Savings Accounts and Financial Planning

Consumers’ savings rates have steadily declined over the years, and perhaps it isn’t surprising. Banks have paid little to no interest on savings for the last couple of decades.

But the rise of online banks and fintech firms has been a game-changer. With less overhead, these firms can pay higher rates of interest while still offering FDIC protection.

Earlier this year, Wealthfront launched a simple savings account that paid the highest interest rate available. Recently, the rate has gone up to 2.51 percent, significantly higher than the U.S. government’s 10-year Treasury bond.

What makes the Wealthfront Cash Account particularly compelling is the fact that there are no fees; you can open an account with as little as $1 and withdraw your money at any time. Deposits are FDIC insured up to $1 million, which is more than most banks.

‘Self-driving money’

"Our cash account is another important milestone on our path to deliver our ultimate vision of self-driving money," said Wealthfront CEO Andy Rachleff when the account was launched. "In order to optimize and automate all of our clients finances, we need to offer ideal short and long-term destinations for their cash. You can expect us to further extend our services into the banking sector this year."

Once upon a time, a passbook savings account at your local bank might pay as much as 3 percent interest, but those days are long gone. Today, the average bank savings account rate is a paltry 0.1 percent, meaning the return on a Wealthfront Cash Account is about 25 times higher.

"Every year the four largest banks in the U.S. make over $300 billion in revenue while paying consumers next to nothing on their cash deposits," said Dan Carroll, co-founder of Wealthfront. "If the $8 trillion in cash sitting at the commercial banks was moved to a service like Wealthfront instead, consumers would have an additional $170 billion in their pockets every year. Imagine how impactful that extra money could be on people's lives."

Other investment products

Weathfront offers a range of financial services and investments, many of which are subject to market forces. Those kinds of investments should be carefully considered, perhaps with guidance from an objective and qualified financial advisor.

Savings accounts, on the other hand, are pretty straightforward. They can be a good place to tuck away money for an emergency fund. As always, it’s advisable to read the fine print carefully so that you fully understand the terms.

There's good news and bad news in GoBankingRates.com's annual savings survey.

Each year the personal finance site asks consumers how much money they've managed to save. This year 54% reported having less than $1,000 in the bank.

While that might not sound like the good news, it is. Last year, 69% of consumers had less than $1,000 set aside.

"We did see that the percentage of people who have less than a thousand dollars saved, and that includes people with zero savings, fall -- and that is good news because it shows a higher percentage of people have $1,000 in savings," Cameron Huddleston, a reporter at GoBankingRates, told ConsumerAffairs.

Now here's the bad news: 39% of consumers admitted they had no savings at all, up from 34% who were in that predicament last year. So despite a steadily improving economy, a lot of consumers are moving backward.

It should be pointed out that the survey specifically asked consumers how much money they had in "a savings account," and Huddleston concedes that it is possible consumers have socked money away in other things, like money market accounts or even checking accounts that pay a higher rate of interest.

"Part of it could just be semantics," Huddleston said. "On the other hand, the increase in people with $1,000 in savings could have to do with their improving financial condition.

Incomes are rising

Consumers, it turns out, are making more money. The Census Bureau reports that real median household income increased by a little more than 3% between 2015 and 2016. At the same time, fewer consumers were officially "poor," with a nearly 1% drop in the poverty rate.

The official tally shows median household income last year was $59,039, up from $57,230 the year before. But while consumers were making more money, it was harder to save.

"The people who are doing okay and seeing their financial situation improve -- perhaps they are actually setting aside more," Huddleston said. "They're finding a little more room in their budget to increase their savings.

But the improvement is not across the board. Drilling down into the numbers, we see that younger people seem to have the hardest time putting money away. There could be several reasons for that.

Millennial headwinds

Millennials are early in their careers and their paychecks aren't that big. If they have started a family, their expenses could be growing. Then, there are those student loans.

"It probably comes as no surprise that Millennials are dealing with a lot of student loan debt," Huddleston said. "Every year student loan balances rise as college tuition rises."

And that takes a big bite out of the monthly budget. That leaves less to pay day-to-day expenses, much less to sock away in savings.

Huddleston says that may make saving money harder, but not impossible. She cites the case of a young couple she recently interviewed with a take-home pay of $3,200 a month. Yet, she says they managed to pay off $5,000 in debt in one month by tightening their belt and liquidating assets.

