You’ve worked hard for your money, and you want to earn as much interest as possible once you deposit it in the bank. But choosing the right type of savings account can be confusing: Are you better off with a CD? A traditional savings account? A money market account? Each has pros and cons, so read on and choose the right option for you.

1. Traditional Savings Account

These simple accounts are one of the most basic ways to bank your money. They're a good choice for a young person’s first savings account, or for anyone who needs easy access to their cash. Most banks don’t require a large deposit to open a savings account – often $25 is sufficient. Typically, you will need to keep a minimum balance in the account to avoid a monthly fee. The minimum amount can be anywhere between $25 and $1,000, depending on the bank and the account. If your savings and checking accounts are with the same bank, chances are you can easily transfer money between the accounts, or use your savings account for overdraft protection. You won’t be penalized for withdrawals from your savings account, but you won’t make much interest either – most banks currently offer around .8% APY.

Pros:

  • Small deposit required to open account
  • No fees when minimum balance maintained
  • Easy to track account activity
  • No penalties or limitations for withdrawals
  • FDIC protected

Cons:

  • Very low interest rates

Who is this good for?

  • Students and children beginning their relationship with a bank
  • Anyone who wants unfettered access to their cash, without penalty

2. Money Market Deposit Account (MMDA)

Money market deposit accounts are similar to savings accounts, but work with bigger numbers. Typically, you’ll need a larger deposit to open the account – $1,000 is common – and will need to maintain a higher balance to avoid fees (this can be as high as $10,000), but you’ll be rewarded with a higher interest rate. Unlike traditional savings accounts, which pay a fixed annual interest rate, many MMDAs have a tiered interest rate, with higher rates for larger balances – some up to .35% for the top tier. This makes them desirable for those able to maintain a high daily balance in the account. Another perk offered by many MMDAs is the ability to write checks from the account, but this is counterbalanced by limitations on the number of withdrawals permitted each month.

Pros:

  • Higher interest rates
  • Often the ability to write checks
  • Withdrawals without penalty
  • FDIC protected

Cons:

  • High balance needed to avoid monthly fees
  • Limitation on the number of monthly withdrawals
  • Lower interest rates if balance drops out of higher tiers

Who is this good for?

  • Individuals with large amounts of cash to deposit, who don't need daily or weekly access to their money.

3. Certificate of Deposit (CD)

When you purchase a CD, you are allowing the bank to use your money for a fixed length of time, which means you will face a steep fine for withdrawing early. However, the interest rates are much higher for CDs than for traditional savings accounts or MMDAs, making them quite desirable for those who can make large deposits without needing access to the money during the CD’s term. Terms can be as short as three months, or as long as five years. The longer the term, the higher the interest rate. You can buy a CD for as little as $100, but typically the initial deposit is larger, often $1,000 or more. CDs generally have fixed interest rates, but some banks offer variable-rate CDs as well. Short-term CDs (less than a year) currently have an average interest rate of .24%, while five-year CDs offer as much as .79%, although some online-only banks offer much higher rates.

Pros:

  • Higher interest rates
  • FDIC protected

Cons:

  • Steep penalties for early withdrawals

Who is this good for?

  • Individuals who do not need access to their money for several months to several years at a time.
  • Larger CDs often get larger interest rates, so individuals with a higher deposit amount will see a better return.

It's important to keep in mind that which bank you select and the length of your term can have a large impact on your interest rate. For more information, see eBank or Brick-andMortar Bank?

The Bottom Line

When deciding if a traditional savings account, MMDA or CD is best for you, you’ll need to consider how much you can deposit initially, how frequently you will need access to your savings and how much you’d like to make in interest. If funds are tight, and you might need your money for bills or emergencies, a traditional savings account or MMDA is the best choice. If you can afford to leave a larger sum of money untouched for a long stretch of time, a CD is the better option.

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