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Develop a Savings Plan


Setting -- and sticking to -- the goal.

The key to a successful savings plan: Put aside a pre-determined amount each month and, if possible, set up an automatic transfer from your paycheck.

"Take it off the top," says Stuart Ritter, a certified financial planner for T. Rowe Price, who teaches a class in personal finance at Johns Hopkins University. "That way, you won't even miss it."

If you attempt to save whatever is left over at the end of the month, your savings plan will fail because expenses have a way of expanding to meet Minyanville's Tips for June Grads available income.

Set a goal for your savings. Right out of school, building a nest egg to have a little extra never hurts. Laying the financial groundwork for graduate or professional school is a good idea, too.

Your check-bouncing undergraduate ways should be behind you. Remember: How you handle money now will affect your credit rating and that goes a long way to determine how much you'll pay for loans in the future.

Savings accounts come in three basic types: passbook, money market and certificate of deposit. Each comes with advantages and drawbacks.

Typically, passbook accounts pay the lowest interest rate. But you can make deposits or withdrawals at any time. All transactions are entered into a passbook, frequently called a bankbook, carried by the depositor and presented to the teller when conducting business. You usually can't write checks against this type of account and you may not be able to set up direct deposit. Some banks will open a passbook savings account with an initial deposit as small as $10.

In general, a minimum deposit of $500 or $1,000 is required to open a money market account. You can withdraw the money at any time without penalty. Money market accounts generally pay more than passbook accounts, but less than a certificate of deposit.

A certificate of deposit usually requires about the same initial deposit as a money market account, but you must agree to leave the money on deposit for a set term ranging from as little as three months to five years or more. In general, longer terms pay higher interest rates. Unlike passbook or money market accounts, most CDs don't allow you to add money to your savings until maturity. But some do, so shop around.

A certificate of deposit will pay a higher interest rate than a money market account, but the catch can tear a hole in your pocket: If you withdraw the money before the term's up, you're likely to lose all accrued interest. So, open a CD only with money that you know you won't need in the immediate future.

Some banks offer a slight increase in the interest paid on savings if you also maintain a checking account. Ask about the terms before opening a savings account.

The Federal Deposit Insurance Corporation, or FDIC, insures deposits up to $100,000 per depositor per bank. If later in your career you hold more than $100,000 in a bank account, you may want to consider the Certificate of Deposit Account Registry Service to maintain full FDIC coverage.

Convenience may dictate opening a savings account at the same bank you use for checking. If you maintain a minimum balance, often checking and savings combined, you can avoid most fees. Be sure to read the terms of your account and ask about standard and special fees. With a little planning, you can avoid them.

"Most people save haphazardly without a strategy," says Drew Tignanelli, a principal at The Financial Consulate in Baltimore. "You want a strategy guiding your savings plan. Are you saving for short-term emergency needs -- the car breaks down -- or for a long-term goal such as a down payment on a house?"

When you've established a savings plan with regular contributions, prepare yourself for the wonders of compound interest.

The Web sites of major brokerage houses and banks offer solid financial tips to grads, including T. Rowe Price (TROW), Merrill Lynch (MER), JP Morgan Chase (JPM), Wells Fargo Bank (WFC) and Wachovia (WB).
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