So, you’ve done your budget, and you have positive cash flow — what now? The obvious next step is to start putting cash away for an emergency, if you haven’t done that yet. Building an emergency fund is a vital step in any personal finance plan, and it’s ideal to have at least enough cash on hand to cover three to six months of expenses. The best way I’ve found to save is to make it automatic.
My first real savings account was with ING Direct, an online-only bank now owned by CapitalOne. Back when I opened my account, they were paying 4% APR interest on savings accounts. Their interest rate is now under 1%, but the goal here isn’t to build money — it’s to keep emergency cash in a place you won’t be tempted to spend it. (Any interest you earn is only a slight hedge against inflation anyway). Building wealth through investing (through mutual funds, bonds, and so on) should only be done with money you plan on saving for the long term, money you won’t need for at least five to ten years.
The best part about my online savings account is that I can make automatic transactions from my primary checking account — every two weeks, on payday — and I never miss them. I can also open multiple savings accounts for a variety of goals: vacation, a new car, and so on. There are several other online banks you can choose from (Ally Bank and FNBO Direct and a couple), and you can compare several of them using bankrate.com to see which ones are currently paying the best interest rates. Wherever you put your money, make sure that it’s with a bank that’s insured by FDIC (or NCUA, if you’re with a credit union). Also, federal law restricts how many times you can withdraw money from a savings account, and that includes transferring funds between savings accounts (if you have multiple accounts for different purposes, as described above). You’re currently limited to six withdrawals per month, so bear this in mind whenever dipping into your savings for any reason.
Happy saving!