Different Types of Savings Accounts: Which Is Best?
So you’ve decided to open a savings account. Good for you! Putting some of your income toward an emergency fund or savings goal each month is a great financial practice that will help you control how your money works for you. You may have been surprised to learn that there are several different types of savings accounts you can open. What are these different types of savings accounts, and what type of account is best for savings? Let’s look at some of the most popular options.
Traditional Savings Account
A traditional savings account is the most basic type of savings account. Often, when you open a checking account at your bank, you’ll have the option to add a basic or regular savings account. These accounts earn a small amount of interest while keeping your money easily accessible. When you need money from your savings account, you can transfer it over to your checking account immediately. However, you are limited to six online transfers and withdrawals from your savings account per month.
Traditional savings accounts are a great option if you have a short-term savings goal and need easy access to your money, but not if you are hoping to invest your money and watch it grow over time.
High-Yield Savings Account
A high-yield savings account offers higher interest rates, earning typically 20 to 25 percent more than a traditional savings account. You may be able to open a high-yield savings account from the bank you already use, but more likely you’ll need to research options available through online banks. As you research these options, consider:
- Interest rates
- Minimum balance requirements
- Initial deposit requirements
- Account fees
High-yield savings accounts offer the chance for your money to grow faster, but accessing it and transferring it into your banking account can be inconvenient. These accounts are great if you want to see your money grow fast while still having access to it, even if that access requires more steps and time than a traditional savings account.
Money Market Account
Money market accounts, or MMAs, are comparable to a hybrid checking and savings account. They are available at credit unions and banks and earn interest like a traditional savings account. MMAs also offer other privileges, such as debit cards and check writing. However, MMAs generally require a minimum initial deposit and require that account balances stay above a minimum amount, imposing fees if the account drops too low. Also, certain types of transfers and transitions are limited each month.
An MMA can simplify your money management, keeping all of your money safe in one account that builds interest while providing instant access. But the fees, minimum balances, and transfer limits are disadvantages. If you struggle with the temptation to spend your savings, you might benefit from keeping your spending money and savings in separate accounts.
Certificate of Deposit (CD) Account
Certificate of Deposit accounts—or CDs—are the highest-earning savings accounts. Unlike the other different types of savings accounts, CDs have an end date: They typically last from six months to five years, and the longer the term, the higher the interest rate and earning potential of your money. The catch is during that time, you have no access at all to your money—unless you want to pay a steep early withdrawal fee.
If you have a chunk of money that you likely won’t need for a few months or even years, consider putting it into a CD instead of letting it sit in your savings account. But if money is tight and you are living paycheck to paycheck, you might need instant access to anything you put aside in case of an emergency. In that case, a CD won’t be the best option.
What’s the Best Savings Account for You?
So what type of account is best for savings? Which account you choose ultimately depends on your savings goals, how fast you want your money to grow, how much you have to invest, and what kind of access you want to your money. Understanding the different types of savings accounts will help you decide which one is best.