What type of savings account to open?
About 95% of U.S. households have at least one member with a checking or savings account, according to a 2019 Federal Deposit Insurance Corporation (FDIC) report.
While a checking account is essential for day-to-day transactions, a traditional savings account is ideal for emergency savings or other purposes. It is important to consider several savings options in order to optimize your returns and make the best use of your cash savings.
If you don’t have an account or want one with better earned interest, there are options you should explore.
It’s important to first understand why savings accounts are so important and how you can benefit from opening one (or more).
Why is a savings account important?
Savings accounts are essential because they provide a safe place to store money that you intend to use for specific purposes or goals. For example, you can use your savings account to keep your emergency fund or to put money aside for a down payment on your first home. Your savings account protects your money until you need access to it.
When to open a savings account? You must open a savings account as soon as you reach the age of 18, the minimum age required by banks. The earlier you can establish the habit of saving money, the better. Saving money allows you to enjoy greater security in your life and deal with unexpected financial emergencies.
How does a savings account work?
You can open a savings account with a bank, credit union, or online lender. You need to complete an application and once accepted, you will deposit money into your account.
Money in your savings account earns interest based on the annual percentage yield (APY) of the account. The higher the APY, the more your money will earn. Banks can compound interest daily, monthly, quarterly or annually. Your earnings will also depend on the amount of money you deposit and how long your money stays in your account.
Let’s say you open a traditional savings account and deposit $10,000 with a bank that compounds the interest annually. According to FDIC data from June 2022, the average interest rate on savings accounts is 0.13% APY, which means you would earn about $13 in interest for the year. After one year, your new balance ($10,013) would start earning interest. Your money will grow faster if your bank offers a shorter compounding period. Keep in mind that projecting your income is not an exact science, as your APY is variable and can change at any time.
You can access your money whenever you want, but some banks have restrictions on withdrawals. Although federal regulations limiting withdrawals to six times per month were lifted in 2020, some banks still charge a fee if you exceed their stated limit.
What are the different types of savings accounts?
When looking at different savings account options, pay attention to the various features, advantages, and disadvantages of each type to determine which savings account best suits your financial needs and goals.
Here are six savings accounts to help you determine which type you should open.
Traditional savings account
Traditional savings accounts are standard accounts offered at physical banks and credit unions. Most national bank savings accounts are covered by FDIC insurance up to $250,000 per account. Similarly, the National Credit Union Administration (NCUA) insures credit union savings accounts up to the same amount.
A traditional savings account may be better if you need a safe place to store money for a long time and don’t care about interest rates. Unfortunately, this type of savings account usually doesn’t offer the best interest rate, although recent federal interest rate hikes have triggered a slightly higher rate of 0.13% APY. Your bank may also require you to pay monthly fees or minimum balance fees.
High Yield Savings Account
Like traditional savings accounts,are federally insured options for storing your money and earning interest. Unlike regular savings accounts, however, high-yield savings accounts typically offer above-average APYs. The security and income potential of high-yield savings accounts can make them a suitable option for your emergency fund or for any other purpose where you might need quick access to your funds.
If you want to grow your savings, you can easily start by opening a high yield savings account right now.
Although traditional banks and credit unions may offer high-yield savings accounts, you’re more likely to find them at online banks, with higher yields and lower fees. A savings account with a high return may seem attractive, but remember, these rates are variable and can change at any time.
Money market account
Money Market (MMA) accounts are ideal if you want more options for accessing your money but still want to earn interest on your savings. In this case, a money market account does the trick by combining the features of a traditional savings account with the features of a checking account. You can earn more interest on your balance than you would with a regular savings account. You will also have the option of writing checks or using a debit card to withdraw funds or make purchases.
Note: You may need to deposit a minimum amount to open a money market account. On top of that, interest rates can be tiered, so you may need to deposit a higher amount to take advantage of the best rates.
Certificates of Deposit (CDs) are savings accounts with a time component, which means that you must lock your money into the CD account for a specific period of time. CD accounts generally offer higher interest rates than savings or money market accounts. As of August 2022, the APY for a 12-month CD is 0.46%, outpacing income from money market accounts (0.14% APY) and regular savings accounts (0.13% APY).
You will likely have to pay an early withdrawal penalty if you withdraw money from the account before its due date. Once the CD matures, you can usually withdraw your savings without penalty or transfer it to a new CD.
Specialized savings account
Until now, savings account options have focused on saving money that you don’t need to access for a while. Specialty savings accounts are different because they usually have a specific savings goal, such as saving for retirement or healthcare costs.
Likewise, specialty savings accounts can focus on one person, such as your child or a student.
Here are some common types of specialty savings accounts
- Health Savings Account (HSA)
- Individual Retirement Account (IRA)
- Flexible Spending Account (FSA)
- Student savings account
- 529 college savings account
- Christmas Club Account
You’ll earn interest on your savings in a specialized savings account, and you might pay little or no monthly maintenance fee in some cases. On the other hand, your interest rates can be less than ideal with children’s savings accounts, student accounts and Christmas Club accounts. Also keep in mind that some specialty accounts follow strict tax rules on withdrawals.
Cash management account
Typically, banks do not offer Cash Management Accounts (CMAs). Rather, they are available through online brokers and robo-advisor platforms. Cash management accounts earn interest, but their primary purpose is to hold money that you’re not ready to invest but will eventually put into your brokerage or retirement account.
Because many investors deal with large balances, cash management accounts often offer FDIC insurance on balances of $1 million or more once the funds arrive at a program bank.
One of the disadvantages of cash management accounts is that their interest rates can be lower than those of a high yield savings account or a CD.
What are the best ways to grow your savings account?
Once you’ve chosen the best savings account for your needs, there are countless ways you can grow the money in your account. Here are some best practices for saving or earning money that you can deposit into your savings account.
- Set a budget so you have a plan to pay all your bills on time.
- Pay off as much debt as possible to minimize or eliminate interest charges.
- Automate your savings by setting up recurring deposits from your current account.
- Set a spending limit on your credit or debit cards to help you avoid overspending.
- Automate your invoices so you never miss a due date and incur late fees.
- Reduce non-essential expenses and deposit the savings in your account.
- Earn more money by working overtime, asking for a raise, or taking on a side job.
What type of savings account is best?
The best savings account is usually one that offers high interest rates without charging excessive fees while providing access to your money. However, the best savings account will likely depend on what you want to achieve financially. Ultimately, one account may not be enough to achieve your goals, so you may want to consider opening multiple types of savings accounts as needed to achieve your goals.
Ready to start? You can open an account now and start earning interest on your savings.