Cultivating a savings habit early in life allows for a longer time period to reap the benefits from compounding interest. Getting a head start on savings can pay off down the road if you're part of Generation Z (Gen Z)—you were born in 1997 or later. But ask yourself one important question before you get started: Where should you save your money?
Location matters, just as it does with real estate. Here are some tips for managing your Gen Z savings if you're ready to start growing a cash cushion.
Note
You may need a parent, guardian, or another adult to help you open a checking, savings, or other account if you’re under the age of 18.
Save for Short- and Long-Term Goals
It helps to think about what you need or want your savings to do for you before you start stashing your cash in an account. This means clarifying your short- and long-term financial goals.
Short-term goals might include:
- Buying your first car
- Renting your first apartment
- Paying for college
- Building an emergency fund
- Planning a vacation with friends
- Saving money for holiday shopping
Long-term financial goals might include things like buying a house or starting a business. It's good to have a mix of both types of financial goals when you're deciding where to keep your savings.
Note
Make your financial goals SMART: specific, measurable, achievable, realistic, and time-bound.
Gen Z Savings Account Options
You can move on to choosing where to save money after you've considered your goals. There are five basic account types that could be a good fit for your Gen Z savings:
- Traditional savings accounts
- High-yield savings accounts
- Money market accounts
- Certificate of deposit (CD) accounts
- Individual retirement accounts (IRAs)
Traditional Savings Accounts
A traditional savings account is just what it sounds like: a deposit account that holds your savings. You can find these accounts at banks or credit unions and use them to save for short- or long-term. goals.
Traditional savings accounts are basic and safe, and they can still pay interest. The typical traditional savings account paid an average annual percentage yield (APY) of 0.06% as of November 2021. But that's low compared to what you could get in a high-yield savings account.
High-Yield Savings Accounts
High-yield savings accounts typically offer higher yields or APYs than traditional savings accounts because high-yield or high-interest savings accounts are often offered by online banks.
With fewer overhead costs compared to traditional brick-and-mortar banks, online banks are able to pass those savings on to their customers in the form of competitive APYs. If a high-yield savings account paid 0.6% APY on a balance of $1,000, that’s $6 in interest earned. You’d earn only 60 cents in interest if that same $1,000 was in a traditional savings account with an APY of 0.06%.
Note
Online banks may charge fewer fees than traditional banks as well.
Money Market Accounts
A money market account combines the features of a savings account, such as earning interest on deposits, with the benefits of a checking account, such as debit or ATM card access or check-writing capabilities. High-yield money market accounts can offer APYs that are comparable to what you might get with a high-yield savings account.
This type of account may be good for saving for mid- to long-term goals. You could put money in a money market account if you're saving for a down payment on a home. You'd be able to draw a check from your account to pay that deposit when it's time to close on a property.
Note
Federal rules no longer limit you to six withdrawals per month from a savings account or money market account (known as Regulation D), but banks and credit unions can still impose their own rules and fees for withdrawals.
CD Accounts
Certificates of deposit (CDs) are time deposits. You agree to save your money with an institution for a set time frame, which may be anywhere from 30 days to 10 years. You'll earn interest during that time, and you can withdraw your initial deposit, along with the interest, when the CD matures.
But an early withdrawal penalty may apply if you withdraw money from a CD before it matures. Federal law imposes a minimum penalty of seven days' simple interest, but there's no maximum penalty. Banks and credit unions could require you to forfeit up to all the interest you've earned.
Note
Look for no-penalty CDs that allow you to make an early withdrawal without paying a fee.
Individual Retirement Accounts (IRAs)
An IRA might be the answer if you want to focus on retirement. You could choose between a traditional IRA, which allows for tax-deductible contributions, or a Roth IRA, which lets you withdraw money tax-free in retirement. But these plans come with income limits. The IRA contribution limit for tax years 2021 and 2022 is $6,000, although those who are age 50 or older can save $1,000 more.
Consider what kind of tax break could benefit you most if you're wondering whether a traditional or Roth IRA makes the most sense for your Gen Z savings. You may not be able to contribute to a Roth IRA if you have a high income now, but you could open a traditional IRA and get a tax deduction on your contributions. A Roth IRA may save you money in the long run if you don’t earn much now, but you expect to be in a higher tax bracket when you’re ready to retire.
Note
Withdrawing money from either type of IRA before age 59½ could trigger a 10% early withdrawal tax penalty, although there are some exceptions.
Other Places to Save Money
There are other places besides savings accounts, money market accounts, CDs, or IRAs where you can save and even invest money for your future, including:
- Interest-bearing checking accounts
- Brokerage accounts
- Savings bonds
- Treasury bills
- Automatic savings apps, such as Digit
Some of these options may work better than others depending on how you spend, how much you have to save, and how much risk you're comfortable taking on. But looking at all the possibilities can help you diversify your savings, so you have multiple ways to earn interest.
Spread Your Savings Around
You're not limited to just one option. You might use a high-yield savings account for emergencies, a 3-year CD to help beef up a down payment for a car, and a Roth IRA for retirement savings. Choosing multiple places to save and adding money to those accounts regularly can help you reach your savings goals as a young adult.
