Definition of Savings
Savings is the money a person has left over when they subtract their consumer spending from their disposable income over a given time period. Savings can be used to increase income through investing.
- Savings refers to the amount left over after an individual’s consumer spending is subtracted from the amount of disposable income earned in a given period of time.
- Savings can be used to increase income through investing.
Savings comprise the amount of money left over after spending. For example, Sasha’s monthly paycheck is $5,000. Her expenses include a $1,300 rent payment, a $450 car payment, a $500 student loan payment, a $300 credit card payment, $250 for groceries, $75 for utilities, $75 for her cellphone and $100 for gas. Since her monthly income is $5,000 and her monthly expenses are $3,050, Sasha has $1,950 left over.
If Sasha saves her excess income and faces an emergency, she has money to live on while resolving the issue. If Sasha does not save her extra money and her expenses exceed her income, she is living paycheck to paycheck. If she has an emergency, she does not have money to live on and must secure payments for her bills.
Bank savings vehicles come with federal insurance of up to $250,000 per depositor.
A checking account offers unrestricted access to money with low or no monthly fees. Money is transacted through online transfers, automated teller machines (ATMs), debit card purchases or by writing personal checks. A checking account pays lower interest rates than other bank accounts.
A savings account pays interest on cash not needed for daily expenses but available for an emergency. Deposits and withdrawals are made by phone, mail or at a bank branch or ATM.
Interest rates are higher than on checking accounts. The best savings accounts can usually be found online because they’ll pay a higher interest rate.
A money market account requires a higher minimum balance, pays more interest than other bank accounts and allows few monthly withdrawals through check-writing privileges or debit card use.
A certificate of deposit (CD) limits access to cash for a certain period in exchange of a higher interest rate. Deposit terms range from three months to five years; the longer the term, the higher the interest rate.
CDs have early-withdrawal penalties that can erase interest earned, so it is best to keep the money in the CD for the entire term. Shopping around for the best CD rate is critical if you want to maximize your investment.
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