What do you do with money that you want to save toward a goal or have as a financial cushion? For most people, the answer is some form of savings account. Here’s a rundown of what’s available and how to decide which one is best for you.
Note: Depositors’ money is generally insured up to certain amounts in money market and savings accounts offered by FDIC-insured banks and in credit unions covered by the National Credit Union Administration.
Savings accounts. This is the traditional place to build up a nest egg. These accounts typically offer a relatively low interest rate and, while you can withdraw funds either in person or through an ATM, you usually can’t write checks.
Tips:
Consider having a set amount automatically transferred from your checking to your savings account each month. You’ll be surprised how quickly your savings balance grows!
Find out if the account has minimum daily balance requirements, limits on how many withdrawals you can make in a month or a regular maintenance fee. Will the rules suit your needs? Hint: setting up an automatic transfer can sometimes waive different requirements and fees, in addition to helping keep you on the savings path.
Research online options. Online savings accounts frequently offer higher interest rates than brick-and-mortar banks, and some don’t have balance minimums or maintenance fees.
If you plan to deposit or build up a large balance, look for banks that offer tiered rate accounts, in which higher balances receive better rates. For example, you may earn 1% for balances under $1,000, 2% for balances up to $2,000, and so on. Keep in mind that other savings options may have better rates as your balance grows, and that you could slip back to a lower rate after a withdrawal.
Money market accounts. These are like savings accounts, but you may be allowed to write a very limited number of checks. Money market accounts also may have minimum balances.
Tips:
While the ability to write checks is a convenience, you’re limited to no more than six checks or ATM or other withdrawals each month. These accounts probably aren’t a good fit if you need regular access to your cash. Consider an interest-bearing checking account instead.
The limited access to funds might be an advantage if you want to avoid dipping into your savings too often.
Rates on these accounts may be higher than for savings accounts, but they are still generally quite low.
These accounts should not be confused with money market funds, which can gain or lose money based on market changes.
Bank certificate of deposit (CD). With a CD, you invest your money for a certain period, which can range from one month to several years. You receive interest when the term period is over—or when the CD “matures”—but you may face a penalty if you need to withdraw your money sooner. Some banks may require a minimum deposit amount.
Tips:
CDs may be a good choice if you want an FDIC-insured investment and won’t need your money before the CD matures.
Typically, the longer the CD term, the higher the interest rate.
CD interest rates may be higher than those for savings or money market accounts, but will still likely be lower than many other types of investments. Higher-yield investments may carry greater risk, however.