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Savings Accounts to Consider
When you opened your first bank account, did you choose an online bank or visit a branch in person? No matter how you got started, you were likely presented with several options for savings accounts, each with unique features to consider.
The options can feel overwhelming. What are the differences between traditional savings and high yield savings accounts? Maybe someone tried to explain it, but if terms like "higher interest rate" and "certificate of deposit" feel confusing, you might have tuned them out and just said yes to whichever one you could remember the name of.
Banking shouldn't be stressful. Here are a few terms you need to know to set you on the right path to deciding which financial tools you need to prepare for your future.
Why Do You Need a Savings Account?
Rather than always spending money, consider using it strategically. For instance, owning a car may require inevitable repairs. Whether your phone breaks suddenly or you aspire to study abroad in junior year, having available funds is crucial. Unexpected expenses happen, but relying on credit and accruing debt isn't the solution. Why not plan proactively for the future by saving a little each month? These savings will accumulate over time, providing a safety net for emergencies and covering significant bills when needed.
The Different Types of Savings Accounts
If you decide you need a savings account. Here are some of the different types you can choose from:
- Traditional Savings Accounts
- High Yield Savings Accounts
- Certificate of Deposit
- Money Market Account
- Cash Management Accounts
Don't let your eyes glaze over! While there are many choices, the different types of savings accounts have more similarities than differences. Read on for a definition of each type.
1. Traditional Savings Account
A traditional savings account is easy to open and use. You usually need a very small minimum deposit to open a savings account, and you can access your money freely. The downside is that the interest rates on this type of savings account are typically small. However, you don't have a waiting period to access your money, if you need to.
2. High Yield Savings Account
A high yield savings account is very similar to a traditional savings account, but is primarily found online. Being online means that there are fewer fees, and often, you need even less money to keep the account open. Plus, these accounts have higher interest rates, so you make more money than you would with a traditional savings account. The downside is that since these accounts are through online banks, you might not be able to get cash from an ATM without paying fees.
3. Certificate of Deposit
If you need to save money for a specific, long-term goal, like studying abroad or paying for future semesters of college, you might be interested in a certificate of deposit, or CD, account. You put cash in this account and agree not to access it for a specific amount of time, anywhere from a few months to a few years. Basically, you're letting the bank borrow your money with the understanding that it will all be available to you, plus interest, at a specific time in the future. Since you're agreeing to ignore it for a while, these accounts earn a higher interest rate than a traditional savings account. The con is that you can't use that money before the agreed upon time without paying a penalty.
4. Money Market Account
A money market account is a savings account with perks. You earn a higher rate of interest than you would in a traditional savings account, and you can write checks directly from the account, which generally isn't an option with other types of savings accounts. A potential downside is that you need to maintain a high minimum monthly balance to keep the account open without incurring fees. Many people like money market accounts for storing their emergency funds. You can make regular deposits and earn interest, but the money is also readily available when you need it, unlike a CD.
5. Cash Management Account
If you invest money in the stock market, a cash management account could be an option for you. These accounts are not associated with a bank. Instead, they are offered by online brokers as a place to store your cash and earn interest while you decide where to invest your money. This type of savings account is not where you would store your money for an emergency fund or your tuition. It's a savings account with a very specific purpose.
How To Choose a Savings Account
Now that you understand your options, you can make an informed decision. Here is a checklist to help you decide which type of account you need.
- Does this account have minimum requirements to open it or maintain it?
- How accessible is the money in this account?
- What are my savings goals?
- How does my income affect my ability to maintain this account?
- What are the terms and fees associated with this account?
Go through each type of account and ask yourself these questions. It's possible that you might find more than one type of savings account that could work for you. Many people have more than one type of savings account for different goals. For example, you may have a money market account that you deposit into once or twice per month for building up your emergency fund, and you have a CD account for your study abroad program that is two years away.
How To Use a Savings Account
Now that you've chosen the types of accounts you need, you have to maintain them. Pay attention to the accounts that require minimum amounts and deposits and make sure to put money in those accounts immediately when you get a paycheck.
Often, the more you can avoid withdrawing funds from your savings account, the more interest you earn. The money is there to use but learn to use it strategically. Make your money work for you.
