By: Elle Winters
Stretching your money these days is not an easy task, and while many of us know that we should be saving, we don’t always know how and where to save it.
Keeping your money in your checking account is not always a wise choice as you can easily spend it and generally, these accounts don’t earn any interest. A savings account will pay a much higher interest rate, and will also segregate your savings from the money allotted for your everyday living expenses. These types of accounts have high liquidity, meaning you can access your money anytime and convert it to cash. The type you choose will ultimately depend on your savings goals. You don’t just have to stick to one type of savings account, however, and having a few accounts for different purposes can help you save for a mortgage, buying a car, going on vacation or as an emergency fund. Let’s have a look at some of the types of savings accounts in which you can save your money in.
Basic Savings Account
Let’s start with a simple savings account, which is highly liquid and allows you to deposit money, withdraw funds, all while earning a little bit of interest. Rates are typically under 1% annual percentage yield (APY) and depend on the financial institution. Savings accounts are generally free, with no transaction fees, although they might only allow a limited amount of transactions per month and require a minimum balance (which is generally low). Savings accounts are safe because they are insured by the Federal Deposit and Insurance Corporation(FDIC) up to a certain limit, and you can have a few open for specific savings purposes. This is often the best route to manage your savings as multiple accounts give you the ability to keep tabs on how much money you have for different goals. Some online savings accounts offer higher rate accounts than traditional brick and mortar banks and even give you an ATM card for withdrawing cash, despite not having any physical branches.
High Yield Accounts
This type of savings account offers a higher interest rate than a standard savings account. Most are also FDIC insured, up to various limits from $100 – $250,000. While these accounts pay a higher interest rate, Investopedia states that they require a larger initial deposit, and access is more limited. Several banks and financial institutions generally offer these accounts to clients who have other accounts and an established history with the bank. Marcus explains that a high-yield savings account allows the owner to earn more interest compared to traditional savings accounts. The rates vary but you’re generally looking at 1.90% – 2.55% APY, as opposed to 0.09% APY for a regular savings account. These types of accounts are usually used for emergency funds and saving for future events and will help grow your savings faster due to the higher interest rate.
Certificate of Deposit
Unlike other types of savings accounts, a certificate of deposit (CD) is a low-risk investment saving that locks in your money for a period of time. Term lengths vary between 1 month to 10 years and the longer it’s locked in the higher the interest rate. CDs also have a minimum deposit and require at least $1,000 to open an account. Say you deposit $2,000; your interest rate will vary from 2.50% for 24 months to 2.60% for 3 years and 2.80% for 5 years. Traditional CDs offer a locked interested rate, while variable-rate CDs offer interest that will adjust to the rate indexes offered by the banks. While CDs offer low risk at higher interest rates, they do have low liquidity and penalties for dipping into them earlier than the set term. One way to mitigate this is with a CD ladder, with CDs that comes with varying maturity dates. This gives you a bit more predictability and flexibility to have your money more accessible. CDs are best suited for long term financial planning, like a down payment on a home, buying a car or other large purchases as their long-term, high-interest rates are preferable.
Money Market Deposit Account
A money market account (MMA) is a hybrid checking and savings account, which incorporates the best of both. Essentially, it’s a higher-yielding, more flexible savings account, offering an APY of around 2%. Because MMA balances are typically channeled into a bank’s short-term investments, The Motley Fool points out that account holders can capitalize on interest rate increases, and reap the benefits of a higher return on their money. For example, an account holder with $50,000 deposited would earn $1,000 in interest after a year, at the top-end rate of 2%. Apart from these advantages, MMAs offer security and peace of mind as they are insured by the FDIC up to $250,000 including principal and accrued interest. Although they can be subject to limitations regarding the frequency of withdrawals and transfers, as well as maintenance of a minimum balance (typically $1,000 or more), MMAs are highly liquid just like basic savings accounts.
This article was written by Elle Winters