Your ability to save money effectively relies heavily on the tools and resources that you use. Putting in the time to learn about different types of savings accounts and methods of saving money can earn you significantly more in the long run.
Disclaimer: Savings interest rates, APY for various account types, and other metrics included are estimated ranges based on the national averages from the FDIC for 2019 – 2020, as well as influence from top financial institutions. We cannot claim that these rates will be accurate for the financial institution of your choosing, so be sure to look at individual provider rates before making financial decisions.
What is a Savings Account?
A savings account is somewhere that you can keep your money and earn interest from the institution at which it is stored. Typically savings accounts are opened through a bank or credit union and are intended to hold onto cash that’s intended to be used at a later date.
As the name implies, savings accounts are typically aimed at saving money long term. Savings accounts are different from checking accounts, which earn little or no interest and are geared toward supporting everyday transactions and frequent access to funds.
The interest earned through a savings account is based on the balance your account holds and the APY, or annual percentage yield. Standard savings accounts rates are typically between 0.01% and 0.1%. Different types of savings accounts have varying APYs, but the highest APY account isn’t always the right answer. It may have some drawbacks that don’t fully fit your needs.
Do I Need a Savings Account?
We recommend that everyone has a savings account (or accounts) of some sort – it’s a matter of identifying the correct ones for you to maximize your saving potential. By keeping a portion of your money in a secure location, you’ll be able to save up for significant purchases such as a home or car, as well as things like emergency money or retirement funds.
While a standard savings account is recommended, there are also other options to explore as secondary accounts which may be more appealing to you and align better with your financial goals.
Is My Money Protected in a Savings Account?
Most bank accounts are FDIC Insured, which is an abbreviation you’ve probably heard. The FDIC, or Federal Deposit Insurance Corporation, is an independent federal agency of the United States government that insures money in the event of a bank failure. These accounts provide security for your cash and are federally insured up to a balance of $250,000.
You have nothing to worry about with most major banks and credit unions, but you should make sure that your money is kept within an FDIC insured account.
Pros and Cons of Standard Savings Accounts
The pros and cons of different types of savings accounts can vary depending on each person’s individual needs. At a high-level, the advantages of a typical savings account through your bank or credit union include:
- Earning Interest
- Separating spending money for your savings goals
- Ability to store cash for when you truly need it
- Providing a secure place to store funds
The drawbacks of savings accounts can often be mitigated through the addition of other types of accounts or saving techniques, but can include:
- Fees (not always applicable)
- Limited access to funds
- Varying earning potential
Alternatives to a Savings Account
There are many other types of savings accounts than just your standard bank’s checking and savings, occasionally with additional versions of each. These other accounts may help expedite growth and provide a better solution to suit your financial goals and timelines.
We recommend considering a mix of accounts, for diversification and a more rounded out savings plan overall.
Arguably the top focus of comparing savings accounts is the interest rate or APY. Standard savings accounts can come with rates as low as 0.01%, although there are high-yield savings account options available to some that earn somewhere around 2% on average.
Money Market Accounts
A money market account is somewhat of a hybrid between a standard checking and savings account. These are similar to savings accounts in the sense that they earn interest. These accounts once earned notably higher interest than typical savings accounts, but have since leveled out to be more comparable. The additional checking account-like features that make money market accounts different are the use of a debit card and checks.
Money Market Account rates are typically between 0.1% and 0.2%.
|Earns slightly higher interest than a standard savings.||Easy accessibility to funds can increase the temptation to spend.|
|Easy access to your money with the added checking features.||Higher minimum balances or starting deposits.|
|Provides a secure and insured location to store money as it grows.||Saving accounts with similar rates may allow for less strict account requirements.|
Certificate of Deposits (CDs)
A CD, or Certificate of Deposit, is a savings product offered by most banks and credit unions. It is similar to a savings account in the sense that you deposit money and earn interest.
These accounts earn higher interest than your standard savings. The trade-off? You agree to leave these funds untouched for a set period of time. CD rates can vary based on this agreed upon time to not withdraw funds – the longer the hold time, the higher the rate (rate tiers will vary by institution).
By having a diversified saving and investing portfolio, we highly recommend looking into CDs as a means to earn a bit higher interest without putting yourself at risk. This is where other accounts and your emergency fund come into play to mitigate that risk.
