When you’re trying to save money, it’s important to know that you have a handful of options to choose from. Most of us know about conventional savings accounts offered by local banks and credit unions, but there are other common savings account types, too.
A few different types of savings accounts have stood the test of time, and the one that’s right for you depends on what you want to do with the money you save. Do you want to save for the long term, save with the ability to access your funds easily, or desire the highest return no matter what?
Let’s look at three of the most popular savings account types: traditional savings account, money market account, and certificate of deposit accounts (CDs).
Top 3 Savings Account Types
1. Traditional Savings Account
These accounts are typically linked to your checking account, but can be standalone accounts as well. They’re easy to establish and maintain, and are designed for the money you want to keep separate from your spending account. A traditional savings account you can link to your checking account is a wonderful place to keep your mini-emergency fund. When an unexpected expense arises, the money will be fairly accessible.
These accounts traditionally had very low interest rates and didn’t earn much interest. However, there has been a rise in high-yield savings accounts that help you maximize your savings online. That’s where I park most of my money now. Even with interest rates declining everywhere over the last few years, my accounts still earn greater than a 4% annual percentage yield (APY).
At just 4 percent APY, which is on the low end, you’ll earn $400 per year on every $10,000 without doing anything but storing your money there.
The interest rates provided to customers can change over time based on federal benchmark interest rate fluctuations. Banks pay interest to savers to entice them to store money with them so they can use the money deposited as a fund to lend to others.
How Banks Use Your Money
– You deposit $10,000 into a savings account and the bank pays you 4% interest.
– In one year, you earn $400.
– That same bank lends $10,000 and charges the borrower 10% interest for the loan.
– In one year, the bank earns $1,000.
– The bank keeps the difference and makes a profit of $600.
This is a simplified overview, but it’s a peek into how banks make money and work.
2. Money Market Account (MMA)
Money market accounts are very similar to regular savings accounts, except they tend to require higher minimum deposits to open and include checking account features such as the ability to write checks. While your money is parked in a money market account, you may earn more interest, but you are often limited in how frequently you can access it.
Money market accounts are a perfect choice for people who don’t need to write a lot of checks, but would like the ability to rest their money somewhere and earn decent interest, while also being able to access it in more ways than with a traditional savings account. You can still get to your money when you need it using a check or debit card, and take advantage of higher interest rates than with most checking accounts.
3. Certificates of Deposit (CD)
Also called CDs, certificates of deposit work a lot like the other savings accounts, but can offer higher interest rates that remain fixed for a set period. The longer you commit to parking your money in the CD, the more interest you’ll earn. If you take your money out early, you may pay a penalty and risk canceling interest you’ve earned. These accounts are best for depositing money you know you won’t touch for months or years.
Another benefit to a CD versus the other types of accounts is that your interest rate doesn’t change until the CD matures. For example, when you invest your money into a one-year CD and the federal interest rates decline, your earning potential won’t decrease like it could with a traditional savings or money market account during that period. Conversely, your locked-in interest rate could wind up below current averages when interest rates rise. So proceed with caution.
Like savings and money market accounts, you’ll likely get the best yields by investing your money with an online-only institution.
Are Banks a Safe Place to Store Your Money?
With so many banks merging, having gone under, and being bailed out by the government over the years, it’s fair to wonder if storing your money in a bank is safe. Luckily, money deposited into nearly all banks in the United States is insured up to $250,000. That doesn’t necessarily mean you’re protected from scams and theft involving people accessing your accounts, but it does protect you from bank failures. Before establishing a savings account, verify that the company you plan to park your money with is FDIC-insured.
The Federal Deposit Insurance Corporation (FDIC) exists, in part, because of the Great Depression. Before FDIC insurance, customers were extremely suspicious of the banking system and would withdraw money for fear of losing it. Many people reacted to rumors of bank failure by making mass withdrawals, and as a result, many banks folded. FDIC insurance created peace of mind for customers.
How Much Money Should You Save?
The short answer to how much money you should save is as much as possible while still paying your bills and enjoying life. It’s easiest to do so when you have specific goals, such as building up an emergency fund, setting aside funds for retirement, or saving to pay for a major purchase like a down payment on a home.
Work out a budget and see what, if any, surplus you have at the end of the month. Make a plan for it and find a place to put it aside. If you don’t have any money left at the end of the month, you can find ways to earn extra cash or reduce your expenses to create savings for the future.
It’s never too late to get started, but I wish I had committed to saving money sooner. Choosing from one of these three main types of savings accounts is a great way to start building your nest egg. They’re proven, trustworthy methods that can help you reach your goals.