A long-term savings account is essential for setting aside funds for major expenses such as educational expenditures, house purchases, retirement, or medical emergencies. This type of savings account can be set aside to pay for one-time expenses or make your daily living costs easier to deal with when you no longer have a job.
What is a long-term savings account?
It is designed to carry the money that you don’t expect is necessary to spend soon. On the other hand, a short-term savings account usually holds money for your bill payments or other immediate expenses. Your long-term savings account is usually in a bank, a chosen financial institution, or a credit union. Some charge a monthly account fee or have withdrawal limits and penalties depending on where it is being held.
Generally, this type of savings account is built for your financial goals that will be achieved many months or years away. For some individuals, the longer they have the money saved and allow interest to compound, the larger their money can grow.
Types of long-term savings account
Knowing how to compare the different types of long-term savings accounts is essential since each possesses different qualities. Below is a list of different long-term savings accounts.
Individual retirement account
This type of savings account also goes by the acronym IRA. It is a convenient way of saving for your retirement based on your tax. A traditional IRA can deduct your contributions from your taxes annually. However, with a Roth IRA, tax is not deducted for contributions, but you can have tax-free withdrawals.
Your funds saved in an IRA can be invested in mutual funds, exchange-traded funds (ETA), or other investment platforms. Although IRAs are linked to more risks than other savings accounts, they offer a better potential for your money growth if your money performs well.
Certificates of Deposit
They are also referred to as CDs. These are time accounts. The funds added to this type of long-term savings account gather interest over time. As the CD matures, you receive an initial deposit with the interest earned.
Other CDs have shorter terms ranging from 30 to 90 days, while others have terms of up to 10 years. Usually, the longer the term, the higher the interest rate and annual percentage yield (APY). However, it is only applicable some of the time.
High-yield savings account
This savings account offers interest rates and APYs higher than what you get in a traditional savings account. Banks such as brick-and-mortar and credit unions have this offer. Online banks usually pay better rates to savers since they tend to have lower overhead costs and let them pass on higher rates to customers. High-yield savings accounts in online banks sometimes charge lesser fees, causing you to keep more of your earned interest.
Money market accounts
It is like a high-interest savings account but has more requirements to keep it open. Some of these accounts need an initial deposit minimum or a certain minimum balance to avoid charging monthly fees.
Savings account for education
This is sometimes called a 529 savings account, which lets you contribute funds on behalf of a beneficiary like your child, grandchild, or anyone who needs an education. You can also have yourself as a beneficiary. The contributions grow tax-sheltered, and withdrawals are tax-free when used for approved education expenses.
Using a long-term savings account wisely
Here are a few tips on utilizing your chosen long-term savings account to enjoy the benefits of your exerted efforts.
– Know how to compare interest rates and evaluate the performances of several savings accounts and CDs to get solid data in gathering the best rate possible.
– Be familiar with the CD maturity dates since penalties for early withdrawals can erase your earned interest.
– Pick out an account that best suits your custom time frame because having it as long as possible will earn more from compounding interest.
– Do not be too eager to drain out retirement accounts early. Premature financial withdrawals can lead to a large tax bill.
– Learn to alter across multiple savings accounts to get more insulation against rate changes. Remember that these could shift movements, increasing or decreasing after some time.
– Keep track of account fees because hidden fees might feed off earnings as you collect good returns.
Pros and cons of having a long-term savings account
Pros
– Your money grows since compounding interest boosts the impact.
– Security and safety of your money is ensured if you find an account insured by the Federal Deposit Insurance Corporation (FDIC). Also, some institutions provide many ways to cover more significant amounts.
– Long-term savings accounts are widely available and can be opened with ease.
Cons
– Having your funds in a traditional savings account usually results in low interest rates.
– There are instances of no tax advantage in holding your money in a savings account.
– You may experience restrictions and fees and can be limited to six monthly withdrawal transactions. Plus, you might pay a minimum balance or other charges.
Know if you need it
Opening a long-term savings account can lead to noticeable benefits for individuals who wish to make their money grow while they still don’t find the need to spend it anytime soon.
The need to have a long-term savings account usually depends on your financial goals and the planned time or date on when to achieve them. For instance, you plan on buying your own house in the future. Opening this type of account matched with a high interest rate can help save up for a down payment as your money grows before purchasing it.
If you are planning to live your dream retirement life, having a long-term savings account and collecting interest while you are still working is best. You may withdraw the funds after leaving your job and benefit from the funds in your account.
However, not having a specific goal does not disqualify you from opening this type of account since you never know when you might need a massive amount of money. Some individuals hold their money in a long-term savings account just in case they encounter an unexpected situation that requires them to spend big, such as medical emergencies in the future.
Keep in mind
A long-term savings account does not guarantee full coverage of all your expenditures. Consider also opening a short-term savings account if you need to pay or purchase something important immediately. Try all the possible ways to set aside your money and make it grow. The way to financial success sometimes is a trial-and-error process.
