If you're thinking about opening a savings account, do your research before committing. Not all savings accounts are created equal. The best account for you depends on several things. These include your savings goals, the amount of money you have for an initial deposit, the likelihood you may need to withdraw money prior to your target date and your comfort using technology.
Here are four types of accounts customers may use for savings, with a few points on what to watch for and what type of investors the accounts are best suited for.
1. Basic Savings Account
Also known as a Passbook Savings Account, these accounts are a good introduction to earning interest and saving money. Transactions on a basic savings account are updated either in a passbook when then customer visits their financial institution, or on a statement issued periodically (often monthly). However certain types of withdrawals on basic savings accounts including checks, debit card purchases and electronic transfers are limited by federal law to just six per month.
Funds of up to $250,000 deposited in a basic savings account are insured by the Federal Deposit Insurance Company (FDIC), making this a good choice for investors who want a very low-risk and easy-to-access savings account. Money held in a credit union basic savings account is insured by the National Credit Union Administration (NCUA).These accounts usually offer lower interest rates than other types of savings accounts because of the flexibility in depositing and withdrawing funds.
If you are new to savings, or want to teach your child about savings, a basic savings account can be a good option to get started.
2. Online Savings Accounts
If you like the idea of online banking, an online savings account could be the solution for you. These savings accounts may offer access to view, deposit, and transfer funds online 24/7, and withdraw money from an ATM anytime depending on the type of online savings account you set up. They may be accessible from any mobile device, including a tablet or smartphone. Deposits in these accounts may also be FDIC or NCUA insured.
Fans of online savings accounts may choose them because they offer a relatively high interest rate compared to traditional basic savings accounts. As these accounts are not serviced in branches by staff members, they are less expensive for financial institutions to maintain. This often allows them to provide higher interest rates than traditional savings accounts.
Online savings accounts are good options for tech-savvy customers looking for self-service banking and higher interest rates than basic, brick-and-mortar savings accounts.
3. Money Market Savings Accounts
Banks and credit unions offer a specialized savings account known as money market accounts (MMAs). They may also be called money market savings or deposit accounts. These are different from money market mutual funds offered by investment companies, which are not insured. Funds of up to $250,000 deposited in a bank MMA are insured by the FDIC. Money held in a credit union MMA is insured by the NCUA.
These accounts may offer tiered interest levels, and/or fee waivers for maintaining a certain balance each month.
Money market accounts suit customers who want a higher interest rate than a basic bank account, and are willing to keep a larger balance in their account. They are suitable for investors with savings goals with target dates ranging from a few months to a few years away. Funds may be withdrawn prior to that time.
4. Certificate of Deposit Account
Certificate of deposit accounts (CDs) are a good savings account option for individuals saving for a goal with a defined target date in mind. Available through most financial institutions as well as some brokers, a CD usually pays a higher rate of interest than traditional and online accounts because a fixed amount of your money is invested with the institution for a specific length of time. This may range from a few months to one or more years. In most cases, the longer the term of the CD, the higher the interest rate paid. CDs of amounts up to $250,000 are insured by the FDIC or NCUA to protect investors in the event the issuer experiences financial issues.
Consider a CD to save for a large financial goal within the next five years such as a down payment for a home or an automobile purchase.
The Bottom Line
There are several types of savings accounts available for investors. A basic savings account is a simple, easy-to-use, low-risk account with a lower rate of return suitable for beginning savers. An online account is a convenient, higher interest account option for people comfortable with online banking. Money market savings accounts may offer perks such as better rates for higher balances. And certificate of deposit accounts pay a premium rate for locking a fixed savings amount in for a specified duration ranging from a few months to five years. Deposits to these savings accounts are insured by FDIC or NCUA for amounts up to $250,000.