Choosing a savings account
Choosing a savings account and a financial institution isn’t a decision to take lightly.
There are a wide range of things to consider, such as whether the account offers FDIC coverage or what the APY is.
Other considerations include:
Types of savings accounts
All savings accounts are basically the same, right? Well, no, not necessarily.
There are several different types of bank accounts intended for savings. While they’re all designed to help you safely store your money, the way the accounts are structured and the benefits these accounts offer will vary.
Before we take a deep dive into the fascinating world of savings accounts, take a moment to consider what you want out of your new account. Do you want 100% online access or is it important to you to have a brick-and-mortar location to visit as well? Are you looking to lock up your money for months, years or decades? Are you stowing away a few hundred dollars or tens, even hundreds of thousands?
Keep your answers to these questions in mind as you explore savings accounts and other ways to make your money work for you.
Regular savings accounts
A regular savings account, also known as a traditional savings account, offers what many consider to be the best balance of access and interest.
You’ll probably get a lower interest rate compared to a high-yield savings account or certificate of deposit (CD), but in exchange, you can make as many as six withdrawals per month (check with your bank for the exact rules regarding monthly withdrawals).
Who it’s for:
People who want to save money and value access and frequent withdrawals over high interest rates, as well as people just beginning to explore their financial freedom (such as young adults opening their first savings account).
- Certificates usually have reasonable fees and minimum deposit amounts.
- Few restrictions on how or when you can make transactions.
- Lower interest rates compared to other types of savings accounts.
- Fees may be higher for accounts with lower balances.
High-yield savings account
High-yield accounts help you get the best return on your money.
They look just like a regular savings account, but you have access to a much higher annual percentage yield (APY). Your APY for a high-yield account may change as the Fed’s rate changes. This is good when the Fed rate is growing, but your APY also could suddenly reduce depending on market trends.
Who it’s for:
Those who want to make a deposit and watch it grow without making frequent withdrawals.
- Higher APY means your initial deposit can grow quickly and generate interest faster than you would with a traditional account.
- Using an online bank for your savings account could mean even higher interest rates because the bank has less overheads.
- Online-only access can be frustrating for people used to brick-and-mortar banking.
- High-yield accounts tend to have more restrictions on how often you can access your account to make withdrawals.
Money market account
Money market accounts (MMAs) are often referred to as hybrid accounts because they offer the best of savings and checking accounts rolled into one.
MMAs generally offer higher interest rates than a traditional account but lower rates than a high-yield account, and your rates may be tied to the amount you deposit (bigger balances = higher interest rates). Your money market account may come with a debit card or even the option of paper checks, so you can make withdrawals whenever you like.
Who it’s for:
People who can make a larger initial deposit and who want the benefit of higher interest rates without losing short-term access to their money.
- MMAs are known for being flexible and allowing withdrawals without steep penalties.
- You can access funds via debit card (even using an ATM) or check, which most savings accounts don’t allow.
- MMA minimum deposits are usually higher than you’d get with a regular savings account.
- Interest rates are good, though not as good as those you’d get with a CD or high-yield savings account.
When you agree to a certificate of deposit (CD), you’re agreeing to keep your money locked up for a predetermined period of time.
This time frame could be as little as three months or it could be five years or longer. Typically, the longer you agree to leave your money in a CD, the higher interest rate you’ll get in return.
The biggest sticking point of a CD is that you cannot touch the money until the CD ‘matures’, which means when it reaches the agreed-upon end date. Attempt to withdraw money or cash in your CD ahead of time and you’ll likely incur a penalty. On the other hand, the interest rate is fixed, so you know that whatever rate you get at the beginning will be your rate for the life of the CD.
Who it’s for:
People who want competitive interest rates and don’t mind losing access to their funds for a set period.
- CDs have higher interest rates than traditional interest-bearing savings account.
- Fixed interest rates mean you don’t have to worry that your rate will change while your money is locked away.
- You can’t touch your money until the account matures.
- Trying to make a withdrawal early can incur significant fees/penalties.
Cash management account
Unlike the other savings account options on this list, cash management accounts (CMAs) are not directly affiliated with a U.S. bank or credit union.
Instead, you open a CMA through an online brokerage or other digital banking platform. That institution would then place your funds through one or more of their partner banks.
Who it’s for:
CMAs are popular with investors who use this approach to savings as just one piece of a larger portfolio.
- Interest rates are higher than traditional savings accounts.
- Different platforms offer different features, allowing investors more opportunities to choose the account style and provider that best fits their needs.
- If your funds end up spread across multiple U.S. banking partners, you may have exponentially more Federal Deposit Insurance Corporation (FDIC) coverage, which otherwise maxes out at $250,000 per institution.
- Depending on where your chosen platform holds your funds, your deposits may not be FDIC insured.
- There are higher interest rates available via other types of savings accounts.
- Online-only investing can make it more difficult to reach customer service representatives.
Specialty savings account
Specialty savings accounts are created for an express purpose, like building a college fund or saving up for retirement.
Some types of savings accounts that fall into the specialty category include:
Kids accounts can be used to teach minors how to save and manage their money. Accordingly, these accounts often come with low or no fees, a low minimum deposit and balance requirements, as well as mobile apps for easy tracking.
Custodial accounts allow parents or grandparents to put money into an account in a child’s name and control how those funds are used until the child reaches a predetermined age (usually 18, 21 or 25).
Student accounts are just traditional savings accounts geared toward the needs of college students, who typically have lower income and can’t afford excess fees.
College accounts like a 529 help families pay for school ahead of time by making tax-free deposits to purchase future tuition at today’s prices.
IRAs and IRA CDs are both long-term retirement accounts that you add to (pre tax) year on year. IRA CDs differ in that the money goes into a certificate of deposit, which may offer better interest rates than a traditional IRA.
Flexible spending accounts (FSAs) offer a place to stash pre-tax money that can later be used to pay off health care or dependency-related expenses.
Health savings accounts (HSAs) hold pre-tax money intended to pay off healthcare expenses, including insurance deductibles, copays and coinsurance.
Who it’s for:
People who have a specific purpose in mind for the money they’re saving and want some help tracking progress and avoiding financial distractions.
- Having a specialty savings account can make it easier to focus on specific goals and needs.
- Tax-free accounts help you make sure the money you earn goes as far as possible.
- Because specialty savings accounts are geared toward a specific goal, you’ll likely be penalized for taking money out early or using it for a different purpose.
Why should I put money in a savings account?
One in 10 Americans say that they have no money in savings.
While it can be difficult for many to find “extra” money after all your bills are paid, using a savings calculator and putting some of the funds you have into savings can help you:
- Spend less and save more.
- Earmark funds to use for a specific goal, like buying a house.
- Keep your cash safer than it would be in a shoebox or behind the veggies in your freezer.