Are Your Family Finances in the Right Place?

Posted in Saving Money , Savings Account • September 23, 2010

Saving money is important, but what’s more important is saving smartly. You may be diligently stashing away a quarter of your gross household income every month, but if it’s not earning you interest or qualifying you for certain tax benefits, you might as well be throwing money away.

Use the infographic below to help you plan a better way to save your money. For example, if you’re saving for retirement, you’re better off putting your money in a tax deferred 401(k) instead of a traditional savings account that doesn’t generate a high enough return or provide tax benefits.

The numbers below are based on a family household of four with two working parents and two children. If your situation is different, adjust accordingly.

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How you should diversify your accounts

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Savings Account Types

Need more information on the different types of accounts? We got you covered:

Personal Checking Account: For everyday expenses like food and clothing, checking accounts provide quick and secure access to your fund using several different methods. You can withdraw money from ATMs, write out a check, transfer funds online or go to your bank to withdraw money. Checking accounts also frequently provide you with debit/credit cards, which may come with rewards programs.

Online Bill Pay Account: While your checking or savings accounts may provide you with an option to pay your bills online, if they do not, then consider opening a online bill pay account. For monthly payments, this provides the fastest and most convenient method of paying your bills.

Instead of mailing in checks to the companies, simply go online and transfer funds. If you want, you can even set up automatic payments each month or instead choose to manually pay to prevent overcharging your account.

High Interest Savings Account and Long-Term CDs: For annual and infrequent expenses, high interest savings accounts and CDs allow you to put the money you need in the account and allow interest to accrue. Make sure your account provides enough opportunities for withdrawal without extra fees.

Any extra invested money not used for bills can be put into long-term certificates of deposits. These CDs have higher interest rates and allow money to add up over time for later use.

Money Market Accounts and Short Term CDs: Everyone should have an emergency fund–and an emergency does not constitute buying a new car or home remodeling. A serious emergency could be a health issue requiring surgery and time off of work or getting laid off from your job and moving across the country to find a new one.

Experts recommend having several months’ worth of wages in these accounts. A money market account gives you higher interest rates with fewer withdrawals, which should not be a problem if you need to withdraw the entire lump sum at once.

401(k) Account: Saving money for your retirement is a process that should be started as early as possible. If you start at the age of 30 or younger, you will have to put away less money each year to have a lucrative retirement account.

A 401(k) account is usually an employer-sponsored account where you can deposit part of your paycheck each month. Employers will sometimes match part or all of your contribution. Money in the account is income tax free until withdrawal. You might even be able to upgrade to a Roth 401(k), which treats your contributions as after-tax dollars.

529 College Savings Plan: These state-managed investment accounts allow you to save for a child’s college education without paying taxes on the account’s earnings. You have control of the account and it can roll over to benefit another child if one decides not to go to college.

Anyone can add money to this account, there are no income limitations and there is no age limit for when the money needs to be used. If your child gets a scholarship, excess money can be withdrawn without penalty and is only taxed.

Junior Bank Account: These accounts provide high interest rates (up to 10% APY) for young account holders. Look for an account with no monthly maintenance fees or minimum balance requirements and unlimited free transactions so withdrawals can be made without penalty once your child is old enough. Not only do these accounts teach your children the advantages of smart banking, but they will also have a bank account under their name with easy access to money.

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