Cultivating a savings habit early on allows for a longer time period to reap the benefits from compounding interest. Generation Z, which refers to young adults born in 1997 or later, are getting a head start on saving in a big way.
According to the National Society of High School Scholars, 10 percent of Gen Z-ers start saving as teens; 35% of Generation Z members say they plan to start saving for retirement in their 20s. Not only that, but they’re also more likely to be saving for a home compared to their millennial counterparts, and aspire to buy a first home by age 25.
Knowing where to save money matters when you’re just getting started. Not all savings vehicles are the same, and it’s important for Gen Z to understand how they differ to get the most bang for their savings buck.
Saving for Short- vs. Long-Term Goals
Where to save money depends in part on what you’re saving money for. As mentioned, Gen Z is interested in saving for retirement and buying a home, but other savings goals may include:
- Buying a first car
- Renting a first apartment
- Paying for college expenses
- Building an emergency fund
- Planning travel or vacations
- Setting aside money for holiday shopping
Honing on your specific goals can help you decide where to save money, based on things like when you’ll actually need it, how much interest you’re hoping to earn and how accessible you need the money to be.
In terms of interest, the longer you can leave your money alone, the more time it has to grow. The annual percentage yield you enjoy on your savings is tied to the type of account you’re saving in.
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 Gen Zers might consider:
- Traditional savings accounts
- High-yield savings accounts
- Money market accounts
- Certificate of deposit accounts
- Individual retirement accounts
Traditional Savings Accounts
A traditional savings account is just what it sounds like: a deposit account that holds your savings. These accounts can be offered by banks and credit unions; savings accounts typically earn interest and allow for up to six withdrawals per month without a penalty.
Traditional savings accounts are a basic and safe savings option for Gen Z. A potential downside is the APY. These accounts generally offer a very low yield for savers compared to high-interest savings accounts.
High-Yield Savings Accounts
High-yield savings accounts are similar to traditional savings accounts with regard to safety and the number of withdrawals allowed monthly. A key difference is that high-yield savings accounts can be much more valuable where the APY is concerned.
That’s because high-yield or high-interest savings accounts are often offered by online banks. With fewer overhead costs compared to traditional banks, online banks are able to pass those savings onto their customers in the form of competitive APYs.
High-yield and traditional savings accounts may be suited to Gen Z savers who are planning for short-term goals and will need to withdraw savings within a few months or a year. Of the two, high-yield accounts are more likely to offer a better rate to savers.
Money Market Accounts
A money market account combines the features of a savings account (i.e. 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 range that’s comparable to what you might get with a high-yield savings account.
This type of account may be good for Gen Z savers who have mid- to long-term goals. For example, if you’re socking away money for a down payment, 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.
Just note that money market accounts are subject to the same withdrawal rules as savings accounts.
That means no more than six withdrawals per month if you want to avoid a penalty.
Gen Z savers who want to earn a high APY on money they won’t need for several years might consider a CD account. 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 Gen Z should keep in mind is the early withdrawal penalty that may apply for withdrawing money from a CD before it matures. This penalty could cause you to forfeit some or all of the interest earned.
Individual Retirement Accounts (IRAs)
Gen Z members with earned income can get a jump on retirement with an IRA. A traditional IRA allows for tax-deductible contributions; Roth IRAs don’t offer a deduction but withdrawals are tax-free in retirement.
For 2019, IRA savers can contribute up to $6,000 if they’re under age 50. An IRA can be opened at a brokerage, while some banks also offer IRA CDs. Young savers may get an additional tax break if they qualify for the Retirement Saver’s Credit.
Consider Spreading Savings Around
One thing Gen Z savers should keep in mind is that they’re not limited to one savings path. They may use a high-yield savings account for emergencies, a five-year CD to build up a home down payment, and a Roth IRA for retirement savings. In other words, there’s no single answer for where to save money. The key is figuring out how much you can afford to save each month and which accounts work best for your goals, then committing to saving that much on a regular basis.