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Different Types of Savings Accounts

Updated: Mar 10, 2023

Different types of savings accounts have different purposes and knowing more about each type along with what they can do for you will help you determine which is right for your situation.





What is a Savings Account?

A savings account is a special type of bank account where your money earns interest. The reason a bank is able to pay you a little interest on a savings account is because of the limited features they offer on savings accounts. Unlike a checking account, you won't receive checks and typically won't receive a debit card.


For most, they use their checking account for day to day spending activity while the money in a savings account is there for longer-term purchases or a rainy day. Because of this limited interaction with your savings account, the bank has the opportunity to invest the money you have sitting with them and make a little interest themselves. They pass some of that interest back to you and pocket the rest. This is one of the many ways a bank makes money (a totally different topic that we will avoid in this article).


Why have a Savings Account?

As mentioned above, a savings account is typically where folks put their extra money to be spent at a later date. If you have created a budget and built-in savings as a part of that budget you should likely keep that money within a savings account to earn a little bit of interest while your money isn't being used (putting your money to work for you). The type of savings account you choose to utilize depends on your current situation and preferences.



Types of Savings Accounts

Below is a list of the various types of savings accounts. Keep in mind they are all very similar in that you hand your money over to someone else with the expectation that your money will sit there for a little while. In exchange, they give you varying amounts of interest.


Traditional

This is the type of savings account your parents may have signed you up for when you were a kid. You put your allowance, birthday, or paper-route money in the account and bought yourself a PS4 with it when you finally had enough.


A traditional savings account will be at a bank with physical, brick & mortar locations. They also don't have very high interest rates vs some of the other options on the list below. This is because they typically have higher overhead (it costs more to maintain a building and employees) so need to make a little more with the money you leave in their hands. The interest rate on these, as of December 2020, is going to be less than 0.25%


Pros:

  • Easy to open and maintain

  • No fees or restrictions

  • FDIC or NCUA insured

Cons:

  • Low interest rates

  • Limited features

Who would benefit:

  • Those who want a basic savings account with no fees or restrictions

  • Those who don't need to access their money frequently





High-Yield

The term high-yield refers to the rate you would receive should you have this type of account. The word "high" is relative here because the average rate on a high-yield savings account right now is only 0.50%. Many high-yield savings accounts are set up through online banks and/or banks with way fewer physical locations. Because they have lowered their overhead they have the ability to pass back some of the interest they earn.


Pros:

  • Higher interest rates than traditional savings accounts

  • FDIC or NCUA insured

Cons:

  • May require a higher minimum balance to open and maintain

  • Interest rates can change over time

Who would benefit:

  • Those who want to earn higher interest on their savings

  • Those who can maintain a higher balance in their savings account




Money Market

Money market accounts are a hybrid checking-savings account. What this means is you get the interest-earning benefits of a savings account and the ability to spend the money on demand like a checking account. Typically there are limits to the "on-demand" part of your spending. For example, they may only allow you to make a certain number of purchases per month. Other unique features of money market savings accounts may be a minimum every time you spend/write a check/use a card (I've seen $100 purchase minimums for certain MMSAs).


Pros:

  • Higher interest rates than traditional savings accounts

  • FDIC or NCUA insured

  • Limited check-writing abilities

Cons:

  • Higher minimum balance requirements

  • Restrictions on the number of transactions each month

Who would benefit:

  • Those who want to earn higher interest on their savings

  • Those who can maintain a higher balance in their savings account

  • Those who don't need frequent access to their money




Certificate of Deposit Account

Certificate of deposit accounts, or CDs for short, is a very common account type that has been around a long time. Most savings accounts there it is assumed by the bank that you will be leaving your money within the account for a longer period of time so they can go ahead and invest that money.


A CD functions a bit differently, you are required to leave your money in the CD for an agreed amount of time. At the end of that time period, your CD is said to have matured and you can either cash it in or roll it over into another CD. These types of savings accounts are best for anyone who doesn't need access to their money for a while. If you are interested in getting a CD now, or exploring rates, I've found great rates at CIT Bank.


Pros:

  • Higher interest rates than traditional savings accounts

  • Guaranteed interest rates for a specific period of time

  • FDIC or NCUA insured

Cons:

  • Penalties for early withdrawal

  • Limited access to your money until the CD term is up

Who would benefit:

  • Those who want to earn higher interest rates for a specific period of time

  • Those who don't need access to their money until the CD term is up



Cash Management Account

A cash management account is a hybrid account that combines the features of a savings account and a checking account. They offer higher interest rates than traditional checking accounts and come with a debit card, check-writing abilities, and ATM access. They often require a higher minimum balance to open and maintain.


