Six Different Kinds of Savings Accounts

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Savings accounts serve as secure repositories for funds that you don't plan on immediately spending.

These accounts prove valuable when preparing for short-term necessities, like an emergency fund, and long-term ambitions, such as accumulating funds for a down payment on a home.

A variety of savings account options exist, each with its own unique characteristics. These options encompass traditional savings accounts, high-yield savings accounts, money market accounts, certificates of deposit, cash management accounts, and specialized savings accounts.

Determining the most suitable savings accounts for your specific needs and goals is contingent upon various factors.

Gaining a comprehensive understanding of the contrasts between the different savings account options can simplify the process of selecting the optimal location to safeguard your funds.

The accuracy of annual percentage yields (APYs) and account details is confirmed as of May 16, 2023.

Types of Savings Accounts:

Categories of savings accounts can be differentiated by analyzing their features, opening procedures, and intended purposes.

When comparing various savings accounts, it is beneficial to consider the following questions:

- Does this account cater to any particular objectives or aspirations?

- What level of interest does this account accumulate?

- Are there any minimal deposit or balance requirements to fulfill?

- Are there any associated fees for maintaining this type of savings account?

- Does this savings account offer any tax advantages or benefits?

- How accessible are the funds within the account?

- Are there any penalties for withdrawing funds from the account?

Conducting thorough research of this nature enables you to discern which types of savings accounts are most suitable. Once you have made a decision, you can proceed to determine where to establish these accounts and how to allocate funds to them.

1. Traditional or Regular Savings Account:

Ideal for individuals seeking to save funds in the short or long term without placing excessive emphasis on achieving the highest interest rate, denoted by the annual percentage yield (APY).

Traditional savings accounts are typically the go-to choice when contemplating where to save money. These accounts are commonly provided by traditional banks or credit unions.

While these types of savings accounts generally allow for interest accrual, the rates they offer are often lower compared to other savings products. Many banks and credit unions impose a low minimum deposit requirement for opening a regular savings account.

Typically, traditional savings accounts permit up to six monthly withdrawals (excluding ATM or in-person branch withdrawals) before incurring penalties. The relaxation of Regulation D restrictions in 2020 abolished the six-withdrawal limit, however, banks and credit unions may still impose fees for surpassing the monthly restriction.

Account management for traditional savings accounts is typically offered through online platforms, mobile banking apps, telephone services, or physical branch locations.

If your bank is protected by the Federal Deposit Insurance Corporation (FDIC), then your deposits are guaranteed up to $250,000 per depositor, per category of account ownership, in the event of a bank failure. The National Credit Union Administration (NCUA) provides similar protection for federally chartered and most state-chartered credit unions.

Advantages

  • Opening a regular savings account is usually a simple process, either at a physical branch or online.
  • You can earn interest on your savings to help your money grow.
  • Branches are available to provide assistance or facilitate cash deposits.

Disadvantages

  • Interest rates are typically lower compared to other savings options.
  • Monthly maintenance fees may offset any interest earnings.
  • Additional fees may be charged for excessive withdrawals.

2. Enhanced Yield Savings Account

Suitable for: Individuals looking to earn a more competitive interest rate on their savings while minimizing fees.

Enhanced yield savings accounts, which are commonly offered by online banks, neobanks, and online credit unions, provide a higher Annual Percentage Yield (APY) compared to regular savings accounts. This type of savings account is ideal for maximizing the growth of your money.

Online banks often offer various types of high yield savings accounts to attract savers who desire better interest rates than those offered by brick-and-mortar banks and credit unions. If you are comfortable managing your account through a website or mobile banking instead of visiting a physical branch, this type of savings account might be appealing to you.

Enhanced yield savings accounts are also protected by FDIC or NCUA, just like traditional savings accounts. In addition to offering superior rates, online banks typically impose fewer or lower fees, including monthly maintenance fees and fees for excess withdrawals.

Advantages

  • You have the potential to earn a significantly higher interest rate compared to traditional savings accounts.
  • Online banks generally have lower minimum deposit requirements to open an account.
  • You are less likely to be charged a monthly fee at an online bank.

Disadvantages

  • Lack of branch access means you cannot deposit cash directly into your account at a physical location.
  • Transferring money between an online savings account and accounts at another bank may take several days to process.
  • Your ability to access your funds via an ATM may vary depending on the bank.

