earn depends on the institution, the balance, the
balance in other accounts at that same institution and whether or not you have to maintain a minimum balance.
▪
▪
▪
▪
▪
▪
▪
PROS
Very liquid: Money is available as you need it. With an on-
line account, you might have to wait a couple of days.
Pay interest: Savings accounts pay the lowest interest, but
some institutions and online divisions of national banks
are paying rates that rival CDs.
Easy to open: Many accounts take little money to open and
some have a low (or no) balance requirement.
Convenient: You can open one virtually anywhere, and
many banks and credit unions let you bank online.
Funds insured: At an insured institution, your money is federally insured up to $100,000.
Ease of use: Automatic deposit is available.
▪
▪
▪
est interest rate of all types of savings vehicles.
Restrictions: There may be penalties or minimum balance
requirements.
▪ Unwanted tie-ins: Some institutions will link your savings
account to your checking account for overdraft protection. If you don’t want this, opt out.
C Money market accounts
Money market accounts can be opened at banks or credit
unions. Rates vary but are usually higher than for a traditional
savings account, but there are some limitations on MMAs.
Initial deposit: MMAs may require more money to establish,
and some accounts have a minimum balance.
Check limits: MMAs usually have limited check-writing
privileges. If you need money, use the transaction privileges to transfer money to a checking account.
▪ Fees and penalties: There may be fees for not meeting the
minimum balance or initiating too many transactions.
D Money market mutual funds
A hybrid of savings and investing, MMMFs are usually purchased through brokerages. Although they often require a
larger initial deposit, they can also reap a higher return.
▪
▪
PROS
Flexibility: You can choose an aggressive or conservative
investing style.
Higher earnings: There is the potential for a higher rate of
return than with savings or money market accounts.
Liquidity: MMMFs are more liquid than CDs or Treasuries,
but less than MMAs and passbook savings.
▪ Ease of use: Automatic deposit is available.
▪
Low rates: Passbook savings accounts tend to pay the low-
▪
CONS
▪
▪
CONS
traditional savings accounts, so shop for the best rates.
Liquid: You can often get the money by writing a check.
Availability: MMAs can be opened at many institutions.
▪
▪
▪
▪
CONS
No guaranteed return: You usually aren’t guaranteed a spe-
cific rate of return. The interest rate you get will depend on
the investments you select.
Opening minimums: Many have a minimum amount to
open an account and many require a minimum balance.
More fees: There are more types of fees with an MMMF,
such as loads (commissions associated with transactions)
and expense ratios (account management fees).
Protection: Although your money is not federally insured,
experts note that no one has ever lost money.
Low liquidity: It could take a few days to retrieve your money if you need it.
E Certificates of deposit
▪
PROS
Earn more: MMAs usually carry higher interest rates than
8
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With a CD, you’re lending a financial institution a specific
amount of money over a specific period of time. In return, you
For more information about Savings: The Right Path to Personal Wealth, go online to www.bankrate.com.
3/2/07 1:46:52 PM
get a somewhat better rate of interest. Since rates vary and
institutions use them to compete with each other, it pays to
shop around for the highest rate.
▪
PROS
Choice of term: You choose how much to invest and for
how long. Terms typically can run from as short as a month
to as long as five years.
▪ Guaranteed rate: When
you buy a CD, you know
exactly what the payout
will be if you hold it to
full term.
▪ Insured: While institutions typically insure deposits for up to $100,000,
the Certificate of Deposit
Account Registry Service,
or CDARS, allows you to
insure up to $25 million.
▪
▪
PROS
Reliable: The rate of return is predictable. Series I bonds
have two interest rates, one that varies with inflation.
Low minimum: Savings bonds don’t require a large investment. You can get an EE bond for as little as $25.
▪ Security: They are backed by the full faith and credit of the
U.S. government.
▪
▪
keep EE and I bonds for at
least one year. When you
cash them in, you get your
principal plus interest.
▪ Not as competitive: Other
savings vehicles may offer
better interest rates.
G Treasuries
Investors need more cash for
Treasuries than for any type
of savings bond. Purchased
through the Federal Reserve or a brokerage, there
are three kinds of Treasuries:
Treasury bills, Treasury notes
and Treasury bonds.
CONS
Not as liquid: While you
can cash out before the
term is up, you could
be risking some or all of
your interest.
