Now that you know your different options for savings accounts or vehicles (see "Types of Savings: Parts I-V"), you should set goals to meet your various savings needs. You can then select specific accounts or vehicles to save your money and obtain returns. Overall, you want to start with your most short-term savings necessities first, and then save for retirement.

First, set up emergency savings. Save a reserve of at least 3-6 months of you typical income, accessible only in unforeseen circumstances like vehicle, home, or small medical emergencies, a layoff from a job or during a period of lost work due to injury. Keep this amount constant; if you withdraw from these funds, replenish the account back to its total reserve amount.

If you are unable to save several months' salary, at least put aside $500 for small emergencies. Maintaining even a small reserve will save you credit card debt or financing used for small emergency expenses. You can keep emergency funds in a traditional savings account, whether you save a small reserve or put aside multiple months' of salary.

Once you have a reserve account, consider saving for specific events that will require a substantial amount of your earnings. Use holiday or vacation saver accounts to separate these funds from your reserve. You avoid using reserves for your summer trip, or not use Christmas gift funds for emergencies that are covered by your reserves.

After your immediate concerns are secured by emergency and event savings, you must now save for retirement. By focusing on this long-term goal early on, you ensure that you can stop working and still support a comfortable lifestyle.

Higher-yielding, long-term savings will be the basis for your retirement. CDs offer modest returns when compared to other long-term strategies like mutual fund or stock investments through an IRA or employee retirement account. But by starting young, compounding will allow you to maximize whatever return you can get from CD interest rates. As you rollover any earnings from the original money saved, there will even greater amounts to derive returns from interest; over time, this will add up exponentially.

But interest rates from CDs may not beat inflation. For instance, if inflation causes money to lose 1-3% of value annually, and you only get 5% interest from a CD, you're really only earning 2% on money saved---which is about same as standard savings accounts.

It is important to balance out more conservative long-term savings with the investment options you can take advantage of through specific retirement vehicles. For instance, in an IRA, you can open high-interest CDs, but also consider investment in mutual funds. As you become savvy with the market, portfolio management, and investment rebalancing, you could venture into individual stock investments, mutual funds, no load mutual funds, and index funds.

Since you are not risking your current income or emergency reserves, you do have some latitude. But you still need to be smart as you are planning for your retirement (see "Types of Savings, Parts III and IV" for more retirement options).


References

Moneywise. Help Your Savings Grow

FCIC. Personal Financial Fitness