Where to Stash Your Cash: 6 Types of Savings Accounts
There are six different types of savings account, each with pros and cons.
Contributing Writer at Tally
October 23, 2022
This article is provided for informational purposes only and should not be construed as legal or investment advice. Always consult with a professional financial or investment advisor before making investment decisions.
When you park your cash in a savings account, you have the potential to earn more interest than you would in a basic checking account. If you don’t have a savings account, you may be a bit curious about the different types of savings accounts 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.
In addition to explaining what a savings account is, we’ll review the pros and cons of six different types of savings accounts and which ones you should consider based on your personal finances and goals
What is a savings account?
A savings account is a type of account offered by financial institutions, typically banks or credit unions. Seventy-eight 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 withdraw it without penalty.
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.
Typically, checking accounts offer all of the above except high interest rates. Savings accounts, on average, have higher interest rates than checking accounts.
What are the 6 types of savings accounts?
Generally speaking, financial institutions offer a few different savings account options. Take a look at this breakdown of what each has to offer and which account is best for saving for certain types of people.
1. Traditional savings account
A traditional savings account (sometimes called a basic or regular savings account) is the most standard savings option when you open a bank account.
Pros of a traditional savings account
Basic savings accounts allow you to earn a bit of interest while keeping your money safe. With this type of savings account, 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.
Cons of a traditional savings account
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. Also, you’re limited to six transfers or withdrawals per month, you 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.
Who a traditional savings account is for
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 a bank account.
2. High-yield savings 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.
Pros of a high-yield savings account
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 these types of savings accounts.
Cons of a high-yield savings 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 from the ATM. You'll need a secondary bank to transfer money into the account, and you’re limited to six transfers or withdrawals per month.
Who a high-yield savings account is for
A high-yield savings account is the best type of savings account 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, 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.
3. Cash management account
A cash management account is another type of savings account 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 in a high-yield account.
Pros of a cash management account
Unlike other types of savings 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.
Cons of a cash management account
There are no physical bank locations, so in-person banking is out. The interest rates are also lower than those typically seen with high-yield savings options, so you could be missing out on potential earnings.
Who a cash management account is for
Cash management accounts are best for savers who are responsible with money, feel comfortable with budgeting and can 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.
4. Money market 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.
Pros of a money market account
Not only do money market accounts have high interest rates, but they also allow you to use a debit card and write checks.
Cons of a money market 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.
Who a money market account is for
A money market account is the best savings account for someone who would rather pay off their emergency bills with a check or debit card than a credit card. Additionally, someone 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.
5. Certificate of deposit
If you don’t need immediate access to your money, CDs may be appealing. They have pre-defined terms, and 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.
Pros of a certificate of deposit
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 funds rate. This means that it can fluctuate slightly. A CD locks you into a rate.
Cons of a certificate of deposit
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%. (Although, the stock market comes with risks, so you should consult a financial advisor.)
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 penalties.
Who a certificate of deposit is for
A CD might work for someone with a significant financial event on the horizon who needs to park their cash for the short term. Examples would include down payments for a home or a car. These aren’t useful for keeping emergency funds since you won't have immediate access to your money.
6. Specialty savings account
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).
Pros of a specialty savings account
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.
Cons of a specialty savings account
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.
Who a specialty savings account is for
Specialty savings accounts are good for those with specific savings goals in mind, such as retirement or college savings for their children.
Which type of savings account is best?
Each type of savings account has pros and cons. The type that’s best for you will depend on your goals and needs. If earning interest is your main concern, then a high-yield savings account may be best. If it’s important for you to have accounts at a local in-person bank or credit union, then you may prefer a traditional savings account, a money market account or a certificate of deposit.
How many savings accounts should I have?
If you’re just starting out on your savings journey, then one savings account is probably enough. However, as you expand your financial goals and have more money to save, you may decide to have one savings account for your emergency fund and one for other financial goals.
You can also mix and match different types of savings accounts. For example, perhaps you have a rainy-day fund in a traditional savings account, an emergency fund in a high-yield savings account and a college fund in a 529 account for your kids.
Also, if your savings really start to grow, you might want to have savings accounts at different financial institutions to keep more of your money FDIC insured.
What type of savings account earns the most interest?
Typically, you’ll earn the most interest from high-yield savings accounts, money market accounts and certificates of deposit, depending on current interest rates and the type of financial institution. For example, as of October 2022, Ally Bank — which is an online bank — has the following APYs:
High-yield savings account: 2.25%
Money market account: 2.25%
High-yield CD: 1% to 3.50%
Start your savings journey today
When it comes to an interest-bearing savings account, 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 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 were in a checking account.
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