▪ Must shop rates: Usually
the longer the term, the
higher the interest. But
not all CDs follow that
rule, so you must shop.
automate your
▪ Low rates: You may find
better returns elsewhere,
such as a money market mutual fund. And some savings
▪
accounts (particularly those offered by online divisions of
▪
some national banks) are offering rates that rival CDs.
▪ Higher minimums: Certificates of deposit often require
higher minimum deposits. You may need at least $500.
F Savings bonds
With a savings bond, you’re literally making an investment in
the U.S. government. The two most common types of savings
bonds consumers purchase are Series EE and Series I (for inflation) bonds.
▪
▪
PROS
Safety: Treasuries are safe
and secure investments.
Protection: Investors are
guaranteed to get back
savings
the principal if they hold
Treasuries until the investment reaches maturity.
Tax break: Interest is exempt from state taxes.
Regular income: Notes and bonds pay interest every six
months. You get dependable income.
▪
CONS
Minimum investment: Treasuries require larger amounts of
cash for initial investment. With T-bills, for example, you
need at least $1,000.
▪ Long-term only: Notes are available for two to 10 years;
bonds for 10 to 30.
For more information about Savings: The Right Path to Personal Wealth, go online to www.bankrate.com.
9861 Bankrate.indd 9
CONS
Not as liquid: You have to
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take advantage of high yields
Balancing one’s portfolio of investments should be done
annually, based on market conditions. Here are some
ideas for making sure your mix is profitable this year.
Fixed-income investors did well in 2006, and there’s a good
chance that conservative investors will fare well again in 2007.
The question is: Which options are best? Peter Crane, publisher of “Money Fund Intelligence,” is speculating that liquid
investments are better than certificates of deposit. Crane says
we could be in for an extended flat rate period and you don’t
want to be locked up in low-yielding investments. Money
market accounts and funds and high-yield savings accounts
could be the way to go.
What’s essential is to take
advantage of the highest
yields you can find. Yields
vary so much that you
could be losing hundreds
of dollars in interest if you
let your money sit in a
typical, low-interest bank
account. For example, a
$10,000 deposit in an account paying 5 percent
earns $500 simple interest in a year. That same
$10,000 sitting in a bank
money market account
will earn an average 0.84
percent, or $84, according
shop for yields.
A popular strategy for CD investing is laddering. Here’s how
laddering CDs works: You go to the bank with $25,000 and
buy a $5,000 one-year CD, a $5,000 two-year CD and so on until your last $5,000 buys
you a five-year CD. Each
the rewards of compound interest
year is a rung on the ladder. When the one-year
Total savings: $489,016
Questions:
CD matures, you reinvest
Interest
that money in a five-year
Your age?
21
CD because by that time
Monthly savings?
your five-year CD has four
100
years left until it matures.
As each year’s CD comes
Interest rate?
8
due, you roll it into a fiveyear CD.
Principal
Calculate
21
36
Years
50
65
Invest in stocks, too
While cash and CDs
should be an integral part
of every portfolio, the
stock market shouldn’t
be ignored. Stocks, mutual funds, exchange-traded funds and
the like not only protect you from inflation, they also help
build wealth.
If you save $100 per month beginning at age 21 at an 8 percent interest rate,
you’ll have saved nearly $500,000 when you reach retirement. To do this calculation for your own situation, go to the Calculators section of Bankrate.com.
to Bankrate surveys. So it pays to
Since August 2006, the Federal Reserve has held the federal
funds rate steady. If the Federal Reserve doesn’t raise the fed
funds rate this year, we should expect interest rates also to
hold steady—and possibly decline. While the drop may not
be big, it wouldn’t be startling to see short-term rates lose a
percentage point from current levels.
Mix your CD terms
Banks have different funding needs, and there’s always competition for deposits. That presents opportunities for you to
benefit from high yields. Bankrate’s 100 Highest Yields sections for CDs and money market or savings accounts can help
you find some excellent deals.
10
Assuming most people will opt to keep a portion of their money in CDs, some financial planners are advising clients who
have been buying short-term CDs to extend their maturities
to two or three years. Others are recommending heavier concentrations in short-term (one year or less) and longer-term
(four- and five-year) CDs with a smattering of buys in the twoand three-year categories. You can best decide what’s right for
you because you know when you’ll need the money.
The stock market in 2007 could be a lot like it was in 2006. That
means volatility may be the norm rather than the exception.
Nevertheless, even if the S&P 500 index returns only 7 percent
this year, it’s worthwhile to be invested.
