Saving More? Here’s What to Save For


Consumers are borrowing less and saving more, according to the Federal Reserve.

That news is not necessarily as good as it sounds. Many people have stopped borrowing because they’ve lost their jobs or already borrowed all they can.

But there does seem to be a growing culture of thrift. Consumer borrowing, not including mortgages, fell a stunning $21.6 billion in June, the largest drop in more than 60 years.

The drop was wide-ranging, involving credit card debt and loans for cars and many other purposes.

Assuming this leaves at least some people with extra cash in their wallets, what’s the best thing to do with it?

Most experts would suggest first building up a rainy-day fund. That’s especially important at a time of poor job security. As a rule of thumb, this fund should be large enough to cover expenses for six to 12 months, long enough to bridge the gap between the last paycheck from the old job and the first check from the new one.

Of course, the fund could be needed for a new roof, medical expenses or any other emergency even if you don’t lose your job.

A rainy-day fund should be “liquid,” or easy to get at, which means you won’t earn much interest. Money market accounts average a paltry 0.428%, according to the survey, while savings accounts average 0.223% and checking accounts just 0.136%.

You can do better by shopping around.

Online bank INGdirect (Stock Quote: ING), for instance, pays 1.3% in its savings account. Use the shopping tool to find the best deals.

Since a rainy-day fund is meant to last for some time, you could earn a little more by keeping some of it in certificates of deposit. Three-month CDs average 0.485% and six-month ones 0.725%, according to the survey.

Keep in mind that if you lose your job you could have unexpected expenses, such as travel for job interviews. So don’t tie up too much money in CDs just to eek out a few more dollars in earnings.

A $10,000 account would earn just $13.60 a year at the average checking-account rate, and $72.50 a year at the six-month CD rate. On a percentage basis that’s a big difference, but in actual dollars the CD doesn’t pay much of a premium to offset the inconvenience of having your money tied up.

If you already have a rainy-day fund, the best use for spare cash is probably to pay off any high-interest debt, such as credit card balances. Paying off $1,000 in card debt charging 18% is like earning 18% in an investment, since it will save you $180 in charges.

Use the Credit Card Pay-Off Calculator to devise a strategy.

Once the rainy-day fund is full and the card balances are empty, you can focus on long-term needs like investing for college and retirement, subjects for another day.

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