Banking Question


a mustard seed
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So, not an LDS question but I trust the people here, at least to not make fun of me for not knowing about certain things because you all know about my situation and how my life has been on hold for the past 10 years. Thus, my knowledge of certain things is limited since my experience is limited.

My question: is there some sort of savings account that you can have at the bank where you put money into it and the money grows over a period of time? Or is that just something I made up in my head? I didn't want to go to the bank and ask about it yet because I feel like that is foolish as a concept, that it's wrong, and I don't want to look like an idiot asking about something that doesn't even make sense. But you guys will tell me if it's dumb or not. So, do banks have that kind of thing or am I thinking of an investment or something? I admit, working at the call center where a couple of our clients are financial advisory institutions, my view is probably skewed on what BANKS can do.

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Guest Godless

I'd look into a CD (Certificate of Deposit).  It's a high interest account that you can start and let mature for a few years. There's a certain period of time during which you can't access the money without paying a fee, but the wait is worth it if you can afford to part with some money temporarily. 

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32 minutes ago, a mustard seed said:

is there some sort of savings account that you can have at the bank where you put money into it and the money grows over a period of time? 

Back a decade ago, we used to pay attention to interest, because it existed.  Around 2008 banks kind of stopped offering much in the way of interest-bearing accounts.  But that's slowly changing as we're emerging from recessions and qualitative easing and whatnot, and the economy is starting to grow more, and inflation is picking up a bit.

So short answer, yes, there are many such things, and they're starting to make a comeback.

http://www.bankrate.com/cd.aspx - looks like a 5 year CD is paying upwards of 2.4%.  Bank savings accounts are maybe 1.3%.  Haven't seen stuff like that in a decade.  As Godless said, CD's are good if you want better interest than a bank account, and you don't need the money.  Back 20 years ago, I had CD's paying 5%.  Maybe we'll see stuff like that again in the next 3-5 years.

 

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Backroads nailed it with specific savings goals.  I move my money around between different accounts and deposit types regularly to maximize return.  It really depends on how much money and how long you can go without having access to it.  If it's an emergency fund and you need to have access at a moments notice, you'll use a different type of account than if you're saving for retirement or a five-year project.

At one point I had 4 of the same type of accounts at the same bank because they provided a larger return on money up to a certain point than they did on anything over that amount.  I just opened multiple accounts to cap that.  They eventually changed the rules to prevent that, so I moved it into a money market.

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7 hours ago, Backroads said:

Yes. They can be handy for specific savings goals.

Ah! I see! I'm trying to save money for college loans that I'll have to pay off. I'm trying to get it all figured out because I've never done this before. I'll be trying to keep up with payments during the breaks, working to pay off the loans(at least what I can) before I graduate. I was just wondering if there was an account or something that I could keep putting money into and still gain interest on it. The CD sounds like an avenue I could take.

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13 minutes ago, a mustard seed said:

Ah! I see! I'm trying to save money for college loans that I'll have to pay off. I'm trying to get it all figured out because I've never done this before. I'll be trying to keep up with payments during the breaks, working to pay off the loans(at least what I can) before I graduate. I was just wondering if there was an account or something that I could keep putting money into and still gain interest on it. The CD sounds like an avenue I could take.

There are also education specific accounts that offer tax breaks and decent returns.  I have them for my children but I'm not sure how they would work for short-term savings.  It may be worth looking into.

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Interest rates are so low right now that unless you have large amounts to deposit or can let it accrue interest for a long period of time I don't think you will see a lot of change. I think the fact that you are saving money is the most important thing. This will pay off the loans faster thus keeping your from having to pay as much interest on the loans (at rates that are probably higher than you'll receive in a savings account). Having said that, there are some online savings accounts that have some decent interest rates that don't require you to leave your money alone for a defined period of time. These also don't have many of the same restrictions as brick and mortar banks.

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AS others have already stated, savings accounts used to grow slowly.  Long ago they had something like a 3% to 5% growth rate annually.  Of course, that's when mortagages ran something between 7% and 11% annually, so they had something to counter off of them.  After the housing crash of 2008, and the massively low interest rates, the Banks had no way of really earning income off the interest, and hence the savings accounts were also hit.

Not of much use for college, but Roth IRA's are probably a better investment for retirement these days, or for shorter terms...CDs as mentioned above.  Bonds may also be coming back for something to invest in, and in some situations can be a higher return than CDs if you have the right advice.

