Money that is considered savings is often put into an interest-earning account where the risk of losing your deposit is very low. Although you may be able to reap larger returns with higher-risk investments such as stocks, the idea behind savings is to allow the money to grow slowly with little or no associated risk. Online banking has expanded the variety and accessibility of savings accounts.
If you're not earning any interest on your savings, your savings will be worth less over time due to inflation. Here are some of the different types of accounts so you can make the most of your savings.
- In general, interest-earning accounts are low risk when compared to investments such as stocks, but the returns are lower.
- You can choose from a number of different types of accounts including savings accounts, CDs, money market funds, Treasury bills, and bonds.
- Compare rates before you open an account to ensure you maximize your savings.
1. Savings Accounts
Banks and credit unions (cooperative financial institutions that members—often employees at a particular company or members of a trade or work association—create, own, and manage) offer savings accounts. The money in a savings account is insured by the Federal Deposit Insurance Corporation (FDIC) up to certain limits. Restrictions may apply to savings accounts; for example, a service fee may be charged if more than the permitted number of monthly transactions occurs.
Money in a savings account typically cannot be withdrawn through check writing and—occasionally—cannot be withdrawn from an ATM. Interest rates for savings accounts are characteristically low, but online banking does provide slightly higher-yielding savings accounts.
2. High-Yield Savings Accounts
High-yield savings accounts are a type of savings account, complete with FDIC protection, which earn a higher interest rate than a standard savings account. The reason that it earns more money is that it usually requires a larger initial deposit, and access to the account is limited. Many banks offer this type of account to valued customers who already have other accounts with the bank.
Online high-yield bank accounts are available, but you will need to set up transfers from another bank to deposit or withdraw funds from the online bank. It's worth learning how to find and open these accounts. And make sure to shop around for the best high-yield savings account rates to ensure you're maximizing your savings.
The maximum insurable amount in an FDIC-insured bank account is $250,000 per depositor, per bank.
3. Certificates of Deposit (CDs)
Certificates of deposit (CDs) are available through most banks and credit unions. Like savings accounts, CDs are FDIC-insured, but they generally offer a higher interest rate, especially with larger and longer deposits. The catch with a CD is that you will have to keep the money in the CD for a specified amount of time; otherwise, a penalty, such as losing three months’ interest, will be assessed.
Popular CD maturity periods are six months, one year, and five years. Any earned interest can be added to the CD if and when the CD matures and is renewed. A CD ladder allows you to stagger your investments and take advantage of higher interest rates. As with savings accounts, shop around for the best rates on CDs.
4. Money Market Funds
A money market mutual fund is a type of mutual fund that invests only in low-risk securities. As a result, money market funds are considered one of the lowest-risk types of funds. Money market funds typically provide a return similar to those of short-term interest rates. Mutual funds, brokerage firms, and many banks offer money market funds. Interest rates are not guaranteed, so a bit of research can help find a money market fund that has a history of good performance.
Money market funds are not FDIC-insured. They are regulated by the Securities and Exchange Commission's (SEC) Investment Company Act of 1940.
5. Money Market Deposit Accounts
Money market deposit accounts are offered by banks and typically require a minimum initial deposit and balance, with a limited number of monthly transactions. Unlike money market funds, money market deposit accounts are FDIC-insured. Penalties may be assessed if the required minimum balance is not maintained, or if the maximum number of monthly transactions is surpassed. The accounts typically offer lower interest rates than certificates of deposit do, but the cash is more accessible.
6. Treasury Bills and Notes
U.S. government bills or notes—often referred to as treasuries—are backed by the full faith and credit of the U.S. government, making them one of the safest investments in the world. Treasuries are exempt from state and local taxes and are available at different maturity lengths. Bills are sold at a discount; when the bill matures, it will be worth its full face value. The difference between the purchase price and the face value is the interest. For example, a $1,000 bill might be purchased for $990; at maturity, it will be worth the full $1,000.
Treasury notes, on the other hand, are issued with maturities of two, three, five, seven, and 10 years, and earn a fixed interest rate every six months. In addition to the interest, the T-notes can be cashed in for the face value at maturity if purchased at a discount. Both Treasury bills and notes are available at a minimum purchase of $100.
A bond is a low-risk debt investment, similar to an IOU, which is issued by companies, municipalities, states, and governments to fund projects. When you purchase a bond, you are lending money to one of these entities (known as the issuer). In exchange for the “loan,” the bond issuer pays interest for the life of the bond and returns the face value of the bond at maturity. Bonds are issued for a specific period at a fixed interest rate.
Each of these bond types involves varying degrees of risk, as well as returns and maturity periods. Also, penalties may be assessed for early withdrawal and commissions may be required. Note that, depending on the type of bond, it may carry additional risk, as with corporate bonds, wherein a company could go bankrupt.
How Can I Buy a Treasury Bill?
You can buy U.S. Treasury bills from the government through the TreasuryDirect website. You’ll need to register and open an account. When you do, it will function like a brokerage account that holds your bonds. T-bills are auctioned on a regular schedule.
What Accounts Are FDIC Insured?
FDIC insurance covers savings, checking, money market accounts, and certificates of deposit (CDs). The FDIC does not insure investment products such as stocks, bonds, mutual funds (including money market mutual funds), and annuities.
What Is the Savings Account Withdrawal Limit?
Due to a federal law called Regulation D, there is a savings account withdrawal limit. You can make no more than six withdrawals per month.
The Bottom Line
Savings accounts allow you to squirrel away money while earning modest, low-risk returns. Due to the large variety of savings vehicles, a little research can go a long way in determining which will work hardest for you. It is important to do your homework before committing your money to a particular savings account so you can make the most of your savings.