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What are Installment Savings Accounts?

March 25, 2009

By Clark Schultz | Money Rates Columnist

Saving for a specific goal can be difficult. Whether it is for a wedding, college tuition, retirement, or even a family vacation; we don't always know what rate of return to expect or how many ups-and-downs we will have along the way. The turmoil in the stock and bond markets in the last year has highlighted the need to use savings accounts as a way to make sure we meet our short-term specific savings goals.  An installment savings plan, offered by FDIC-insured banks across the country, is one way that a saver can plan to meet their savings goal.

Disciplined Approach to Savings
Americans are already accustomed to making monthly retirement contributions to their IRAs, 401Ks, or Profit-Sharing Plan. These retirement plans offer tax benefits and the luxury of time to overcome market fluctuations. Saving for a more immediate financial obligation can be trickier. Many people have learned that stocks and mutual funds do not provide the stability for short-term savings goals. Making a monthly contribution to an installment savings plan is an effective way to let your savings compound to meet your goal. Because an installment savings account is a contract between you and your bank, you are more likely to become regimented to making the monthly savings payments. Thus it is easier to ultimately reach your savings goal than making sporadic transfers to a savings account.

The Basics of an Installment Savings Plan
By opening up an installment savings account with a bank you are agreeing to make monthly payments to the bank for a specific period of time. The bank will pay an interest rate on your installment savings account that is typically higher than their best savings rate or highest CD rates. Banks including Hanmi Bank in California, Premier Bank in Colorado, and MetroBank in Texas are offering installment savings accounts that can be opened with terms from one year to five years. You can set up your savings goal in any $1,000 increment. After making monthly payments by check or automatic transfer from another bank account for the contracted period, your payments and the compounded interest will have accrued to your savings goal. At this point you can withdraw your funds.

Penalties for Early Withdrawal
Each bank will have their own policy regarding the early withdrawal of your funds. Because you are entering a contract with the bank, penalties do apply for withdrawing funds before the maturity date of your plan. This makes an installment savings plan more similar to a CD than a savings account.

Rates
The rates paid on installment savings accounts are typically pretty good. Many of the banks will require that you open up a checking account with a balance requirement, but by shopping around for an installment savings plan that meets your needs you can still come out ahead.

FDIC Insurance
The FDIC insures deposit accounts up to $250,000 per depositor. If you have concerns about a savings account that you find online, check FDIC.gov to verify details and information about the bank.

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