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10 hours ago, a mustard seed said:

Ah! I see! I'm trying to save money for college loans that I'll have to pay off. I'm trying to get it all figured out because I've never done this before. I'll be trying to keep up with payments during the breaks, working to pay off the loans(at least what I can) before I graduate. I was just wondering if there was an account or something that I could keep putting money into and still gain interest on it. The CD sounds like an avenue I could take.

There's this thing called a 529 Plan which is specifically used for education investment.  The good thing about 529's are they have tax advantages.  There are two general types of 529's - pre-paid college and college savings.  Pre-paid is great if you are going to a college in the state that you live in.  You get certain advantages in addition to the tax advantage, such as locking tuition rates today so you won't have to worry about rising tuition when you eventually get into college.  I have the Utah Educational Savings Plan (UESP) college savings plan for my kids.  I don't live in Utah and I don't care one way or the other if my kids go to BYU or any other Utah colleges but I chose the UESP because out of all the states 529 plans, Utah is one of the good ones that have better interest returns options (from risky investments with high yield or safer ones with lower yield).  It is managed by Vanguard which I think is a good one.  UESP college savings can be used in any college in the  US. 

 

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8 hours ago, laronius said:

This will pay off the loans faster thus keeping your from having to pay as much interest on the loans (at rates that are probably higher than you'll receive in a savings account).

Assuming you already have a loan, this would be my advice - if the loans will let you pay extra principal without penalty, you're better off doing that than putting the money in a simple interest-bearing account - unless you can magically find an account that pays a higher rate than the loan's rate.  (That said, I'd have a small savings account for emergencies first, then start paying off the loan as fast as possible - even seemingly trivial amounts applied to the principal will quickly knock down the overall amount you pay.)

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529 plan would be best as you can add to it as you go keep in mind there are restrictions on how the money can be spent, a CD locks the money in, you can withdraw early and pay a penalty (the penalty is tax deductible)it is an above the line deduction, so not really a penalty at all. 

I say go for a high yield savings account, you have instant access to your money since it seems like you will be paying as you go.

 

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Just now, NeuroTypical said:

These exist?  Where?  Bankrate's best deal is 1.35%...

http://www.bankrate.com/banking/savings/rates/

 

Just because they have crap rates doesn't stop the banks from calling them "high yield" You can go to Wells Fargo and get a "platinum" savings account I think you can earn .06%APY, really the OP should go to a credit union they have the best rates, I earn 2% on my checking account.

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But if the loan is charging, for the sake of argument, 6% interest; and the best savings account she can find offers, for the sake of argument, 4% interest, putting the money into the savings account is actually losing money (in the long run).  It's a better use of the money to pay down principal (essentially saving 6%) than to put it in the savings account and be losing the 2% difference.

Unless someone has changed math since I was in school (entirely possible, accountants like to obscure everything).

Edited by zil
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3 hours ago, zil said:

Assuming you already have a loan, this would be my advice - if the loans will let you pay extra principal without penalty, you're better off doing that than putting the money in a simple interest-bearing account - unless you can magically find an account that pays a higher rate than the loan's rate.  (That said, I'd have a small savings account for emergencies first, then start paying off the loan as fast as possible - even seemingly trivial amounts applied to the principal will quickly knock down the overall amount you pay.)

The loan is subsidized so, it won't start gaining interest until after I graduate in about 4-5 years. My general plan was either to pay as much of the loan off from money earned during my 6 month breaks while I'm still in school, so, by the end, it wouldn't be as big as it would be otherwise. OR find a savings account that I can keep shoving money into(the money earned during breaks) and save it for the entire 4-5 years and hopefully make it somewhat larger than what I directly earned through interest somehow. By the end of school the loans I get, if I am eligible each year, will total about $50,000. Working two jobs during 6 months each year, I can maybe get $20-30,000 saved/earned by the end of school. It'll take a big bite out of it but the less time I have to spend dealing with the loans after I graduate, you know, the better, of course.

I thank everybody for their advice and sharing their knowledge of these things. At least now, I have some actual things I can ask my bank about. <3

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1 minute ago, a mustard seed said:

The loan is subsidized so, it won't start gaining interest until after I graduate in about 4-5 years.

