Saving money is often a tough endeavor, and job losses and stock market setbacks fueled by the coronavirus pandemic made it even tougher. Whether you are saving for short-term goals or long-term retirement, you have several saving tools at your disposal. Understanding the different types of saving accounts available for you can help you choose the ideal tool for the task at hand. Here are five different savings account types to consider.
1. Traditional Savings Account
Regular or traditional saving accounts are great for people who are looking to save money for short- or long-term goals but aren’t concerned about obtaining the best interest rates. Traditional banks and credit unions typically offer these accounts. You can open a regular savings account with a low minimum deposit and earn some interest on your account balance. In most cases, these accounts limit the number of monthly withdrawals you can make before incurring penalties.
Pros
- It’s easy to open a regular savings account.
- You can earn some interest on your savings to help grow your money.
Cons
- Traditional savings accounts have lower interest rates compared to other savings options.
- Extra fees may apply for excessive withdrawals.
- Monthly maintenance fees could cancel out your interest earnings.
2. High-Yield Savings Account
If you’re looking to earn a more competitive interest rate on your savings while minimizing fees, a high-yield savings account is your ideal choice. This type of savings account offers a higher annual percentage yield (APY) than regular savings accounts. You can set up this account with an online bank that offers lucrative rates. High-yield savings accounts can be insured by either the FDIC or NCUA and offer lower fees and monthly maintenance or withdrawal fees.
Pros
- High-yield accounts have much higher interest rates than traditional savings accounts.
- They carry lower minimum deposit requirements.
- Many online banks that offer these accounts do not charge a monthly fee.
Cons
- Online banks do not provide branch banking access.
- You may not have access to your savings via ATM.
3. Specialty Savings Account
A specialty savings account is perfect for people who want a savings account tailored to their specific savings goals. In some cases, these accounts can be intended for a specific person rather than a goal.
Examples of specialty savings accounts include:
- Custodial savings accounts
- Kids’ savings accounts
- Student savings accounts
- Home down payment savings accounts
- Christmas Club savings accounts
- Health Savings Accounts (HSAs)
- 529 college savings accounts
You can set up these accounts at certain banks, credit unions, brokerages, or investment companies. Overall, opening a specialty savings account makes sense if you have a singular goal for saving money.
Pros
- Specialty savings accounts can help you save money for specific financial goals.
- They can earn interest to help grow your money.
- You may pay low or no monthly maintenance fees.
Cons
- Some specialty accounts like IRAs, HSAs, and 529s have strict tax rules when making withdrawals.
- The interest rates might be lower than high-yield or regular savings accounts.
4. Money Market Accounts
Money market accounts (MMAs) combine features of a regular savings account with those of a checking account. Brick-and-mortar banks and online banks both offer this type of savings account. Overall, an MMSA allows you to earn interest on your savings at a rate better than regular savings accounts. Although you may be able to write checks from your savings account or access your money with an ATM or debit card, making excessive withdrawals can attract a fee.
Pros
- Money market accounts may offer better interest rates than traditional savings accounts.
- You can write checks from your savings account or access your funds via a debit or ATM card.
- You can open these accounts at traditional banks or online banks.
Cons
- Money market accounts may require a higher minimum deposit
- Interest rates may be tiered on a higher balance.
- Banks may charge a monthly fee.
5. Certificate of Deposit Account
If you want to earn competitive interest rates and won’t need to access your savings right away, a certificate of deposit account could be your ideal option. Certificates of deposit (CDs) are typically time deposits – you agree to leave your funds in the account for a specified period. Your money earns interest during the entire period, and upon maturity, you can withdraw your savings or further roll it into a new CD.
Pros
- CDs can offer above-average interest rates
- No monthly maintenance fees are involved.
- Banks may offer lower initial deposit requirements, particularly for online CDs
Cons
- Withdrawing money ahead of its maturity date triggers an early withdrawal penalty
- Putting your money into a longer-term CD may make it harder to capitalize on future increases in interest rates.
Different Savings Accounts for Different Goals
Depending on your financial goals, there are several savings accounts that you can choose from. In some cases, you may find it in your best interest to set up more than one savings account. Always pay attention to the interest rates you could earn and the maintenance and withdrawal fees the account could attract to find the ideal savings account for your situation.