Good money management requires you to save regularly, ideally by having a small part of every paycheck—maybe 5% to start— deposited directly into a savings account. You can do that by signing up for an allotment at mypay.dfas.mil and designating the account. It can be at the same bank or credit union as your checking account or at one that pays higher interest. 

True, upfront saving reduces the amount you have to meet your living expenses. But there’s a tradeoff: When you need extra cash to pay for an unexpected cost you’ll have it. It’s a situation you can count on facing from time to time. 

As an added benefit, savings can be essential for achieving short-term financial 

Savings accounts, also called deposit accounts, do more than serve as a buffer against an occasional cash shortfall. In fact, you might consider opening two or more savings accounts, designating each for a specific purpose. That’s an approach called mental accounting. 

You might set aside one of your savings accounts for short-term goals, such as an account strictly for funding your next vacation. Being able to afford something you really want can take some of the sting out of self-imposed financial discipline. 

A savings account is also the perfect place to build your emergency fund that can help see you through a serious financial emergency. 

Credit unions and banks generally offer several types of savings accounts—regular savings, money market accounts (MMAs), and certificates of deposit (CDs). CDs may be called share certificates at some credit unions and money market certificates at others. 

Regular savings typically earn the lowest rate of interest the institution pays, require the smallest minimum balance, and offer the greatest flexibility on withdrawals. Sometimes larger balances qualify for higher interest rates in what’s called a prime savings account. 

MMAs are hybrids. They share some features with checking accounts and some with savings accounts. You can make up to three transfers to a third-party payee each statement period, which is usually a month. MMAs typically pay somewhat higher interest, but there’s a catch. You must maintain the required minimum on deposit, often $2,500 or more. If your balance dips, you may lose interest, be charged a fee, or both. 

If you’re using CDs for your emergency fund, you can use a strategy known as laddering. Instead of opening just one CD, you split your principal into three CDs that mature in a stepped pattern. To start, you choose terms of six months, a year, and 18 months. Each time a CD matures, you roll it over into a new 18-month CD to extend the ladder. That way one-third of the total is available every six months if you need to use it. If not, you just roll it into the next CD for the same term. 

CDs are time deposits. They last for a fixed term, from as short as six months to five years. The amount you deposit to open a CD must stay in the account until the term is up or you may forfeit the interest you would have earned. 

The interest is usually higher than on other deposit accounts, and the longer the term, the higher the rate tends to be. The rate is fixed with most CDs, as it is on other savings accounts. But sometimes it’s adjustable, or could change up or down. In that case, there’s usually a floor limiting how low it can go. Floating rates are pegged, or linked, to a published interest rate, such as the rate on US Treasury notes, and go up or down as that rate changes. 

Banks and credit unions are free to set the interest rates they pay, but they must disclose the annual percentage yield (APY) you earn and the fees you’ll pay. That means you can make an informed comparison among accounts. 

The difference between the rate that’s paid—or what’s called the nominal rate—and the APY is that the APY tells you what you actually earn as a percentage of your principal. You’ll find the nominal rates being offered at the same time are typically very similar because they reflect the current cost of borrowing. When borrowing is expensive, savings accounts pay higher rates, and when borrowing is cheap, they pay lower rates. 

The APY depends on the compounding method the credit union or bank uses. The higher the rate and the more frequent the compounding, the greater the yield, or what you earn. 

You’ll want to think twice about institutions offering CDs with APYs substantially higher than the competition. Often, they’re not insured by the FDIC or NCUSIF, so your money could be at risk. Risks apply as well for CDs whose terms are longer than five years. 

When you save, and when you invest, compounding is your greatest ally. When savings compound, the interest you earn is added to your principal, or the amount you deposit, to form the new base on which future interest is paid.

The next time interest is calculated—often on a daily basis—the amount you earn is incrementally larger because you’re earning interest on your interest as well as on your principal. 

DCUC

finances

previous coverage

• Money briefing: debit cards
• Money briefing: credit cards

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