The ABC’s of Saving During A Recession

Dec 18, 08 The ABC’s of Saving During A Recession
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Typically, with the glum news of falling stocks, folding businesses, and failing banks, we may think that hoarding our money is the best idea.  The fact remains that our economy is sick, but solvent.  Thus, hoarding money under the mattress, or the floorboards, or the freezer is ineffective at best.  The rich have obtained and maintained wealth by following a few well-honed and time-honored principles.  Chief among these is learning to let your money work for you.  The ABC’s of saving during a recession will cover the first few steps of financial planning that are essential to surviving the recession.

First, there are two ways of defining exactly what is meant by “saving”.  The simplest form of saving means setting aside money for future use.  Investing is risking your savings in order to receive a positive return.  Savings are typically placed in a deposit account where interest is earned.  In a typical savings account, the bank pays you a rate of interest because they recognize that you could invest your money elsewhere.  In order to confuse their customers, some banks use the euphemism “Investment Accounts”.  However, if your money is invested in cash, you have a savings account.  If you can gain or lose money because of market forces, you have made an investment.

Now that we understand the basics of saving, it is time to find a good bank.  This is the best option for people that are learning to budget, or who are otherwise risk averse.  While the interest rates for basic savings accounts are generally low, banks are considered safe because they are FDIC insured up to $250,000.  (This will return to $100,000 in January 2010.)  It is important that you ask the bank for the effective APR so that you can obtain the highest interest rate.  Effective APR provides you with a clear picture of the how much interest you can accumulate based on how much you have saved.

Online banks are quickly becoming a more viable option than traditional banks because you can get better interest rates in addition to a number of services that make your monetary transactions smoother.  Also, for those with a less than stellar banking and checking history, many online banks will provide you with a savings and possibly a checking account because they do not receive reports from the traditional check guarantee agencies.

After finding a good bank and setting up a savings account, you should explore the option of certificates of deposit.  CDs, as they are commonly called, offer a number of benefits that make them superior to traditional savings accounts.  Besides being FDIC insured, CDs usually have a fixed interest rate.  You deposit your money for a fixed term that ranges from three months to five years.  The fixed interest rates generally increase the longer you agree to leave your money in the account.  If the interest rates fall while your money is parked, the banks still have to honor the initial rate.  However, if interest rates rise, you are stuck with the same rate you originally had.  Some banks offer variable rates, which are interest rates that fluctuate.  While you stand to gain or lose based upon market forces, your money is still insured up to $250,000.  CDs are an excellent saving option; you only need to find the terms that work best for your individual saving goals.

Deciding that it is time to save is the most important step.  Saving during a recession is as good a time as any.  For too long, too many Americans have lived above and beyond their means.  Flying high on borrowed time will lead to a disastrous crash if you don’t have any safety nets in place.  But don’t just have a net to catch you.  Learn to make your money work for you; and turn that net into a trampoline that will bounce you higher than before.

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