In that case, you want to save up until the day before interest starts accruing1 and pay as much as you can on that day.  That way, your money will be multiplying up until the loan starts accruing - any interest rate is better than nothing, and you would get no benefit paying principal early.

1 This assumes that it's not one of those scenarios where it's actually accruing the whole time, it's just that you don't have to pay anything - I've seen such nonsense in fine print.  The big print says things like "no payment for 4 years" and implies no interest is accruing all that time, but the fine print says, "oh, by the way, we're charging interest for the entire life of the loan".

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PS: the longer the term of the CD, the higher the interest rate, usually.  Therefore, you want to get as long-term an account as you can given the risks involved (e.g. if there's doubt about when you have to start paying, and that's assessed annually, then get a 1-year CD and renew it, or open a new one after a year).  But if there's no doubt, a 4 year CD (if there is such a thing) would likely be best.

Edited by zil
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4 minutes ago, zil said:

PS: the longer the term of the CD, the higher the interest rate, usually.  Therefore, you want to get as long-term an account as you can given the risks involved (e.g. if there's doubt about when you have to start paying, and that's assessed annually, then get a 1-year CD and renew it, or open a new one after a year).  But if there's no doubt, a 4 year CD (if there is such a thing) would likely be best.

When I first started looking at such things, a long-term CD paid significantly less that a short-term. These days, the reverse is true.

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4 hours ago, zil said:

Assuming you already have a loan, this would be my advice - if the loans will let you pay extra principal without penalty, you're better off doing that than putting the money in a simple interest-bearing account - unless you can magically find an account that pays a higher rate than the loan's rate.  (That said, I'd have a small savings account for emergencies first, then start paying off the loan as fast as possible - even seemingly trivial amounts applied to the principal will quickly knock down the overall amount you pay.)

I agree with this, with the following caveat: If the education loan doesn't charge interest for a period of time, put your money in a savings account or CD instead of the loan. This will give you a (small) increase in interest to pay toward the loan. Then on the month (or week, or day) before the account starts charging interest, put all of your money that you have saved up into the education loan.

EDIT: Okay, never mind, you and zil have already covered this ground.

Edited by Vort
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56 minutes ago, a mustard seed said:

The loan is subsidized so, it won't start gaining interest until after I graduate in about 4-5 years. My general plan was either to pay as much of the loan off from money earned during my 6 month breaks while I'm still in school, so, by the end, it wouldn't be as big as it would be otherwise. OR find a savings account that I can keep shoving money into(the money earned during breaks) and save it for the entire 4-5 years and hopefully make it somewhat larger than what I directly earned through interest somehow. By the end of school the loans I get, if I am eligible each year, will total about $50,000. Working two jobs during 6 months each year, I can maybe get $20-30,000 saved/earned by the end of school. It'll take a big bite out of it but the less time I have to spend dealing with the loans after I graduate, you know, the better, of course.

I thank everybody for their advice and sharing their knowledge of these things. At least now, I have some actual things I can ask my bank about. <3

Something else to consider if, ten years down the road, the loan is not paid off (not that you will ever be in that state).  Or, the second option if you want a big boost at repayment if you don't repay the loan immediately.

 

Student Loan forgiveness after paying 120 payments and working a government job

Or, another even better option is

Student Loan repayment by US government Jobs

Which gives 10K a year towards repayment of the Loan incurred.  I never got these programs (firstly, probably because I was blessed greatly and got out of school debt free and never had to take up a student loan), but I have known some acquaintances that have benefited tremendously from one or the other.

 

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12 hours ago, anatess2 said:

There's this thing called a 529 Plan which is specifically used for education investment.  The good thing about 529's are they have tax advantages.  There are two general types of 529's - pre-paid college and college savings.  Pre-paid is great if you are going to a college in the state that you live in.  You get certain advantages in addition to the tax advantage, such as locking tuition rates today so you won't have to worry about rising tuition when you eventually get into college.  I have the Utah Educational Savings Plan (UESP) college savings plan for my kids.  I don't live in Utah and I don't care one way or the other if my kids go to BYU or any other Utah colleges but I chose the UESP because out of all the states 529 plans, Utah is one of the good ones that have better interest returns options (from risky investments with high yield or safer ones with lower yield).  It is managed by Vanguard which I think is a good one.  UESP college savings can be used in any college in the  US. 

 

 

Thanks for sharing this. I'm looking into starting college funds.

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