"During that time they had been paying off student loans, they had actually been putting money aside into savings," she said.

Make saving a priority

If you're going to save money, Huddleston says, you have to make it a priority. If you don't, you'll be tempted to spend any extra money in your budget. The concept of "paying yourself first" actually works if you build a regular payment into your savings account into your monthly budget.

And while saving for retirement, a down payment on a home, or a child's education are worthy savings goals, Huddleston says the first goal should be to fund an emergency savings account.

"Something is going to come up," she said. "Your car is going to break down, you're going to need emergency dental surgery, you're going to have a big medical bill, and you're going to have to come up with the cash to pay for it."

Why does it seem so hard to save money? Yes, life does seem to have a lot more expenses than it did in earlier generations, but Huddleston doesn't discount the role of social media. When consumers see posts about their friends' fun vacations or nights on the town, they naturally want to join in.

In fact, she cites previous studies that show it isn't low-income consumers who live paycheck to paycheck as much as those making good salaries. Households earning $100,000 a year or more are most likely to be the ones living paycheck-to-paycheck.

When it comes to savings, the priorities of Gen Xers and Millennials are more alike than you’d think. A new survey by online loan marketplace LendingTree showed that members of both generations agree that saving for an emergency fund should be a top priority.

Millennials choose to sock away money in an effort to save for the following ten things, according to the survey:

• Emergency fund (14.86%)
• A house or an apartment (12.50%)
• Vacation (8.44%)
• New computer (6.72%)
• Retirement (6.44%)
• Travel abroad (6.06%)
• New car (5.81%)
• Clothing, accessories, or shoes (5.11%)
• Holiday gifts (4.72%)
• Education (4.36%)

Gen Xers prioritize retirement savings

In contrast, Gen Xers were much more likely to make saving for retirement a top priority. Almost 11% percent of Gen Xers said their second priority for saving was retirement, but only 6.44% of Millennials ranked saving for retirement as one of their top ten priorities for saving.

And while many of the 2,000 Millennials who responded to LendingTree's survey were still saving for a home or an apartment, Gen Xers seem to be more focused on saving money to fix up the residence they're currently in. 

Around 8% of Gen Xers said saving for home repairs or improvements was a top priority. Home repairs or improvements didn't crack the top ten savings priorities for Millennials.

Other prominent priorities

However, both generations agreed on the importance of saving money for an emergency, such as an unexpected car repair or trip to the hospital. Nearly 15% of Millennials and 16.11% of Gen Xers said saving for an emergency fund was their top saving priority.

Young people and Gen Xers may also be on the same page regarding vacations. In the survey, around 8% of Millennials and 10% of Gen Xers said they were saving for their next vacation.

Other popular purchases to save for included:

• A new car -- almost 6% of Millennials and nearly 8% of Gen Xers
• A new computer -- almost 7% of Millennials and about 5% of Gen Xers
• Holiday gifts -- roughly 5% for both generations

One of the goals of savers, besides putting money away for retirement, is to have a “rainy day” fund, enough money on hand to cover a financial emergency, such as car repair bill or trip to the emergency room.

Other emergencies can include a sudden loss of income, such as losing your job. Personal finance experts generally recommend, as a rule of thumb, to have savings equal to six months of income. But how many households can actually do that?

A recent report by personal finance site Bankrate says more than half of consumers do not have enough money on hand to pay an unexpected $500 car repair bill. While these bills don't crop up every month, they do occur.

And even if you do have an emergency fund, it might not have enough money in it to meet today's unexpected expenses. After all, car repair bills can be a lot more than $500.

62% say they would struggle

A survey conducted by Harris Poll on behalf of Oasis Financial found that even though 63% of consumers said they have an emergency fund, 62% of consumers think they would struggle financially if their income were interrupted for three months.

"The survey illuminates the need for Americans to evaluate their finances honestly, with an eye toward the unexpected," said Ralph Shayne, CEO of Oasis Financial.

Sometimes emergency situations are covered by insurance, but the coverage can be spotty in some cases, the survey found. A wide majority of consumers in the survey think consumers have to fight insurance companies to get a fair and timely settlement.

How much to save each month?