3. Money Market Accounts

Suitable for: Individuals who want to earn interest on savings while having increased options for accessing their funds.

Money market accounts (MMAs) combine the features of a regular savings account and a checking account. These accounts can be found at brick-and-mortar banks, online banks, and credit unions.

Also referred to as money market savings accounts or MMSAs, these accounts allow you to earn interest on your savings. The interest rates are typically better than those offered by regular savings accounts, and some MMAs offer rates similar to enhanced yield savings accounts. You may also have the ability to write checks or use an ATM or debit card to access your funds.

Similar to regular and enhanced yield savings accounts, banks may charge a fee if you exceed six withdrawals per month, despite the relaxation in federal Regulation D restrictions, which now allows for easier access to your funds. Going over the monthly limit may result in a fee or the closure of your account if it happens frequently.

Advantages

  • Money market accounts have the potential to provide more favorable interest rates compared to other types of savings accounts offered by banks.
  • Access to funds through check writing or debit/ATM cards is possible with money market accounts.
  • Both traditional and online banks offer money market accounts for opening.

Disadvantages

  • A higher initial deposit may be required in order to open a money market account.
  • Interest rates for money market accounts may be tiered, meaning a higher minimum balance is required to earn the best rates.
  • Banks may impose a monthly fee for maintaining a money market account.

4. Certificate of Deposit (CD)

Useful for: individuals seeking competitive rates and who do not anticipate the immediate need for accessing their savings.

Certificates of deposit (CDs) are time deposits. This means that you agree to keep your money in the account for a specified period of time. During this duration, your money accrues interest, and upon maturity, you typically have the option to withdraw your savings or reinvest it in a new CD. This characteristic sets CDs apart from other savings accounts as time plays a role.

CDs can be acquired from both traditional and online banks. Generally, online banks tend to offer more competitive interest rates. CD terms can range from as short as 30 days to as long as 60 months, with longer terms usually associated with higher rates (although this is not always the case, particularly in a low interest rate environment).

CDs are ideal for funds that you know you won't need to access immediately, as early withdrawal penalties may apply if you withdraw your savings before the maturity date. Establishing a CD ladder, consisting of multiple CDs with varying maturity dates, can serve as a solution to this issue.

Advantages

  • CDs provide savers with above-average interest rates for short- or long-term financial goals.
  • Monthly maintenance fees are typically not applicable to CD accounts.
  • Online banks may have lower initial deposit requirements for CDs.

Disadvantages

  • Withdrawing funds from a CD before its maturity date may result in an early withdrawal penalty.
  • CDs from traditional banks usually offer lower interest rates compared to online banks.
  • Investing in a long-term CD makes it challenging to take advantage of future increases in interest rates.

5. Cash Management Account

Useful for: individuals who want to maintain accessible cash for investing in brokerage or retirement accounts.

Cash management accounts differ from other savings accounts as they are not exclusively designed for saving purposes. Instead, these accounts allow you to hold cash that you intend to invest in a taxable brokerage account or a retirement account.

Cash management accounts may be offered by online brokerages and robo-advisor platforms to their investors. The funds held in such accounts can earn interest, often at higher rates than those offered by banks.

Depending on the brokerage, you may also have access to standard checking account features. For instance, you might be able to write checks, pay bills, or transfer funds between accounts at your bank.

Advantages

  • Cash management accounts offer a convenient means of earning interest on funds intended for investment.
  • These accounts combine the benefits and features of both checking and savings accounts.
  • By collaborating with multiple banks, accounts may provide FDIC coverage limits that exceed the normal maximum.

Disadvantages

  • High-yield savings accounts could potentially offer higher interest rates for the money being saved.
    • Due to their association with online brokerage accounts, branch banking may not be accessible.
    • These accounts may not always be protected by FDIC insurance.

    6. Specialty Savings Account

    Beneficial for: Individuals seeking accounts customized to specific savings objectives.

    Specialty savings accounts are designed to assist individuals in achieving specific savings goals, rather than acting as a catch-all for unallocated funds. Furthermore, in certain cases, they are tailored for specific types of individuals rather than savings goals.

