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WalletPrep worksheet · Saving

Where should you keep your cash savings?

Name ____________________ Date __________

Key ideas

  1. Pick the account by when you need it. Money you might need this month goes in savings. Money with a known date can go in a CD or Treasury bill.
  2. Insured deposits are covered up to a limit. Savings, CDs and money market accounts (savings with checks) at insured banks are covered to $250,000 per depositor, bank and ownership category.
  3. Breaking a locked rate early costs money. In the example, cashing a CD out after 6 months turns $222 of interest into $112 after the penalty.

Vocabulary

Certificate of deposit
A bank deposit that pays a fixed rate for a set term, like 6 months or 5 years, with a penalty if you take the money out early.
Treasury bill
A short-term loan to the US government, lasting 4 to 52 weeks. You buy it below face value and get the full face value at maturity.
High-yield savings account
A savings account that pays a much higher interest rate than a typical bank savings account, often offered by online banks.
Money market account
A bank deposit account that pays interest like a savings account and may include checks or a debit card. It is FDIC insured.
Credit union
A not-for-profit financial cooperative owned by its members, offering checking, savings and loans much like a bank.
Emergency fund
Cash set aside only for surprises like a job loss, a car repair or a medical bill. A common goal is 3 to 6 months of essential costs.

Work it out

Priya has $10,000 she plans to use in a year. She compares a high-yield savings account at 4.00% with a 12-month CD at 4.40%. Both rates are examples.

  1. Deposit
  2. Savings interest at 4.00%
  3. Savings after 1 year
  4. Deposit
  5. CD interest at 4.40%
  6. CD after 1 year
  7. CD interest after 6 months
  8. Penalty, 3 months of interest
  9. Interest kept if she cashes out

Check yourself

  1. Which option is the best fit for an emergency fund?

    • A. A 5-year CD
    • B. A high-yield savings account at an insured bank
    • C. A 52-week Treasury bill
    • D. A stock index fund

  2. You hold a $10,000 CD at 4% and break it early. The penalty is 3 months of interest. About how much is the penalty?

    • A. $40
    • B. $100
    • C. $400

  3. Which of these is not covered by FDIC insurance?

    • A. A money market account at a bank
    • B. A CD at a bank
    • C. A savings account at a bank
    • D. A money market fund at a brokerage

Your turn

Log in to your savings account and find its current rate. Then write down each pot of savings and the date you will need it. Anything without a firm date stays in savings.

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Answer key

Where should you keep your cash savings?

Work it out

  1. Deposit$10,000
  2. Savings interest at 4.00%$407
  3. Savings after 1 year= $10,407
  4. Deposit$10,000
  5. CD interest at 4.40%$449
  6. CD after 1 year= $10,449
  7. CD interest after 6 months$222
  8. Penalty, 3 months of interest− $110
  9. Interest kept if she cashes out= $112
  1. Both accounts compound monthly. Savings earns about $407 in a year. The CD earns about $449, so the CD pays $42 more if she keeps it the full year.
  2. If Priya needs the money after 6 months, the CD has earned $222. A 3-month penalty is $10,000 × 4.40% ÷ 4 = $110.
  3. She keeps $222 − $110 = $112. Savings would have paid her about $202 by then, with no penalty.

Check yourself

  1. B. A high-yield savings account at an insured bank Emergency money needs to be safe and reachable within a day or two. Savings at an insured bank is both, with no penalty to withdraw.
  2. B. $100 One year of interest is $10,000 × 4% = $400. Three months is a quarter of that, $400 ÷ 4 = $100.
  3. D. A money market fund at a brokerage A money market fund is an investment, not a bank deposit. It aims to hold a steady value but can lose money and is not FDIC insured.