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KEY TAKEAWAYS
If you earn more money than you spend on bills and other expenses each month, but you’re not sure what to do with the extra cash, a savings account may be a good idea.
When it comes to savings accounts, there are so many options. So which one is the best?
We’ve put together this comprehensive guide to help you understand the types of savings accounts available and how the account you choose could impact your financial future.
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:
If you’re opening a savings account simply to hold your money, your list of required features may differ from someone who wants a savings account that offers maximum growth opportunities. Decide what you plan on doing with your money before you evaluate your options or make that initial deposit.
It’s not uncommon for savings accounts to come with deposit minimums, transaction limits and other restrictions that dictate when and how you can access your money. There are also minimum deposit requirements to be aware of; sometimes your initial deposit is even used to determine your interest rate.
Unlike checking accounts, savings accounts offer interest to help you grow your savings. Different banks will offer varying interest rates, with some institutions even offering multiple types of savings accounts, each with their own rate schedule. High-yield accounts earn higher rates of interest than regular accounts.
Depending on the bank, your savings account may be subject to a startup fee or monthly maintenance fee. Some fees only pop up if you cannot maintain a minimum balance, if you make too many withdrawals or if you withdraw before the fixed term on your account is up. There are incidental fees, too. Ask your bank if they charge for paper statements, inactivity or annual maintenance. If your account offers ATM access, there may be fees associated with ATM withdrawals as well, so this is something to be looking into.
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.
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).
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.
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.
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.
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.
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:
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.
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:
You don’t need to have more than one savings account, but having multiple accounts could offer you additional FDIC coverage and offer more opportunities to leverage varying interest rates and account perks.
Savings accounts are lower risk, but investing could bring higher rewards. Spreading your savings between an FDIC-insured account and a portfolio of low-risk investments may offer the best of both worlds. It’s also important to know about investing and to understand the market and the risk involved before putting your money into stocks and shares. What you want may change depending on your age and current financial situation.
The type of savings account that’s best for you depends on your goals. Regular accounts are best for low-maintenance, low-stress savings, while high-yield accounts could get you to your financial goals faster. Some people just want an emergency fund, while others are better off choosing an account type dedicated to a specific purpose, such as saving for retirement or for a down payment on a house.
High-yield savings accounts, money market accounts and CDs are most likely to offer the highest interest rates and earn the best return on your money.
Traditional savings accounts typically have the lowest interest rates and earn the least money.
A savings account is considered a liquid asset because it holds financial value and can be turned into cash quickly.
Alana Musselman is a versatile storyteller with over a decade of experience writing for diverse industries. Her writing has been featured on prestigious brands such as WW (Weight Watchers), Amazon, and Penta.
