One of the best ways to secure your money and earn interest at the same time is to use savings accounts. There are many types of savings accounts and they vary by banking styles, account size, time in effect, etc.
The Annual Percentage Yield (APY) you will earn, terms and other benefits will vary from one account to another. The types of savings accounts that will interest you will depend on your personal preference, current financial situation, and future financial goals.
For example, if you want to earn interest but also have access to your funds at any time, your choice will be different from someone who is only interested in safety and returns. In this case, you could open a traditional savings account, whereas the other person could open a long-term CD account. These choices will directly impact your returns on investments and have different restrictions on your savings accounts.
How do savings accounts work?
Just like the name says, a savings account is an account you open with a bank or a credit union that allows you to save money but also earns you interest at the same time. After opening an account, you will deposit money in the account and keep it there. You can add more money to the account through transfer, cash deposit, or check deposit.
Most types of savings accounts operate this way with minimal variations.
In return, your bank will pay you an interest known as annual percentage yield or APY for short. The APY is the interest rate you can earn on your savings account balance over a year.
Some savings accounts will have the flexibility to withdraw cash from the account, transfer funds, write checks, etc. Others, however, will have your money locked away until the maturity date.
This article has details on 5 types of savings accounts you can start with and manage your money like a pro. Make sure that you pick the right savings account that matches your current and future financial goals.
Without further ado, the following are 5 types of savings accounts to get you started.
1. High-Yield Savings Account
By default, traditional banks do not offer good returns on savings accounts.
There are banks, however, that offer competitive yields on savings accounts. Banks that offer High-yield savings accounts are those that operate online. That is they have no physical infrastructure which allows them to reduce their expenses. Hence, providing better rates and fewer fees.
Institutions that offer high-yield savings accounts include neobanks, online credit unions, and online banks.
You already know what a bank and credit union means. So, what is a neobank? According to Bankrate, a neobank is a bank that offers all services online without a physical location like normal banks have. These banks are usually startups and they are normally referred to as challenger banks in the UK.
The returns you can expect from a high-yield savings account will be somewhere around 0.4% APY on average. This number sounds small, but it is competitive compared to traditional banks where you earn around 0.06% APY.
Most high yield savings accounts are secure and insured by FDIC for up to $250,000 per bank and per depositor. When opening a high-yield savings account, make sure that you open it with a financial institution that is insured by FDIC.
Pros of high-yield savings accounts
- High returns compared to traditional banking systems
- Fewer fees
- Convenient
- Lower deposit when opening an account
- Some are insured by FDIC for up to $250,000
Cons of high-yield savings accounts
- Some banks do not offer services via ATM
- No physical address which means no cash deposit
Who should have a high-yield savings account?
High-yield savings accounts offer two benefits: (1) safety of your money and (2) competitive yield on your savings.
With these two benefits in mind, a high-yield savings account is good for anyone who is looking for the safety of the money, but also, who wants to earn a little extra.
2. Regular /Traditional Savings Account
If you have been to a bank or a credit union, you probably heard about a savings account. A regular or traditional savings account is an alternative account to a checking account. This account allows you to earn a small interest on the money you keep in the account.
The interest earned on a savings account does make much of a difference to the overall account. But, it is beneficial to have a savings account as it prevents you from spending all your money and gives you access to it when necessary.
Savings accounts come with monthly contributions and a limited number of withdrawals. The Federal Reserve Board Regulation D limits the number of withdrawals and deposits to six per month. This simple rule regarding traditional savings accounts prevents you from using your account as a checking account.
Pros of savings account
- You can open this account at any bank or credit union
- Your money is insured for up to $250,000 per depositor for banks covered under FDIC
- Helps you save money for your short-term and long-term projects
- It gives you easy access to the money
- Earns you a small interest
Cons of savings account
- The interest earned is too small compared to investment options
- Comes with stricter terms compared to a checking account
- A monthly contribution is required in most cases
- There is a limit on the number of withdrawals and/or deposits you can make per month
- You will pay a fee for excessive withdrawals
Who can use a traditional savings account?
A traditional savings account is good for almost anyone. However, if you are interested in earning high returns, this account will not cut it. For this reason, investors should not consider traditional savings account due to a very small interest rate; unless saving is their primary goal with the account.
The traditional savings account is good for people who want to save money for short-term or long-term goals. The money will be there and can be accessed anytime they want. In addition, you will earn a small return on the account.
