While most of us understand the importance of saving money, that doesn’t mean we know where to save it. Unfortunately, figuring out which type of savings accounts will work best is often the hardest part of getting started.
The good news is, there are at least four different types of savings accounts that might fit the bill. The most popular types of accounts for your money include checking accounts, savings accounts, certificates of deposit (CDs), and money market accounts.
While each of these accounts usually offer FDIC insurance on deposits up to $250,000, the right type of savings account for you depends on your savings style and personal goals.
Four Types of Savings Accounts to Consider
If you’re angling to save more money this year than last, or just looking for the best place to safely stash your short-term savings, here are four types of bank accounts to consider:
If you’re looking for easy and frequent access to your money, a checking account might be your best bet. With a checking account, you can write checks against your balance to pay for goods or services. Provided your bank offers online account management, you can also pay bills and send money online. Some checking accounts also offer debit cards that make using your account funds for purchases a breeze.
The best checking accounts on the market offer minimal fees, a broad network of ATMs where you can access cash quickly, and a low minimum balance requirement.
While the benefits of checking accounts are broad enough to help almost anyone’s financial picture, there is one notable downside to consider: Most checking accounts hardly pay any interest on your deposits. So, if you want to earn interest and grow your funds over time, you’ll be better off depositing your money elsewhere.
While savings accounts work similarly to checking accounts, they don’t offer a checking component when it comes to accessing your money. Generally speaking, you can access the funds in your savings account fairly easily through an online account management system, at the bank itself, or at an ATM — though federal law limits you to six withdrawals or transfers per month, unlike a checking account.
The best savings accounts offer low fees and a low minimum deposit requirement. Further, they almost always make it easy for you to access you money. The best part about savings accounts, however, is that they usually offer higher interest rates than checking accounts. With an online savings account specifically, you can usually earn a decent rate of return and grow your money over time.
Certificate of Deposit (CD)
Where checking and savings accounts make it easy to access your money when you need it, a certificate of deposit, or CD, ties up your money for long stretches of time. With a CD, you start by choosing a length of time for your money to grow – usually somewhere between three months and 10 years. During that time, your deposit will generate a fixed rate of return. Generally speaking, you’ll get a higher rate the longer you lock in your cash.
Obviously, there are downsides to consider when it comes to investing in a CD. First and foremost, certificates of deposit don’t let you access your money easily — you can expect to pay a penalty if you cash out your CD early (though you can sometimes borrow against the money using a CD loan). Also, most banks require you to deposit at least $1,000 to open a CD, which creates a barrier of entry that most new savers can’t overcome right away.
On the upside, CDs tend to offer higher interest rates than almost any other type of low-risk investment or savings account.
Money Market Account
In a lot of ways, a money market account offers a combination of the benefits found in other savings accounts. With a money market account, you generally need to deposit $1,000 or more, but you tend to earn more interest than you would with a traditional savings or checking account. Unlike CDs, however, a money market account won’t tie up your money for any predetermined length of time.
Many money market accounts also provide you with checks or a debit card that make it easy to access your cash quickly and without hassle. If you want the ability to withdraw money in an emergency, a money market account won’t prevent you from doing so.
Based on federal regulations that limit “convenience withdrawals,” however, your ability to access cash may be limited to six times per month, as with a savings account. Make sure you know how often you can access cash in your money market account, and whether there are any fees involved.
- Related: What Is a Money Market Account?
Which Type of Bank Account Should You Consider?
When it comes to types of savings accounts, you have plenty of factors to consider. To find the best type of account for your needs, you should start by asking yourself a few key questions:
How much money can you deposit right away? How often will you need to access your money? Do you want the ability to write checks against your balance? Also, how important is your interest rate?
Asking yourself these questions and others will help you narrow down your choices to only the best type of account for your needs. Once you understand your options, you can head to a traditional, brick-and-mortar bank or hop online to open your account virtually.
With the right type of account, saving for your future will become a lot easier.
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Which type of bank account do you prefer? Why?