Shayne says consumers should dedicate a portion of their income to savings each month. How much? Experts at TIAA say the percentage will vary, depending on your goals. But as far as an emergency fund goes, it recommends between three and nine months of current income.

To get there, it suggests identifying all the non-essential spending in your monthly budget, such as cable TV, and divide that number in half. That, the company says, is the amount you need to put away each month to get an adequate emergency fund within a year.

Forbes counsels that three months of income in savings may only be adequate if you're single, renting, and have the option of moving back in with your parents.

For families and individuals living paycheck-to-paycheck, saving money for the future, or for an emergency fund, might seem out of the question. But by developing a budget plan and sticking with it, it is possible to get ahead, assuming you are not currently drowning in debt.

The secret, according to many financial advisers, is to take baby steps, cutting costs a little here and there, and then not spending the savings on other things. Here are five ideas that might help you carve out a little room in your budget.

Eat at home

Food costs account for a huge part of spending each month, and unfortunately this spending isn't always subject to a budget. If you aren't tracking what you're spending at the supermarket each week, you're probably spending a lot more than you think.

That's bad enough, but when you throw in a few meals at restaurants, then spending on food can quickly get out of control.

Eating meals at home will save money, pure and simple. To maximize savings, plan meals before going to the supermarket. Use coupons and buy things on sale. Saving money on food will deliver the biggest bang for the buck when it comes to a household budget.

Don't pay for banking services

Ever wondered how banks can afford to offer free checking and other services? Because most of their customers are paying for them. Don't be one of them.

A monthly service charge on a checking account can easily be $10 a month. Out of network ATM fees can be $6 or more. Look for a bank or credit union that not only offers free checking, but will also pay you interest on your balance and reimburse ATM fees. If you keep your savings in your checking account, and have the discipline not to spend it, you can probably earn more interest than you would in a passbook savings accounts.

And, for heaven's sake, don't use a credit card that charges an annual fee. There are plenty of credit cards with no fee and that pay some kind of cash back rewards.

Negotiate lower rates

Most of us have fixed costs in our budget, but just how fixed are they? Your auto and homeowners' insurance premium may be the same amount each month, but these companies may be very willing to reduce your rate in order to keep you as a customer.

Call them and tell them you have been shopping around and have found lower rates. Ask them what they can do. To save money, sometimes you only have to ask.

The same is true for your cellphone provider. And while they might not lower your rate, you may be able to move into a less expensive plan.

Reduce interest payments

If you have a large credit card balance, it's probably taking a big bite out of your budget. You are also probably paying 15% or more in interest, making it harder to pay off.

If you can transfer all or part of the balance to a credit card with a 0% introductory rate on balance transfers, you can save hundreds of dollars a year in interest. Just select a card that doesn't charge a high balance transfer fee. The Chase Slate card is one that doesn't.

Track your spending for a week

Finally, carry a small notebook with you for a week. Every time you spend any money, whether it's pocket change or a credit card purchase, write down what it was for and how much you spent.

It's amazing, but at the end of seven days you'll have an eye-opening picture of your spending habits and where you might be able to cut back.

Some people seem to be able to build up a savings account with little effort. Others struggle to do so and become mired in debt.

Is it a question of income, financial literacy, or is it something else? Psychologists are wading into this issue, with new research suggesting there is one distinctive difference between those who save and those who don't.

Research presented at the annual convention of the American Psychological Association found that people who focus on the future are less likely to give into impulse, no matter their level of financial literacy. Those who live in the moment are more likely to spend like there's no tomorrow.

“Our results suggest that by helping people to create vivid, detailed mental pictures of their future, we may be able to help people make better financial decisions,” said Sarah Newcomb, a behavioral economist at Morningstar, who presented the research.

Psychology has long been used by marketers to identify ways to get consumers to spend more money. Now, it seems financial planners are exploring the human mind to help people save. Newcomb says the research was aimed at better understanding the human emotions involved with money.

Impulsiveness and materialism

A study of over 700 consumers linked impulsiveness and materialism – traits associated with in-the-moment living – with poor financial decision-making. The study found that forward thinking was a better predictor of good financial behavior than the degree of financial literacy each participant possessed.