Pros:

  • Higher interest rates than traditional checking accounts

  • Comes with a debit card, check-writing abilities, and ATM access

  • FDIC or NCUA insured

Cons:

  • May require a higher minimum balance to open and maintain

Who would benefit:

  • Anyone willing to carry a higher balance in exchange for a higher interest rate

  • Those who want a single account that acts as both a checking and savings account


Specialty Savings Account

A specialty savings account is a type of savings account that is designed to meet specific financial needs. These accounts often come with unique features, such as high interest rates or specific limitations on how funds can be used. Here are a few examples of specialty savings accounts:

  • Health savings account (HSA): An HSA is a type of savings account that is designed to help people save money for medical expenses. Contributions to an HSA are tax-deductible, and the funds can be used tax-free for qualified medical expenses.

  • Christmas club account: A Christmas club account is a type of savings account that is designed to help people save money for holiday expenses. These accounts often come with restrictions on withdrawals to encourage savings.

  • Vacation savings account: A vacation savings account is a type of savings account that is designed to help people save money for travel expenses. These accounts may offer special features, such as discounts on travel expenses or free travel insurance.

Pros and Cons of Specialty Savings Accounts

Specialty savings accounts offer unique benefits, but they may not be right for everyone. Here are a few pros and cons to consider before opening a specialty savings account:


Pros:

  • Special features: Specialty savings accounts often come with unique features, such as high interest rates or discounts on expenses.

  • Tailored to specific needs: Specialty savings accounts are designed to meet specific financial needs, which can be helpful for people with specific savings goals.

  • Tax advantages: Some specialty savings accounts, such as HSAs, offer tax advantages that can help reduce your tax bill.

Cons:

  • Limited use: Specialty savings accounts may have restrictions on how funds can be used, which can be inconvenient if you need to access your savings for other expenses.

  • Limited availability: Not all banks offer specialty savings accounts, so you may need to shop around to find the right account for your needs.

  • Fees: Some specialty savings accounts may come with fees, such as annual maintenance fees or transaction fees.

Who Would Benefit

Specialty savings accounts can be a good choice for people with specific financial needs. Here are a few examples of people who might benefit from a specialty savings account:

  • People with high medical expenses: An HSA can be a good choice for people who have high medical expenses and want to save money on taxes.

  • People who travel frequently: A vacation savings account can be a good choice for people who travel frequently and want to save money on travel expenses.

  • People who want to avoid holiday debt: A Christmas club account can be a good choice for people who want to avoid going into debt during the holiday season.

Student Savings Account

A student savings account is a type of savings account that is designed for students. These accounts may offer special features, such as lower fees or higher interest rates, to help students save money while they are in school.


Pros and Cons of Student Savings Accounts

Student savings accounts can be a good choice for students, but they may not be right for everyone. Here are a few pros and cons to consider before opening a student savings account:


Pros:

  • Special features: Student savings accounts may offer special features, such as lower fees or higher interest rates, that can help students save money.

  • Convenient: Many student savings accounts can be opened online or on campus, which can be convenient for students.

  • Teaches financial responsibility: Opening a savings account can be a good way for students to learn about financial responsibility and how to manage their money.

Cons:

  • Limited funds: Student savings accounts may have limits on how much money can be deposited or withdrawn, which can be inconvenient if you need to access your savings for other expenses.

  • Limited availability: Not all banks offer student savings accounts, so you may need to shop around to find the right account for your needs.


Summary

There are more types of savings accounts, but the list above covers a majority of individual needs. Whatever your need, having a savings account is a good idea if there is any room in your budget for saving. As a rule of thumb, just like mortgage rates and car rates, shop around for the best possible savings account rate you can find. Make sure to read about the features, or lack thereof, within the savings account so you don't incur any unforeseen fees or are unable to access your funds when you need them.


Other personal finance articles for your reading pleasure:

Want to grow your net worth with a money making blog? Check out my step-by-step guide!

Want to learn about refinancing? Check out the basics

Like the net worth calculations above? Try out the mortgage calculator

Want to find a new way to make some extra cash? Check out the Side Hustle Guide


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