As time goes by we learn some finance lessons that we wish we had known sooner rather than later. Be it saving, investing, spending, budgeting, we all stand to learn something new each day as financial habits are quite personal. Check out: 7 common financial mistakes and how to avoid them
Thus, as you embark on your financial journey particularly, saving for long term projects, school or one time activities like buying a house, here are things you should consider when choosing a long-term savings account.
- Time horizon
A long term savings account allows you to build up your savings for an extended period of time. This happens through regular contributions and earned interests. For this reason, before choosing a long terms savings account or product, identify the time horizon through which you’ll have your money stay in the account.
For example, saving college money for a kid who’s about to leave high school is not the same as saving for a kid who just started school. The difference being the person saving for a kid who just started school will have more time for their money to grow unlike the former, who’ll start withdrawing funds sooner.
This means that aside from considering the time horizon, you’ll need to match your account to your goals before investing.
Therefore, identify the time horizon to not only get an insight into the number of months or years you have left before you start withdrawing funds but to also assess your risk level. Perhaps savings accounts are safe. However, they might or might not be the best way to grow your assets – if you’re looking to save for over a decade. Savings or investing, which way to go?
On the other hand, you don’t want to be incurring losses or have your money in volatile accounts when you need it the most. Hence jot down your goals, assess the timelines, the options you have and the risk involved with each option.
2. Invisible fees
Hidden fees are usually in form of opportunity costs, maintenance fees and excess transaction fees. Therefore it is important to pay attention to any hidden fees, since such fees can wipe out your progress, eating into your balance and damaging your interest.
Therefore before you open an account, look into the fee disclosure and ensure that you have all the information you need. Here are the reasons to have a personal finance adviser
There’s no reason that your savings account should be deducted a monthly fee as if you’re paying the bank. Consider other options such as local banks that don’t charge maintenance fees. In line with this check the rates and penalties, you will be charged for early withdrawals.
3. Compound interest
It is wise to analyse multiple savings account offers, so you can settle for the one offering the best rates. Afterall maximising your interest will indeed help you attain your investments goals faster. Bear in mind that some savings accounts have a low interest for new accounts. However, once you commit to saving your money for longer periods (fixed accounts) the rates become significant.
This is why you should also factor the timeframe you need before making withdrawals, as this could make a huge difference in the compound interest you stand to earn.
In other terms, compare how much access you need to your funds against what the account offers. As mentioned above if you need funds that are liquid you may have to settle for low interests or consider a money market account which requires a larger deposit and higher minimum balance. Such accounts pay higher interests and offer more access making them best for emergency funds. However, terms and conditions apply. Finances: When You Should Use Your Emergency Fund
Ultimately, your goals and the time frame you have before you start making withdrawals will play a key role in determining the product or long term saving accounts you choose for your investments needs.
Here is how you can Plan for the future By creating a Financial Plan which will inform your savings plan.
Find out why you should start saving early