5 Different Types of Savings Accounts
Savings accounts come in many forms, which include traditional savings accounts, certificates of deposits (CDs), and special savings accounts. In addition, there are high-yield savings accounts, which offer higher interest rates than traditional accounts. Most traditional bank accounts and credit unions offer some or all of these savings account options.
Learn how to pick the right savings account based on your financial goals. These different types of savings accounts are a good way to put your money to work and grow wealth over time.
What Are the Basics To Know About Savings Accounts?
There are several types of savings accounts, and each has its own particular benefits and drawbacks. You can open an online savings account or open one with a brick-and-mortar bank. Many brick-and-mortar institutions will open a savings account automatically for you.
In general, savings accounts tend to offer better interest rates than checking accounts. However, you'll have to decide if you need access to your money on a regular basis, or if you're more interested in earning a higher return on your money. These factors could influence the type of savings account that is most suitable for your particular spending habits and lifestyle.
1. Traditional Savings Accounts
Traditional savings accounts allow you to earn interest on money that you deposit into them. However, they usually require a minimum amount of initial deposits and allow only six withdrawals per month.
Certain financial institutions and online banks waive the minimum balance when opening a savings account. While the minimum deposit is not always required, keep in mind that if you want to withdraw more than six times a month, you'll likely need to pay a small monthly fee.
While regular savings accounts are great for storing cash in the short term due to their liquidity, they offer a low-interest rate and do not provide any tax advantages. If you want to avoid paying taxes on your savings, you should consider a tax-deferred investment account instead, such as a Roth IRA (often used as a retirement account). Though they have a few drawbacks, basic savings accounts offer great flexibility and easy access to your savings.
2. High-Yield Savings Accounts
If you want to maximize your money's potential growth, you may want to open a high-yield savings account. These savings accounts often come with higher interest rates than other types, but they're not guaranteed to make you rich. High-yield savings accounts also tend to have a limit of six withdrawals per month. If you go over that limit, you may have to pay a fee.
What Are the Pros and Cons of High-Yield Savings Accounts?
This type of savings account is a great way to save emergency funds. They earn interest on the money you deposit, which translates to significant savings when you have a larger amount to invest. These accounts are backed by the Federal Deposit Insurance Corporation (FDIC), which means you're protected by up to $250,000 per account owner and insured bank.
This level of protection is an added benefit that allows you to be more flexible with your money. Another great feature of high-yield savings accounts is compound interest. Compound interest means you'll earn interest on interest, which means your money will grow faster than in a traditional savings account.
Consider a high-yield savings account when saving money for major purchases, such as a vacation. You may need to budget for airfare, lodging, food, and other miscellaneous expenses. By saving a portion of your money in a high-yield savings account, you can save up for your dream vacation in a relatively short amount of time.
These accounts typically follow the federal funds rate, which changes eight times a year. If the Fed cuts the rate, the APY on your account will be reduced within a few days. This means that you will have to keep a higher balance than you might otherwise in order to keep it at a higher interest rate.
3. Money Market Accounts
Another type of savings account is a money market account. A money market account pays higher interest than a standard savings account and allows you to keep a large amount of money. This account can be useful for long-term savings goals as well as short-term emergency savings.
They are similar to savings accounts in that they allow you to write checks, make online bill payments, and ATM withdrawals. These accounts may have different interest rates depending on the amount of money you deposit.
Typically, you can get a lower rate if you have less than $10,000 in your account. A higher rate is available if you have between $10,000 and $25,000 in your account. You may have to deposit a higher amount to open a money market account.
While money market accounts are a convenient option for storing your funds, they're not always the best choice. If you need access to your funds frequently, you may want to consider a high-yield savings account.
4. Certificates of Deposit (CDs)
Certificates of deposit (CDs) are deposit accounts that earn a fixed rate of interest on the amount of money that you deposit. These accounts are generally FDIC-insured. They have higher interest rates than savings accounts, and you may also be able to find certificates of deposit with a variable rate.
Compared to a traditional savings account, CDs generally pay a higher interest rate because you have to leave your money on deposit for a specific period of time, the CD term. These accounts do not charge monthly maintenance fees or charge an early withdrawal penalty, which makes them appealing to those looking to save money for longer periods.
Generally, CDs are safer investments than savings accounts. In addition to their interest rate, a Member FDIC CD account is backed by the “full faith and credit” of the U.S. government, which makes them a safe investment. However, not all CDs are created equal. Some have higher interest rates than others, while others have lower introductory rates than market rates.
5. Specialty Savings Accounts
These types of savings accounts are excellent for saving for a specific purpose, such as for education or a new car, as some could come with tax advantages. For example, you may want to open a health savings account (HSA) if you have a high-deductible health plan. Keep in mind some specialty savings accounts have special restrictions on how and when you withdraw the money.
Key Takeaways About Different Types of Savings Accounts
Saving money regularly is a great way to prepare for unforeseen expenses. Having extra cash in the bank can help you pay for major expenses like car repairs. You can also use your savings to fulfill your financial goals. You should choose the best savings account for your personal finances.
Certificates of deposits (CDs) are a safe way to save money, and they offer stability and higher interest rates than savings accounts and money markets. However, you may lose money if you withdraw your money before the maturity date. Furthermore, you may have to pay early withdrawal penalties, which can cut into your principal.
Traditional savings accounts are a great way to save for rainy days or emergencies. These types of accounts allow you to save money quickly and easily, but they can also allow you to build up a larger rainy day fund over the longer term. Most of them have minimum balance requirements but offer a high degree of compatibility with traditional debit cards and credit cards. To make the most of your traditional savings account, consider setting up recurring payments or downloading a mobile app.
The high-yield savings account is a good option if you're looking for a high-interest rate. These accounts offer higher interest than traditional savings accounts, but you should keep in mind that these accounts may have additional fees and restrictions on how you use your money.
However, be aware that high-yield savings account yields are variable, and banks can increase or decrease the rate at any time. If you're saving for retirement, a high-yield savings account can help you earn a higher interest rate. Some of the best high-yield savings accounts offer APYs over 2 percent. Over time, these higher earnings can make a big difference.
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