Different Types of Savings Accounts
Updated: Dec 18, 2020
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.
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%
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.
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).
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.
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.
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