Saving money may not be easy, but once you’re determined to put money aside, the question: what savings vehicle should you pick. Savings accounts are the first to come to mind, but there are also certificates of deposits (CDs) and long-term funds that can be set up for retirement or college tuition.
The answer to this question is “it depends”. The goals of your savings can determine the best route. But you also should understand how each of these schemes work, to be able to decide what is right for you.
Here are brief descriptions of the most common savings options.
You probably have had one since you were a young kid. And savings accounts are the go-to option for many people. They do reward you for your savings with a good return — 2 per cent to 2.5 per cent from some banks in the UAE. Some lenders will raise the interest rate you receive with higher balances.
Savings accounts are also easy to manage. You can link them to your payroll or checking account and automate transfers, which helps you stay on track with saving every months. Savings accounts come in all colours and perks. Some may allow to save in various currencies under the same account, for example.
So when you head to the bank to open a savings account, make sure that you discuss your priorities with the bank representative. In fact, you should even look beyond your current bank for a savings account that serves your needs.
Certificates of deposit
As their name implies, certificates of deposit allow you to deposit a certain amount of money for a particular term. The longer the term, the higher your earning will be. The big downside, however, is that your money will be locked in this certificate. It is not that you won’t be able to access it, but you likely will have to pay an early-withdrawal penalty if you do.
Certificates of deposit are safe and best for people who put money aside for a long term. One tactic that you can use is called laddering, which is when you stagger your certificates of deposit so they mature at different times — using different terms. Still CDs are not a good option, if you don’t have another cushion of savings to lean on in case of emergencies.
Similar to any bank product, there are various types. So shop around to find the type that works for your situation and risk appetite. Make sure that you compare the annual percentage rate (APR) and the annual percentage yield (APY) that lenders offer you. In addition, many attractive CDs require a minimum deposit, so be careful how much money you will have tied up in each CD.
Retirement and student funds are typically for investment — and therefore they can have high or low yield based on your risk tolerance. Employers may offer pension funds or you can talk with your financial adviser if you don’t want to do the research yourself. Be sure that you understand the various tax requirements and the restrictions on accessing this money prior to the set age for your retirement or children’s education.
Similar to CDs, despite the more attractive return, this is not something you should use for emergency funds. Having said that, there is a good reason to begin planning for your retirement as early as possible. And the same goes for college tuition. So check your option and start putting money aside even if it appears to be a small amount — in addition to a more accessible savings account. It will build up over time and the investment, if done right, should help have a good amount to cash when time comes.
By Rania Oteify
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