Working Your Way Up the Savings Rate Ladder

Savings programs are more effective when they are goal-based. Specifically, what really works is a series of incremental goals. Fortunately, many banks make it easier to work toward a series of incremental goals by offering you incentives at various milestones along your savings journey.

After all, when you first set out to save for retirement, it doesn't do you much good to focus solely on the long-term goal of a comfortable retirement. For one thing, your target date for reaching that goal may be so far off that there is no sense of urgency to do anything about it today. For another, when you start saving, the amounts you accumulate in the first year or so may seem like a drop in the bucket compared with the amount of money needed to fund your retirement.

In contrast, a series of incremental goals will create the impetus to take short-term action and provide you with an encouraging sense of progress even in the early days of a savings program.

Savings Rate and Accumulated Savings Goals

There are two types of incremental savings goals you can use: your savings rate, and your accumulated savings.

• Savings rate. Your savings rate is the percentage of income that you save. This may start out as a small number in the early years of your career, when a lower income leaves you little money after living expenses. At that point in your life, any positive savings rate (in contrast to building up debt, which would constitute a negative savings rate) is a sign of progress. Then, with each successive raise in pay, you can try to increase your savings rate. Don't simply raise your standard of living to the level of each raise you get. Try to spend no more than half of each raise in the present, so you can put at least half of it toward your savings.
• Accumulated savings. After a few years of building your savings rate, you should see a meaningful savings balance starting to accumulate. At this point, you should check out some of the rewards that banks offer you for reaching those milestones.

Some Common Savings Milestones

Banks offer a variety of incentives for larger account balances--higher savings account interest rates, a waiver of fees on related accounts, etc. You can think of these incentives as rewards for reaching various savings milestones.

These incentive thresholds may start for balances as low as $500 or $1,000. They work their way up at various round-number balance thresholds such as $5,000, $10,000, $25,000, $50,000, $75,000, $100,000, and even $250,000. Think of these breakpoints as a savings ladder, where you try to work your way up towards greater and greater rewards.

What to Do When You Reach a Milestone

What should you do when you reach a next step on the savings ladder? Take the following actions:

• Check with your bank to see if the threshold you just reached makes you eligible for a better deal, such as fee waivers, lower fees, or higher bank rates.
• Once you know what kind of deal your bank offers at your balance size, check money-rates.com to see if there might be better deals out there at other banks.
• As you reach higher account balances, check to see that you are still within FDIC coverage limits.

It takes a small amount of discipline to reach a small goal. By focusing on achieving the next rung of your savings ladder, you'll soon realize that the aggregation of these small goals has put you on track to funding your future.

Source:

HSBC: http://www.us.hsbc.com/1/2/3/personal/savings/deposit-rates?code=xx&WT.ac=HBUS_xx

Bank of America: http://www.bankofamerica.com/deposits/checksave/