    For instance, there are various types of savings accounts specifically designed for minors. Three examples of savings accounts that could be established for a child or teenager are as follows:

    • Savings accounts for kids
    • Custodial savings accounts
    • Savings accounts for students

    Additionally, one can establish various types of education savings accounts such as 529 college savings accounts and Coverdell Savings Accounts. These particular types of college savings accounts provide the opportunity to set aside funds for higher education expenses in a tax-advantaged manner.

    Moreover, there are diversified retirement savings accounts that an individual could establish, including Traditional and Roth Individual Retirement Accounts (IRAs) as well as IRA CDs. Similarly, an account can be opened to aid in saving for healthcare expenses, such as a Flexible Spending Account (FSA) or Health Savings Account (HSA).

    Lastly, there are additional savings accounts available depending on personal requirements. For instance, one can establish a Christmas Club savings account or a home down payment savings account to allocate funds for those specific goals.

    Most of these accounts can typically be found at banks, credit unions, brokerages, or investment companies. However, access to a Health Savings Account is contingent upon having a high-deductible health plan.

    Opening one or multiple specialty savings accounts may be a sensible decision if one has a distinct purpose for saving money. However, it is important to note that there may be limitations on the withdrawal of funds at a later stage.

    Advantages

    • They can facilitate savings for a diverse range of specific financial goals.
    • Specialty accounts offer the opportunity to earn interest and grow one's funds, similar to other types of savings accounts.
    • Depending on the account, they may come with low or zero monthly maintenance fees.

    Disadvantages

    • Certain specialty accounts, including IRAs, 529s, and HSAs, have strict tax regulations pertaining to withdrawals.
    • Interest rates for child savings accounts, student accounts, or Christmas Club accounts may be lower compared to high-yield or regular savings accounts.
    • There may be restrictions on who is eligible to open specialty accounts.

    Why Should You Put Money in a Savings Account?

    Below are reasons why depositing money in a savings account can prove to be advantageous:

    • Potential to earn interest: By depositing money in a savings account, one can accrue interest on their balance. Although some checking accounts offer interest, many do not. Funds left untouched in a non-interest-bearing checking account miss out on the opportunity to grow.
    • Facilitates saving and prevents spending: Possessing a savings account can deter individuals from spending funds allocated for specific goals. Conversely, keeping all funds in a checking account can make it easier to spend money intended for saving purposes.
    • Assists in financial emergencies: Even in the absence of a defined savings goal, having a savings account can still prove beneficial. A savings account provides a safety net in case of unexpected financial crises, such as job loss or vehicle breakdown. It eliminates the need to rely on credit cards or high-interest loans. Furthermore, if savings are not utilized for emergencies, individuals can continue to grow their funds without accumulating debt.
  • It can safeguard your money. By keeping your funds in a savings account, you are providing a layer of protection. If you were to store cash at home, it becomes vulnerable to theft. Carrying around a wallet full of cash also puts you at risk of theft or misplacement. However, when your money is in a savings account at a bank insured by the FDIC or credit union insured by the NCUA, it is protected up to the total coverage limit. As of 2022, this limit stands at $250,000 per depositor, per account ownership type, per financial institution.

Main Takeaway

When selecting a savings account, it is crucial to remember that you are not limited to choosing just one. Depending on your financial objectives, you may decide to open multiple savings accounts, CD accounts, money market accounts, or specialized accounts. To find the ideal account for your needs, consider your financial goals.

Common Inquiries (FAQs)

Which savings account is the most suitable?

The optimal savings accounts offer generous interest rates, minimal fees, and the necessary accessibility. An online bank or credit union may be the best choice for you if you prioritize an excellent APY and do not require branch banking. Conversely, if you prefer in-person banking, a savings account at your local bank might be more preferable.

What kinds of savings accounts should I have?

The types of savings accounts you choose should align with your financial needs and objectives. For example, you might opt for a high-yield savings account to house your emergency fund and a money market account to save for short-term goals like purchasing a car.

Can a savings account be considered an asset?

An asset is something that possesses positive value, and a savings account falls within this category, provided it maintains a positive balance. Savings accounts are typically classified as liquid assets due to their ease of conversion into cash. For instance, if you require funds to cover unexpected expenses or make a payment, you can withdraw cash from your savings account or transfer funds from savings to a checking account online with just a few clicks.

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