An economist recently offered a similar theory. Earlier this year Keith Chen, an associate professor of economics at UCLA, said that his research focused on the savings rate of people who spoke different languages. He found an intriguing consistency.

People who speak languages that make little or no distinction between the present and future tend to be the world's biggest money-savers. The Chinese language, he says, is a good example. There is little difference in future and present tense and the Chinese are among the world's most prolific savers.

English, on the other hand, makes sharp distinctions between present and future and Americans and the British are among the worst savers.

Key to better financial behavior

Newcomb says financial literacy efforts are fine, but she urges efforts to help consumers focus on the future.

“Working with individuals to develop a clearer picture of their future may have a more substantial impact than simply teaching financial concepts,” she said.

In the meantime, she says her research made one thing clear – the destructive role of credit cards. Newcomb said the study showed that even the most impulsive consumers were able to save some money if they did not have access to credit cards.

“This suggests that the first line of intervention for better financial health among people who struggle with impulse problems may be to stop the use of credit cards altogether,” she said.

Goldman Sachs is a banking name closely associated with Wall Street, not Main Street. As an investment banker, its primary business has long been trades, investing, and facilitating deals.

But the venerable institution is suddenly moving in a new direction, offering a savings account that requires as little as $1 to open.

Actually, it isn't Golden Sachs, itself, that is going after consumer deposits. It's the online deposit platform of GE Capital Bank (GECB) that it has recently acquired. But the parent company makes clear that it is eager to get into consumer banking.

“We are committed to providing our new online deposit customers the high level of service they have come to expect,” said Esta Stecher, CEO of GS Bank.

$16 billion in deposits

Goldman Sachs closed on the acquisition, including taking over about $16 billion in customer deposits after clearing federal regulatory hurdles, as well as winning approval from the New York State Department of Financial Services and the Utah Department of Financial Institutions.

“This transaction increases the funding diversification and strengthens the liquidity profile of Goldman Sachs and GS Bank,” Robin Vince, Treasurer of The Goldman Sachs Group, Inc., said in a release. “We are pleased to add the capability for accepting online deposits, a strategic priority for the firm and for GS Bank.”

The online savings account currently pays 1.05% APY on deposits. While there is no minimum deposit to open the account, there are limits on how much customers may deposit.

Interest compounded daily

Interest on deposits is compounded daily and paid monthly. Depositors may access funds multiple ways but are limited to six withdrawals per statement cycle. Money can be accessed online, by phone or by wire.

Deposits can be made the same way or with the old school method of mailing a check.

GS Bank is chartered in New York and is a wholly-owned, direct subsidiary of The Goldman Sachs Group, Inc. Like a traditional bank, its deposits are FDIC insured up to $250,000.

The stock market's volatility in 2016 has some investors looking for places to park their money – anything from a nest egg or an emergency fund.

While stocks have rallied over the last few weeks, they have mostly regained the value they had at the start of the year. Government bonds and certificates of deposit (CD), meanwhile, can tie up money for extended periods of time.

But savings accounts, and their cousin – the money market account – may provide a safe and flexible place to temporarily park some cash, The FDIC insured up to $250,000. While most of these accounts pay a minuscule amount of interest, a few stand out by paying 1% or more.

$25,000 or more

If you have a significant amount of cash to deposit – $25,000 or more – it will be hard to beat the savings account at UFB Direct. It pays 1.2%, comparable to many banks' CD rates.

You can open an account with as little as $1, but you won't get nearly as high a rate of interest on balances under $25,000 – around 0.20% APY.

SFGI Direct doesn't pay quite as high of an interest rate on savings, but it's still a fairly impressive 1.06% APY. It doesn't require nearly as much money to earn that rate. It pays on balances of at least $1.

Money market accounts sometimes pay a higher rate of interest, depending on the amount of money in the account. For example, the Patelco Credit Union currently pays 3% APY on balances between $1 and $2,000. The rate declines as the balance rises above $2,000.

Advantages

Checking into a money market account before automatically selecting a bank's savings account is usually a good idea. They sometimes offer advantages.

"Santander's FDIC-insured money market savings account is a standout because our customers' balances grow faster than in traditional savings accounts while giving them that access through checks, online banking or mobile,” Michael Cleary, Santander's head of consumer and business banking, said in a release. “We design our products so they reflect how people like to bank.”

