Cultivating a savings habit early on allows for a longer time period to reap the benefits from compounding interest. If you're part of Generation Z (Gen Z), meaning the generation born in 1997 or later, getting a head start on savings can pay off down the road.
But before you do, you should ask yourself one important question: “Where should I save my money?”
Just like with real estate, location matters when it comes to where to save money. If you're ready to start growing a cash cushion, here are some tips for managing your Gen Z savings.
If you’re under the age of 18, you may need a parent, guardian, or another person who is over the age of 18 to help you open a checking, savings, or another account.
Save for Short- and Long-Term Goals
Before you start stashing your cash in an account, it helps to think about what you need or want your savings to do for you. This means clarifying your short- and long-term financial goals.
For example, short-term goals might include:
- Buying a first car
- Renting a first apartment
- Paying for college
- Building an emergency fund
- Planning a vacation with friends
- Saving money for holiday shopping
On the other hand, 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 deciding where to keep your savings.
Make your financial goals SMART—specific, measurable, achievable, realistic, and time-bound.
Gen Z Savings Account Options
Once you've considered your goals, you can move on to choosing where to save money. 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 the short- or long-term.
Traditional savings accounts are basic and safe, and they can still pay interest. As of May 2021, the typical traditional savings account paid an average annual percentage yield (APY) of 0.07%. However, that is 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. That's 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. For example, if a high-yield savings account paid 0.7% APY on a balance of $1,000, that’s $7 in interest earned. If that same $1,000 was in a traditional savings account with an APY of 0.07%, you’d only earn 70 cents in interest.
Online banks may also charge fewer fees than traditional banks.
Money Market Accounts
A money market account combines the features of a savings account, like 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 an APY that's 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. For example, if you're socking away money for a down payment on a home, you could put it in a money market account. When it's time to close on a home, you'd be able to draw a check from your account to pay those costs.
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.
Certificates of deposit, or CDs, are time deposits, meaning you agree to save for a set time frame, which may be anywhere from 30 days to 10 years. You'll earn interest during that time and when the CD matures, you can withdraw your initial deposit, along with the interest.
One thing to keep in mind is the early withdrawal penalty that may apply for withdrawing money from a CD before it matures. Federal law imposes a minimum penalty of seven days' simple interest but there is no maximum penalty, which means banks and credit unions could require you to forfeit up to all the interest earned.
Look for no-penalty CDs, which allow you to make an early withdrawal without a fee.
Individual Retirement Accounts (IRAs)
An IRA might be the answer to where to save money 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 comes with income limits. The IRA contribution limit for tax years 2020 and 2021 is $6,000 (those age 50 or older can save up to $1,000 more).
If you're wondering whether a traditional or Roth IRA makes more sense for your Gen Z savings, consider what kind of tax break could benefit you most. For example, if you have a high income now, you may not be able to contribute to a Roth IRA, but you could open a traditional IRA and get a tax deduction on your contributions. If you don’t make much now, but expect to be in a higher tax bracket in the future when you’re ready to retire, then a Roth IRA may save you money in the long run.
Withdrawing money from either type of IRA before age 59 ½ could trigger a 10% early withdrawal tax penalty (though there are some exceptions).
Other Places to Save Money
Besides savings accounts, money market accounts, CDs, or IRAs, there are other places 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
One thing to know about where to save money as a member of Generation Z is that 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 Gen Z savings goals.