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Financial Planning: A Midyear Guide 1987 : part one: Planning Ahead : Even Small Savings Can Earn More

June 21, 1987|MARGARET HART | Margaret Hart is a Los Angeles free-lance writer specializing in business.

If you have less than $2,500 to work with, you don't have a lot of investment options these days. Yet one of the most durable instruments, the regular savings account, is alive and readily available at banks, savings institutions, credit unions and thrifts and loans.

Although some financial advisers scoff at its low return and growth potential, they can't deny the advantages of safety and being able to withdraw your money at any time. Moreover, savings accounts often are the only way small savers can ever accumulate enough for a larger investment.

The personal savings rate of Americans is expected to decline again this year to a 40-year low of 3.6% of disposable income, according to a survey of 51 forecasters by Blue Chip Financial Forecasts of Sedona, Ariz. Recent tax reform didn't add much in the way of saving incentives. Yet many people still follow Ben Franklin's pronouncement that "A penny saved is a penny earned."

Of course, there's more to saving than tucking away a few dollars every month, according to Andrew Tobias, author of "The Only Investment Guide You'll Ever Need."

What can you do with your hard-won savings once you've accumulated them? Since government deregulation of interest rate ceilings and minimum balance requirements was completed last year, institutions now set their own requirements. Keep in mind that account specifications vary from institution to institution.

Here's what is available today for savers with $2,500 or less:

Regular savings accounts. Savers are provided records of accounts either through passbooks or statements mailed periodically from the institution. Accounts may pay variable or fixed interest rates, currently ranging around 4.75% to 5.5%. Minimum deposit requirements to open an account and minimum balance requirements to earn interest vary.

Some institutions will open an account with as little as $1, but may not pay interest on a balance under $100 and charget a quarterly fee of $4.50 if the minimum balance isn't maintained.

Interest on checking. Technically there are negotiable orders of withdrawal (NOW) accounts, and SuperNOWs, which pay higher interest for higher minimum balances. Many institutions are merging the two accounts, which are available at

banks, savings and loans, and credit unions, but generally not at industrial thrift and loans. Some institutions pay interest on any size balance but require a $100 minimum deposit to open, and may charge a monthly fee of $4 if the balance is below $500.

Money-market accounts. These generally allow six pre-authorized withdrawals per month without incurring a fee. Most require $1,000 or $2,500 to open, and some will pay interest on any balance. But if you fall below minimum balance requirements, monthly fees can eat up all your interest and then some. Interest rates are not necessarily higher than with regular savings accounts, and rates depend on what tier your balance falls into. Tiers vary by institution but are frequently in $500 increments.

Certificates of deposit. The most popular deposit accounts, CDs pay fixed or variable rates and lock up your money for a specified period. The most popular terms are 3, 6, 12, 18 and 30 months. Minimum deposits for one-year CDs can run as little as $250. Interest rates depend on your balance, and there usually are penalties for early withdrawal. (Please see "Banks Tailoring CDs," Page 33.)

Banks, savings banks and S&Ls generally offer the same types of savings and interest checking accounts, although surveys by Consumer Action of San Francisco show that California S&Ls generally pay higher interest on savings than banks. Accounts are insured up to $100,000 by the federal government through the Federal Deposit Insurance Corp. for banks and the Federal Savings & Loan Insurance Corp. for savings and loans.

Credit unions offer most of the same accounts as larger institutions but pay an average of one-half or three-quarters of a percentage point more because of their not-for-profit nature. Each credit union has its own membership requirements based on criteria such as place of employment, neighborhood, group or religious affiliation. But a few credit unions are open to everyone. The California Credit Union League will help match you up with a union that would accept you as a member if you call (714) 628-6044 and ask for the research and information department. Accounts at credit unions are insured up to $100,000 by the National Credit Union Shares Insurance Fund.

Industrial thrift and loans or consumer finance companies have no membership requirements and generally do not offer checking accounts. Some are insured by the FDIC for accounts up to $100,000. Others insure deposits up to $50,000 through the California Thrift Guaranty Corp. These generally offer a quarter to half a point higher interest on savings because they've historically been viewed as having less protection.

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