One of the chief benefits of these money market accounts is they often have tiered interest rates, meaning they pay higher rates of interest if you deposit more money. At the same time, they usually have higher minimum balance requirements to open a new account, meaning you might have to start with a savings account and convert it to a money market once you hit the minimum threshold.

Money market accounts may also make it easier to use the money, giving you limited check-writing privileges, something not usually found with savings accounts.

On a historical basis, the return on keeping your cash in an FDIC-insured bank account is pretty paltry. However, the cash is safe and readily available. By shopping around, you should be able to find the best choice.

What do you do with your spare cash -- park it in a passbook savings account?

It's good to have liquid assets available for an emergency, but it's also true the money won't grow. Banks these days pay a tiny fraction of a percent in interest.

The stock market can offer more significant returns but can be more intimidating to novice investors, and many may require more cash to get started. Enter Stockpile, the self-described purveyor of gift cards for shares of stock. The company says these gift cards make it easy for anyone to invest in the stock market.

"Most people have never had an opportunity to own stock in their favorite companies because it's too expensive and complicated to get started," Avi Lele, founder and CEO of Stockpile, said in a statement.

$25 minimum investment

Lele says you can't do anything with $25 at a traditional brokerage, but he says Stockpile removes those barriers by selling fractional shares. If Apple is selling for $107 a share, you can still start accumulating shares, $25 at a time.

Just choose the card you want and pay the cashier, who activates it. To redeem the card and get the stock, just enter the code on the back of the card at stockpile.com, and create or log in to your Stockpile account.

Stockpile gift cards are available at many of the same places you buy gift cards for retailers and restaurants – from Office Depot to Kroger. It makes buying stock as easy as buying a product.

Just keep in mind that you aren't buying a product, but investing money. And investing a little at a time – dollar cost averaging – might not be a bad way to get started.

Assuming you make purchases on a regular basis, the share price might be up or down. The theory behind dollar cost averaging is that, over time, the total value of the position will exceed what you paid.

How it works

When you buy a Stockpile giftcard, you can choose from a thousand different stocks or funds. Users can also redeem rewards points for stock, or turn existing gift cards into stock.

If you purchase a stock gift card, you receive a fractional share of the stock in a brokerage account. The value can fluctuate, depending how volatile the stock is. You can track the value, add more to the position, and cash out whenever you want.

Dan Schatt, Chief Commercial Officer at Stockpile, says the company is partnering with institutions that are promoting financial literacy.

"Local credit unions to Fortune 500 companies are leveraging Stockpile's platform -- whether it's to offer a brand new set of gifting services, a differentiated loyalty program, or an innovative employee incentives and recognition plan,” he said. “They also get a new way to communicate more personally with their retail shareholders."

Actor Ashton Kutcher is among the Stockpile advisors and says the company may change the way retail investors buy stock.

"Stockpile has nailed it,” he said. "It's a drop-dead easy user experience and affordable to all."

Fees

There are always fees involved in the purchase of stock and a Stockpile gift card is no exception. If you buy a $25 gift card, the fee is $4.95. If you get a $50 gift card, it's $6.95. On a $100 gift card, the fee is $7.95.

As a comparison, an online brokerage account like TD Ameritrade has a fee for each transaction of $9.99 no matter how many shares are bought. If you were investing $1,000 at a time, that would be a much cheaper way to go.

However, Stockpile points out that you can invest in your Stockpile brokerage account without buying a gift card and avoid the gift card fee. Funding the transaction from a bank account costs just 99 cents, no matter how many shares you purchase.

For someone just getting started with investing and unable to put in more than $25 or $50 at a time, Stockpile would actually be a cheaper way to invest overall.

Years ago most consumers parked spare cash in a passbook savings account at their bank, a place where money could be separated from cash needed for day to day expenses and, where it could earn a little interest as well.

But in an era of rock bottom interest rates and the addition of numerous bank fees, many have come to question whether it makes sense to have a savings account.

It may, under the right circumstances. But it will definitely pay to shop around.

Scaling back options

Many banks – especially the larger national ones – have scaled back their savings account options and the rates they pay. Bank of America has what it calls its basic savings account, as well as a Rewards Money Market Savings account, with higher rates and added benefits. They are fairly typical of the industry standard these days.

