When considering opening a savings account, it’s essential to do your research and assess the options available to find the best fit for your needs. Different savings accounts cater to various requirements, such as your savings goals, initial deposit amount, likelihood of withdrawals, and comfort with technology.
Here are four types of savings accounts, along with some key points to consider and the type of investors they are best suited for:
Basic Savings Account
Commonly referred to as passbook savings accounts, these accounts serve as an excellent introduction to earning interest and building savings. Transactions for a basic savings account are either recorded in a passbook during visits to the financial institution or provided through periodic statements, often on a monthly basis.
A noteworthy benefit of basic savings accounts is that funds deposited, up to $250,000, are insured by the Federal Deposit Insurance Corporation (FDIC), ensuring a very low-risk and easily accessible savings option for investors.1 Similarly, money held in a credit union basic savings account is insured by the National Credit Union Administration (NCUA).2 However, it’s essential to keep in mind that these accounts typically offer lower interest rates compared to other types of savings accounts due to the flexibility in depositing and withdrawing funds.
If you are new to the concept of saving money or wish to teach your child about financial prudence, a basic savings account can be an ideal choice to initiate the savings journey.
Online Savings Accounts
If the concept of online banking appeals to you, an online savings account could be the perfect solution. With these accounts, you can enjoy the convenience of accessing and managing your funds online 24/7. You can view, deposit, and transfer money at your convenience, and depending on the type of online savings account you choose, you may also have the option to withdraw money from an ATM anytime. These accounts are accessible from various mobile devices, including tablets and smartphones. Additionally, deposits in online savings accounts may be FDIC or NCUA insured, providing added peace of mind.
Fans of online savings accounts often appreciate the relatively higher interest rates they offer compared to traditional basic savings accounts. Since these accounts are not serviced in branches by staff members, they are less costly for financial institutions to maintain. As a result, online banks can often provide more attractive interest rates than traditional savings accounts.
For tech-savvy customers seeking self-service banking and higher interest rates than those offered by basic brick-and-mortar savings accounts, online savings accounts are a great option to consider. Their convenience and competitive interest rates make them an appealing choice in the world of modern banking.
Money Market Savings Accounts
Both banks and credit unions provide a specialized savings account known as money market accounts (MMAs), sometimes referred to as money market savings or deposit accounts. It is important to distinguish these from money market mutual funds offered by investment companies, as the latter are not insured. However, funds deposited in a bank MMA, up to $250,000, are insured by the FDIC, while money held in a credit union MMA is insured by the NCUA.
Money market accounts often offer tiered interest levels and may provide fee waivers for customers who maintain a certain balance each month. These accounts are tailored to customers seeking higher interest rates than those offered by basic bank accounts. To benefit from the higher rates, individuals are usually required to maintain a larger balance in their account.
Suitable for investors with savings goals set within a few months to a few years, money market accounts allow funds to be withdrawn prior to the target date if needed. They serve as a viable option for those seeking to grow their savings at a more competitive rate while still maintaining access to their funds if required.
Certificate of Deposit Account
Certificate of deposit accounts (CDs) present a favorable savings option for individuals with specific financial goals in mind and a defined target date. Available through most financial institutions and some brokers, CDs typically offer higher interest rates compared to traditional and online savings accounts. This is because with a CD, a fixed amount of your money is invested with the institution for a specific duration, which can range from a few months to several years. In general, the longer the term of the CD, the higher the interest rate paid.
To safeguard investors, CDs of amounts up to $250,000 are insured by the FDIC or NCUA in case the issuer encounters financial issues. This provides an added layer of security and peace of mind.
If you have a significant financial goal to achieve within the next five years, such as saving for a down payment on a home or an automobile purchase, consider opting for a CD. Its higher interest rates and fixed investment period make it an attractive choice for disciplined savers with specific objectives. By setting aside your money in a CD, you can work towards your target date with confidence, knowing that your funds are protected and steadily growing.
The Bottom Line
Investors have various options for savings accounts. A basic savings account is simple and low-risk, ideal for beginners. An online account offers higher interest rates and convenient online banking. Money market savings accounts offer perks for higher balances, and certificate of deposit accounts offer premium rates for fixed savings. All these accounts are insured by FDIC or NCUA for up to $250,000.