Related: How much money should you keep in a savings account?
3. Certificate Of Deposit Account or CD Account
A certificate of deposit (CD) or CD account is a type of savings account where your money is locked in the account until the maturity date. Each CD will have its maturity date and these dates will affect the Annual Percentage Yield (APY) of the CD.
Think of a CD as a contract you have with your bank where you are not allowed to touch the money until a given time in the future. In return, the bank gives you interest while your money is locked in the account.
After the maturity date, you can withdraw your money, renew the CD, or transfer that money to a new CD. You can also use a CD ladder, which is a variation of a normal CD. With a DC ladder, you divide your money into different amounts and open multiple CDs with different maturity dates. This prevents you from locking all your money in one CD and gives you access to some of your cash much faster.
Most traditional banks and online banks offer CD account services. A CD is a great investment strategy for people who want the safety of their money while getting competitive rates.
The maturity dates of CD accounts can range from 30 days to 5 years, according to Capital One. Short-term CDs are better for those who want high returns but cannot afford to have the money locked away for a long time. On the other hand, long-term CDs are good for people who can afford to have their money locked away for a while.
What are the pros and cons of CD accounts?
Pros of certificates of deposit
- You could qualify for a lower deposit when opening an account
- Access to higher yield
- Safety of your money when opening a CD account with an FDIC insured institution
- Most of the time, CD accounts do not have a maintenance fee
Cons of certificates of deposit
- Unless you open a CD with an online bank that has a high-yield rate, you will get a lower rate on your CD from a traditional bank
- Your money will be locked away for a while
- You pay a penalty when you withdraw your money before the maturity date (you get penalized for breaking the terms of the contract)
Who should invest in Certificates of deposit (CD)?
Since a CD account is locked until the maturity date, you should look at your financial standing before you open one. Typically, anyone can open a CD account. However, there are some considerations to be made.
- If you cannot afford to have your money locked away, then don’t open a CD account. You could end up withdrawing your money too early and pay a penalty.
- If you can afford to have your money locked away for a short period of time, then get a short-term CD or have a CD ladder. This way you will get access to your money sooner without paying a penalty.
- If you can afford to have your money locked away for a while, then your choices are unlimited.
How much money can you make on a CD?
The interest you earn on a CD account varies depending on the account size and the maturity date. Usually, long-term CD tends to earn more returns than short-term ones. According to the Federal Deposit Insurance Corporation (FDIC), the average return for a CD account under $100,000 is from 0.03% to 0.29% APY in 2022. The maturity dates for these CDs range from one month to 60 months.
4. Types of savings accounts: Money Market Account
A money market account or MMA for short is a hybrid between a regular checking account and a savings account. With an MMA account, you get to enjoy the benefits of savings accounts while having access to your funds at the same time.
An MMA account will allow you to withdraw cash from your account or write checks from it. At the same time, you will have a limited number of withdrawals you can make from the account per month. According to Synchrony bank, you will have a maximum of six withdrawals from your MMA account. This number of transactions does not include teller or ATM transactions.
Pros of money market account
- You will enjoy the benefits of a savings account
- Earns you interest
- You can write checks and make ATM transactions
Cons of money market account
- A penalty/fee is applied when you withdraw more than acceptable times
- There is a minimum deposit
- You pay a monthly fee
- Rates are better only for bigger accounts
Who should open a money market account?
A money market account is good for people who want to enjoy the benefits of saving (earn interest) and have fewer restrictions on their funds. If you only have a checking account, you will pretty much earn nothing on the account. On the other hand, if you have only a savings account, you will have stricter access to the money.
5. Money Management Account / Cash management account
Unlike other types of savings accounts, the money management account or cash management account operates differently. The money management account is an account offered usually by investment institutions to their investors. These accounts allow investors to earn returns on cash they have in their brokerage accounts, Robo-advisor accounts, or retirement accounts.
Some brokerage companies will allow you to transfer cash from your account or pay bills from the same account. With this setup, you don’t just have money sitting in the account. You are putting it to work while waiting for the right investment opportunity.
For example, if you have a cash management account with Fidelity, you will not pay a fee or worry about a minimum deposit. On top of that, you will get FDIC coverage up to $1.12 million, have ATM reimbursements, pay no account fees, and be able to invest the money.