CD rates vary often. Typically a 12 month CD can earn between 0.4% and 0.8%, with longer-term CDs holding rates exceeding 1%.
|Earns higher interest.||Unable to access funds for a period of time.|
|Helps avoid temptation to spend money by locking it away.||Substantial fees for emergency withdrawals or account closure.|
|The vast majority of banks and credit unions offer some sort of CD program.||Less risky and more conservative way to earn higher interest while avoiding stocks and bonds.|
|Longer-term CDs can earn upwards of 1.25%.|
Cash Management Accounts (CMAs)
Cash Management Accounts, or CMAs, are a service typically provided by non-bank financial companies and are offered as online-only services. These accounts are a mashup of checking, savings, and investing features.
CMAs are a nice way to keep a larger portion of your finances in one place, however, they don’t always provide the growth potential you’ll be looking for down the road. That being said, CMAs can make a great account to consider that can help keep your finances organized and manageable.
CMA standard rates have a wide range, so exploring different options is critical. Typically, rates from cash management accounts will fall around 0.3% to 1.0%.
|Various account features allow for fewer accounts to be opened and managed.||Often earns less interest than high-yield savings options or investment accounts.|
|Slightly higher interest rates than many standard banks.||Limited in-person banking and customer service (if that’s your thing).|
|Easy accessibility to funds through online apps and websites.|
There are also a variety of targeted savings programs through specialty accounts that are offered by certain banks or credit unions. These specialty savings accounts are usually targeting a certain goal, life milestone, or purpose.
Specialty accounts can be very helpful in separating funds to simultaneously save for different goals or purposes. For instance, saving for college and health related expenses like the accounts below, along with a personal purchase goal makes sense to do all at the same time, right? These focused accounts can help keep you organized and on track to hit your financial goals.
Savings accounts and programs geared towards students are very common. Many banks have student programs or accounts that may offer lower fees, better rates, or different account structures that can help students save for education costs.
There are also 529 plans, which are tax-advantaged accounts exclusively used for education purposes, and are run by the states. Initially, 529 plan accounts were only used for college savings, however in recent years they’ve been expanded to cover K-12 standard education costs in 2017 as well as apprenticeship programs in 2019.
There are two types of 529 plans – the savings plan and the prepaid tuition plan. The 529 savings plan can take advantage of tax-free withdrawals for qualified expenses, while the prepaid tuition plan can lock in current rates and save for a university.
Health Savings Accounts (HSA)
Health savings accounts, or HSAs, are accounts that are used specifically to cover healthcare-related expenses. These accounts allow you to set aside money pre-tax, which can save you a lot in the long run depending on your medical expenses.
If your employer offers an HSA plan or you have direct deposit to regularly contribute to an HSA, it is a good account to consider. Medical expenses can be unexpected and extremely costly, so having funds set aside for this purpose can mitigate significant financial stress in the event of a medical emergency or high healthcare-related costs.
Savings Account Requirements
Different account types, financial institutions, and personal circumstances will all influence the requirements for opening and maintaining a savings account. Standard account requirements that you may encounter include:
- Initial Deposit
- Minimum Balance
- Monthly Transactions (sometimes to qualify for better rates)
- Holds on Funds (in the case of CDs)
Opening a savings account is relatively easy. With almost any bank or credit union you can get started online and review their specific account requirements to determine if it’ll work for you.
Then, you’ll need to provide your personal identifiable information (PII) to open the account, often consisting of your full name, address, date of birth, and social security number.
Savings Account Type Comparison
Now that you know all about the different types of savings accounts and the benefits and drawbacks of each, it’s time to get out there, find what makes the most sense for your current financial situation, and start maximizing your earning potential!
|Standard Savings||High-Yield Savings||Money Market||Certificate of Deposit (CDs)||Cash Management Account (CMAs)|
|APY||0.01 - 0.1 %||1.25 - 1.75%||0.1 - 0.2%||0.4 - 0.8%||0.3 - 0.7%|
|Funds Accessibility||Limited Transfers||Limited Transfers, Online||Easy||None for Duration of CD||Easy|
|Requirements||Low or None||High initial deposit and minimum balance||Initial deposit and minimum balance||Hold on funds||Low or None|
|Fees||Excessive Transfer Fees||Excessive Transfer Fees||Often Carry Maintenance Fees||Early Withdrawal Fees||Excessive Transfer and Occasionally Maintenance Fees|
* Account requirements, fees, terms, rates, and other features will vary by institution and personal qualification for its various programs.