Contributing Writer at Tally
November 10, 2021
When you park your cash in a savings account, you have the potential to earn more interest than you would in a plain old checking account. If you don’t have a savings account, you may be a bit curious about the different types of options available. If you have one, it may be time to consider if it's still the right one for you and if it helps meet your financial goals.
Either way, you’re in luck. This is a complete guide to the different types of savings accounts.
What a savings account is
The six different types of savings accounts
The pros and cons of each
Which ones you should consider based on your personal finances and goals
You should understand where to store your money instead of a standard checking account by the end of this article.
A savings account is a type of account offered by financial institutions, typically banks or credit unions. Seventy-one percent of Americans have a savings account.
Savings accounts are known for three distinct things:
Interest rates: Savings accounts have higher interest rates than checking accounts. Essentially, financial institutions pay you to keep money with them. Putting cash in one of these interest-bearing accounts can increase your overall balance. Interest rates are expressed as annual percentage yields (APYs).
High liquidity and easy access: Your money is accessible. You can transfer it to other accounts and easily convert it to cash. This is the case for most savings options. Some, like certificates of deposit (CDs), define how long your money has to stay in the account before you can touch it.
Safe access: The Federal Deposit Insurance Corporation (FDIC) or the National Credit Union Administration (NCUA) insure savings accounts. Should your bank or credit union fail, up to $250,000 of your assets are insured. This is not the case if you invest your money, where you’re subject to market fluctuations. Some specialty savings accounts are not NCUA or FDIC-Insured in every state.
Technically, checking accounts offer all of the above except high interest rates. Savings accounts, on average, have higher interest rates than checking accounts.
Generally speaking, there are a few different savings account options available. Take a look at this breakdown of what each has to offer.
When you open a bank account, many brick-and-mortar institutions will automatically open a savings account for you. A traditional (sometimes called basic or regular) savings account is the most standard savings option.
Basic savings accounts allow you to earn a bit of interest while keeping your money safe. You can access your funds via transfer or ATM withdrawal. Depending on where you open the account, you may also be able to visit a physical location to perform these activities or to speak with a banker about any questions you may have.
Though you’ll likely have a higher rate than with a checking account, your APY will be lower than some of the other options on this list. You’re limited to six transfers or withdrawals per month, won’t receive a debit card (only an ATM card) and you likely won’t have check-writing capabilities. There may also be monthly maintenance fees.
A traditional savings account might be for someone who enjoys going to a physical bank location. It’s also useful for those who may need to deposit cash into their account.
Online banks typically offer high-yield options. These banks can offer higher interest rates because they don’t have physical locations, meaning they don’t need to worry about overhead and paying for things like rent like a traditional bank does.
You'll have a higher interest rate with an online savings account, which means you'll earn more when you leave your money parked in the account.
You won’t have physical access to a bank location. Though your online bank may waive fees for ATM withdrawals, you may not be able to deposit cash into the account. You'll need a secondary bank to transfer money into the account, and you’re limited to six transfers or withdrawals per month.
A high-yield savings account might work for someone who needs a safe place to store their rainy day or emergency fund. You won't need these funds frequently, but you’ll need access to them quickly should an unexpected expense occur. A high-yield savings account ensures you have access to your money, it's safe, and you maximize how much you earn in interest. You should earn a bit more keeping your money here than you would in a standard savings account.
A cash management account is another option typically offered by online banks. It’s a hybrid checking and savings account. The rates are usually higher than a standard checking account but lower than those seen in a high-yield account.
Unlike other deposit accounts, which limit you to six monthly transfers or withdrawals, cash management accounts don’t have any withdrawal limits. That's because they’re classified as checking accounts. Though you may be subject to overdraft fees if you take out more money than you have in the account, you shouldn’t be subject to withdrawal penalties. Some cash management accounts allow you to write checks or use a debit card.
There are no physical bank locations. The interest rates are also lower than those typically seen with high-yield savings options, so you could be missing out on potential earnings.
Cash management accounts are best for those responsible with money who can budget and manage both checking and savings accounts. They’re also good for those who aren’t concerned about having a physical bank location and would like to earn a bit more in interest than they would in a standard checking account.
Typically both traditional banks and online banks offer money market accounts, though those offered online may have higher APYs. Of the different types of savings accounts listed so far, these generally have the highest interest rates.
Not only do money market accounts have high interest rates, but they also allow you to spend funds using a debit card, as well as write checks from the account.
Because of the different perks offered, these accounts tend to have the highest initial deposit and minimum balance requirements. However, some financial institutions may be willing to waive the opening deposit requirements. Even though you can write checks from the account, you’re still only permitted to make six withdrawals or transfers per month.
Someone who would rather pay off their emergency bills with a check or debit card than a credit card would likely benefit from a money market account. Additionally, someone who’s flush with cash can leave their money sitting for the longer term until it’s needed for an emergency. It could also be useful for those looking to safely secure funds while meeting significant savings goals, such as having enough cash on hand for a down payment.
If you don’t need immediate access to your money, CDs may be appealing. They have pre-defined terms. You’re guaranteed a savings rate for your CD term, but you can’t touch your money during that time. If you do, you’re subject to early withdrawal penalties.
You know exactly how much you’ll earn in interest, as you’re guaranteed a rate for the CD term. Technically, the APY on other savings accounts is tied to the Fed Fund Rate. This means that it can fluctuate slightly. A CD locks you into a rate.
The best rates are reserved for those with longer terms. CDs can offer terms up to five years. However, tying up your money for this long could cause you to miss out on earnings. For instance, you may earn more in an investment account with a brokerage during that time, as the stock market has an average annual return of 10%.
CDs also have minimum deposit requirements as well. Typically, the higher the deposit, the better the rate. These accounts don’t offer high liquidity, either. If you do want your money before your CD term expires, you’ll have to pay hefty penalties.
A CD might work for someone with a significant financial event on the horizon who needs to park their cash short-term. Examples would include down payments for a home or a car. These aren’t useful to keep emergency funds since you won't have immediate access to your money.
Specialty savings accounts can be great options for long-term goals. Many of these act as investment accounts rather than traditional savings deposit accounts. Examples include health savings accounts (HSAs), 529s, custodial accounts and individual retirement accounts (IRAs).
You can maximize earnings because your funds can be invested. Working with a trusted advisor can help you select a portfolio that matches your risk tolerance. Some of these options, like a Roth IRA, offer tax benefits.
Your money may not be FDIC-insured. However, some states are moving to insure 529 plans for college savings. These accounts may have withdrawal stipulations, so you may not have immediate access to your money. You may need to do some research to find out the risk you’re taking when opening an account.
Those with specific savings goals in mind, such as retirement or college savings for their children.
When it comes to an interest-bearing savings account, it's important to remember that the longer you leave the money in the account, the more you are likely to earn in interest. For that reason, it's important to start saving today.
Each of the six different types of savings accounts we’ve listed has its own pros and cons. The option that you choose will very much depend on your financial situation and goals. But, even putting your money in a traditional savings account to get started can earn you a bit more in interest than you would if your money was in a checking account.
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