Most financial experts advise consumers not to try to cherrypick individual stocks unless they have time for plenty of
research and the wherewithal to make the investments. Index
funds, in the form of mutual funds or exchange-traded funds,
are often the cheapest and easiest way to match the performance of the market. And once you’ve invested in them, you
don’t have to think much about them.
For more information about Savings: The Right Path to Personal Wealth, go online to www.bankrate.com.
9861 Bankrate.indd 10
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use your tax refund to save
Every year, you say you’ll save your tax refund, but it
always winds up getting spent. Now Uncle Sam is trying
to help you.
deposits for regular savings accounts but not for education
savings accounts. Also, ask your financial institution about
fees associated with electronic transactions.
New this filing season is an option to directly deposit your
refund money into as many as three accounts. You can have a
portion of the refund sent to your checking account, another
amount directed to savings, and a third chunk of IRS cash sent
straight into your individual
retirement account.
Married couples can ask the IRS to deposit a refund on a joint
return into individual accounts held by either partner or one
held in both names. However, verify that your financial institution will accept a joint refund sent to an individual account.
The direct deposit option to
a single account remains on
the 1040EZ, 1040A and 1040
forms. It’s also available on
1040s filed by nonresident
and Puerto Rican taxpayers,
as well as self-employed taxpayers who must file 1040SS. But if you want to divide
your refund into multiple
accounts, you’ll need to send
along the new Form 8888
with your individual return.
Possible IRA snafus
Even better for savings, you
can also direct your refund
to an individual retirement
account, either a traditional
one, a Roth IRA or, if you are
self-employed, a SEP-IRA.
First, set up your retirement
account before you request
the direct deposit, and let
your IRA trustee know that
the IRS will be transferring
money into that account.
Also, be sure to tell your IRA
trustee which tax year you
If you’ve used the single acwant the refund deposit
count direct deposit option
applied toward. If you don’t
before, there’s nothing new
designate whether the conbut the number of accounts
tribution is for 2006 or 2007,
you can enter and a new box
the trustee can assume the
to check.
deposit is for 2007. That
could
pose a problem if you
make your ira deposit easy
The IRS requires a minimum
counted the refund deposit
refund of $1 for each account you designate. For any refund
as a 2006 contribution and claimed a deduction for it.
to go into an account, the money must be held in a U.S. financial institution, such as a bank, mutual fund, brokerage firm or
If your refund is a 2006 contribution, make sure you file
credit union.
early enough so that it’s deposited by the April deadline. If
the money shows up a day after April 17, it will be counted
You can also send your refund directly to other financial
as a 2007 contribution. If you reported the directly deposited
instruments, such as money market accounts, health savings
refund as a deduction in figuring your 2006 taxes but it ends
accounts (HSAs), Archer medical savings accounts (MSAs), and
up in tax year 2007, you’ll have to amend your return.
Coverdell education savings accounts.
Finally, be sure your account numbers are correct. The IRS
Make sure the institution accepts direct deposits for these
doesn’t accept responsibility for wrong account numbers, and
types of accounts. A bank, for example, may accept direct
it could cost you your refund.
Mind these details
For more information about Savings: The Right Path to Personal Wealth, go online to www.bankrate.com.
9861 Bankrate.indd 11
11
3/2/07 1:46:55 PM
Wilmington Trust
awarded Bankrate.com’s
4-star Safe & Sound ®
rating, 2006.
You deserve savings that go
beyond the ordinary.
Earn an extraordinary 5.26% APY* when
you open your new online savings account
now at wtdirect.com/save.
Enjoy our higher rate, personal service,
and greater protection. WTDirect is the
smarter choice for your savings, especially
your bonus or tax refund.
5.26
*
accounts $10,000+
Open now
wtdirect.com/save
Questions? Please call 1-800-WTDIRECT
Save with Confidence
SM
*Annual Percentage Yield. APY is variable and is effective as of 01/02/2007 and may change at any time. There is no minimum deposit
required to open the account. 5.26% APY for the first 60 days from the date the account is opened, regardless of the balance. After the first
60 days, the APY for the account will have two tiers: (a) a higher APY for accounts with balances of $10,000 or more (currently 5.26% APY);
and (b) a lower APY for accounts with balances of less than $10,000 (currently 0.60% APY).
© 2007 Wilmington Trust FSB. Member FDIC. WTDirect is a division of Wilmington Trust FSB, Baltimore, Maryland.
9861 Bankrate.indd 12
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