Savings accounts provide a safe place to keep your money where it is readily accessible. These accounts typically offer you at least a small amount of interest. Plus, keeping your savings in a savings account makes it easier to track your progress toward achieving personal finance goals.
However, not all savings accounts are created equal. There are several different types of savings accounts where you could save for the future without putting your money at risk. But some account types may differ in some meaningful ways. You could choose one or even several because there aren’t limits on how many savings accounts you could have. Each type might fulfill a different goal.
But what are these types? Let’s look at five different account types to help you decide what savings accounts you could consider.
What is a savings account?
Savings accounts are accounts that are held at banks, credit unions, online lenders, or other financial institutions to earn interest. Your money in a savings account may be insured against loss, depending on the type of account you choose.
A savings account allows you easy access to your funds because they’re not invested in the market and could be accessed through a teller, ATM withdrawals, or bank transfers. In most cases, there’re no limitations on when you can access your money either.
Savings bank accounts differ from checking accounts in that they are intended to be a place where you can store money you use for mid-range or short-term financial goals. On the other hand, checking accounts are used as a holding vessel for money that you use for daily spending.
You typically deposit money into a checking account, such as a paycheck. You could then use the checking account to pay bills, withdraw cash for everyday spending, and fund a savings account.
This key difference between savings accounts and checking accounts is cemented in a federal regulation limiting the number of transfers you can make each month. The regulation was relaxed during the coronavirus pandemic, but many financial institutions have chosen to enforce it still. Based on the regulation, a savings account could have six outgoing transfers or withdrawals per month, while a checking account doesn’t have a limit.
Why do I need a savings account?
Opening a savings account could give you a safe place to store money to accomplish financial goals and build a secure future.
Unlike an investment account, you wouldn’t be putting your money at risk in a savings account. The returns you earn are likely to be lower than if you invested in stocks or bonds, but your money would be accessible and you won't face a chance of losing money.
This means that you could access your cash when needed, as long as you don’t hit the monthly transfer number limit or be restricted by other withdrawal limitations. You could also easily track how much you have set aside for different purposes, such as saving for an emergency fund or a home down payment.
It's helpful to have a savings account separate from your checking account since funds in a checking account are generally used to cover bills and everyday costs. You could earmark the money for the specific goals with separate savings accounts. In many cases, you would also be able to earn more interest on your savings than you would in a checking account.
If you have multiple financial goals, it could be helpful to open more than one savings account. You could transfer money into each account based on the amount you've determined you need for each goal.
You would easily see how much you have invested in each objective you set. Plus, you might be less likely to spend the money on other things if it's kept in a savings account that you opened for a specific purpose.
If you open multiple savings accounts, you could choose from several different account types. This would allow you to take advantage of each type's benefits and perks.
5 types of savings accounts
Here are several different types of savings accounts that could be worth considering:
1. Regular savings accounts
Many banks and credit unions offer standard or basic savings accounts. These accounts come with some simple advantages. For example, depending on your bank or credit union, you may have access to in-person customer service at a local branch.
Another advantage is that regular savings accounts usually have FDIC insurance through the Federal Deposit Insurance Corporation or are protected by the National Credit Union Administration (NCUA).
Transferring money to these accounts is simple, especially if linked to your checking account. Additionally, Some savings accounts may come with debit cards for more straightforward withdrawals.
The downside is that the interest rate may not be as high as a dedicated high-yield savings account. Additionally, many standard savings accounts limit you to six withdrawals per month.
2. High-yield savings account
A high-yield savings account is a savings account that promises a higher interest rate than the national average. Online banks often offer these accounts, though some standard banks and credit unions may also offer high-yield savings accounts.
The main advantage of high-yield savings accounts is that they offer a higher interest rate than standard accounts. Most are also FDIC-insured, so there's no risk of loss.
However, their downside is that you may not get in-person customer service. Additionally, your account might not be directly linked to a checking account unless the financial institution you choose offers a checking account.
These online savings accounts may also be subject to the same limit of six monthly withdrawals that standard accounts have. And you may need to maintain a certain minimum balance to qualify for the higher interest rate.
3. Certificate of deposit account
Certificates of deposit (CDs) are longer-term savings accounts offered by many different financial institutions. They are offered by banks, brokerage firms, and even independent salespeople called deposit brokers.
CDs generally have higher interest rates than standard savings accounts, which is a major advantage. A CD could be insured by the FDIC when opened through a federally insured bank, so you don't face any risk of loss.
However, there are several significant drawbacks. CDs have higher minimum deposit limits, and you must commit to placing your money into a CD for a set length of time, known as the CD term. Interest accrues periodically over that time, but the inability to use the money reduces your liquidity.