The basic account currently pays an interest rate of 0.01% APY. If that sounds very low, it is. If you had $1,000 in an account for one year, you'd earn almost nothing in interest.

While that's definitely on the low end, at least it's something, and safer than sticking your cash in a mattress.

Walling off money

These days, few consumers put money in a savings account to earn interest. Rather, it's a way to wall off the money so it doesn't get spent on other things.

With online banking, it is easy to transfer money from a checking account into savings without having to make a trip to the bank.

Bank of America, along with many other banks, also offers a “Keep the Change” program. If you opt-in, the bank will round up every debit card purchase to the next dollar, transferring small amounts of change into your savings account. It's a fairly painless way to save.

You can also use your savings account for overdraft protection. Should you overdraw your checking account, the bank can transfer money from savings to cover it.

So there are some advantages to having a savings account, even though they don't earn any interest to speak of. And while online banks, like Ally, pay a higher rate on passbook savings, it's still a far cry from the rate paid a couple of decades ago.

Requirements

Of course, there are some requirements to maintain a savings account without incurring fees. For the Bank of America basic account, you must maintain a $300 minimum daily balance, or link to your Bank of America Interest Checking Account, or make combined monthly automatic transfers of $25 or more from your checking account during the preceding billing cycle.

Failure to meet those requirements results in a $5 fee.

Bank of America's Rewards Money Market Savings account pays a slightly higher interest rate – 0.03% to 0.06% – but has steeper requirements, like maintaining a $2,500 minimum daily balance. Failure to meet all the requirements results in a $12 monthly fee.

While a savings account is not going to grow your money in any real sense, it might prevent you from spending it. It's a fact that some consumers need a separate account as a way to exercise financial discipline. And if you can meet all the requirements so that monthly fees are not eating into your savings, that's a perfectly legitimate reason.

Other options

For those who can carefully track their spending and exercise tight discipline, however, a rewards checking account might be a better solution. Some banks will pay a higher interest rate – in some cases over 2% APY – on balances up to $15,000 or so.

By meeting all the requirements – usually a certain number of debit purchases each month and at least one direct deposit – consumers can avoid fees, earn interest, and sometimes receive other benefits, such as having all out of network ATM fees refunded.

No matter what type of account you use, the important thing is to save.

Consumers know they need to save more money in this new economic environment, but some still find it very hard to do. Here's a tip from the America Saves campaign: Split your direct deposit into your checking and savings accounts.

A new survey by the Consumer Federation of America (CFA) finds that although 66 percent of all employees use direct deposit, only 23 percent split their deposit into different accounts. Just 59 percent who have access to direct deposit and use it have the option to split and of those, only 39 percent choose to split their deposits.

"Many companies don't offer their employees the option to split direct deposit," said Stephen Brobeck, executive director of the CFA. "They are denying their employees a basic benefit that doesn''t cost the company any more to offer and can potentially help their employees start consistent savings programs."

A 2006 survey by NACHA — the Electronic Payments Association — showed that consumers who use direct deposit save $90 more per month than those who use another method to save.

NACHA suggests the easiest way to start a consistent savings program is to have your employer deposit just enough in your checking account to cover your expenses and have them automatically deposit the rest into your savings account through a split direct deposit.

"Just like retirement savings, if you automatically save the money, you are less likely to spend it," said Jan Estep, president and CEO of NACHA. "Splitting direct deposit is easy to set up for new employees or established Direct Deposit users. The process takes minutes to complete. Just talk to your employer."

It's a win-win situation, experts say.

"Direct deposit helps employees save money and it's free for employers to offer this benefit," said Dan Maddux, executive director of the American Payroll Association. "Employees should ask their payroll departments about direct deposit splitting options and should suggest adding the benefit if it isn't offered yet. Employers can do their part by encouraging their employees to save more by splitting their direct deposit between checking and savings accounts."

The CFA survey showed that 66 percent of all employees use direct deposit. Of those that have access to direct deposit, 78 percent use it. Of those that don't have access, 76 percent said they would use it if they had the option.

"Especially in this economy, every penny counts," said Brobeck. "Even if you only have $20 left each month after your expenses, deposit it automatically to your savings account. With this type of consistent savings, you will be well on your way to establishing a financial emergency fund, college savings program or a vacation fund."