4. Money market account
Money market accounts (MMAs) are similar to standard savings accounts. They’re also offered by banks and credit unions.
Money market accounts are insured by the FDIC or the NCUA. The main advantage of these accounts is that they often provide a higher interest rate than standard savings accounts.
However, there are downsides. These accounts usually have a higher minimum balance requirement than standard savings accounts. Additionally, you may be limited to six monthly withdrawals like some standard savings accounts.
5. Cash management account
Cash management accounts are similar to standard savings accounts but are usually offered by brokerage firms or other non-bank financial service providers.
Cash management accounts typically combine checking and savings account features, so one significant advantage is that you could get benefits offered by both. You may also receive a higher interest rate than a standard checking account. Many cash management accounts are FDIC-insured as well.
However, there are some cons. Most cash management accounts are offered by non-traditional banks, so there may be no local branches to provide customer service. Additionally, you may not get as high of an interest rate as you would with a high-yield savings account.
Things to consider when selecting a savings account type
As you decide which type of savings account is right for you, there are several key things to keep in mind. These include:
- Monthly fees: Some accounts charge monthly maintenance fees, which would eat into your returns and make it more difficult for you to achieve your goals. These fees may be based on the balance deposited or the account's services.
- Minimum deposits: In some cases, you might be required to maintain a certain minimum balance to avoid fees. You’d need to deposit a set minimum amount to open an account in some other cases. So it’s essential to make sure you have the required amount.
- Interest rates: Accounts that pay interest rates allow you to grow your wealth quicker. This rate is often expressed as an annual percentage yield (APY), and understanding the rules for earning a specific APY would work for your benefit. Some savings accounts require maintaining a minimum balance to reach the most competitive rates.
- Insurance protection: If an account is FDIC-insured, you don't need to worry about losing the money placed in it — even if the financial institution were to go bankrupt.
- Withdrawal rules: Some accounts might limit how often you can make withdrawals. Understanding these limits would give you a clear picture of how to access your money when you need it.
You could consider your savings goals and the features available in each type of savings account when you choose the best savings account.
How to open a savings account
Once you've decided what account type you want, it’s easy to learn how to open a savings account. Here are the steps you could take to open one:
- Research account options. Several different financial institutions may offer the account type you want. Research interest rates, fees, and rules of each one to pick an institution that works best for you.
- Gather your information. Generally, you need to provide basic information, including your Social Security number, ID, and contact details.
- Complete an application. Most financial institutions allow you to apply for an account online. However, in some cases, you may want to visit a bank or credit union in person to fill out the paperwork and open your account.
- Fund your account. Once your application is approved, you can make the initial deposit into your savings account. You could do this via an ACH transfer from your checking account or other savings accounts. You may also be able to write a check or visit a local bank branch to make a cash deposit.
Once you have opened your account or opened several accounts for different financial goals, you may want to set up regular automatic contributions from your checking account. This will help you to stay on target toward accomplishing your financial objectives.
Is FDIC insurance important for my savings account?
FDIC insurance is an important benefit that many savings accounts offer. If an account is FDIC-insured, the Federal Deposit Insurance Corporation protects you against financial loss if the financial institution fails.
This means that when an account is FDIC-insured, you cannot lose money as long as you keep your deposits below the insurance limits. Suppose an account is not FDIC-insured or otherwise backed by a government agency like the NCUA. In that case, there is always at least a small risk of financial loss.
Can a savings account be an IRA account?
A saving account could be an IRA account. Financial institutions offer IRA savings accounts to provide a tax-advantaged saving account that helps you save money for retirement. These accounts pay interest, just as regular savings accounts do, and they don’t invest your money in bonds or stocks.
IRA savings accounts come with certain limitations in exchange for their tax advantages. There are strict rules on the sum of contributions you could make and the penalty-free timing of your withdrawals. If you need access to your money before reaching 59 1/2, you may face a 10% tax penalty on withdrawals.
The return an IRA savings account might provide is usually going to be lower than the returns you would earn if you opened a traditional IRA with a brokerage firm and invested in stocks. But you also take on much less risk.
Are savings accounts the same as CD accounts?
CDs are certificates of deposit that many financial institutions offer. They are a type of savings account and might be protected by FDIC insurance, but they are different from standard savings accounts in some fundamental ways.
CDs typically offer a higher rate of return than a traditional savings account. However, they generally require a higher minimum deposit balance. You usually also need to lock up your money in a CD for a minimum time frame.
No matter what savings account option you select, saving money for your future is always a good idea.
To make the most of your hard-earned money, you could research the pros and cons of the account type you choose and review the financial institution you plan to open it with to make sure you work with the best banks.
Explore all your options before making a choice. The best savings account is the one that could give you the most benefits, the highest interest rate, and the fewest limitations.
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