The end of the year—and the start of a new one—are frequently when people choose to re-evaluate their financial situation. This can include changing around investment strategies or approaches to retirement planning, but often it’s just as simple as looking to start saving.
Did you know there are several different types of savings accounts available? Here, we walk through each type and consider the motivations people have for choosing it over the other options.
1. Traditional Savings Account
Although these accounts don’t have the highest interest rates, holders of these accounts earn interest on the money they put in—which is typically FDIC insured up to $250,000. A useful consideration to keep in mind is that many banks still charge a fee if a saver makes more than six withdrawals each month, although Regulation D was recently loosened to remove this limit.
2. High-yield Savings Account
Take a traditional savings account, raise its earnings by a factor of 20 or even 25, and you’ll be left with a high-yield savings account. These are typically available from online banks, and so they rely on financial transfers from your existing banks.
3. Specialty Savings Account
If you have a particular goal in mind and need funds to get there, a specialty savings account might be the best bet for you. 529 college savings accounts, health savings accounts (HSA), and even individual retirement accounts (IRA) are just some examples of specialty savings accounts that are available to you.
4. Certificate of Deposit (CD) Account
Out of everything on this list, a CD differs the most. Certificate of deposit accounts have fixed terms for money to be placed in them at fixed interest rates. After the term is over, the bank will pay out the money including the interest. Usually, larger principals will earn higher interest, as will personal CDs. These accounts can be FDIC insured, although generally speaking uninsured accounts tend to earn interest at higher rates.
5. Money Market Account
Usually offering higher interest rates than traditional savings accounts, money market accounts also offer a debit card and checks that allow for a certain number of transactions every month. Many individuals prefer an account like this where they have relatively easy access to the funds placed in the account, although that can also be a drawback for others who may be tempted out of keeping their money in savings. Some of these accounts require high minimum balances.
6. Cash Management Account
While not strictly a savings account, a cash management account lets you set money aside so that it can be readily accessible for placement into a brokerage or retirement account. Think of it as a savings account for long-term investments. These are usually online, and so you don’t usually get the in-person experience that other accounts can offer. Check to see whether your cash management account is FDIC-insured so that you can rest easy knowing that your money is safe.
Being deliberate with your budget can help you set money aside in case of emergency. Regular savings goals should be balanced with trying to put money aside for retirement, meet monthly obligations, and set reasonable expectations for monthly lifestyle spending. The more realistic your budgeting is, the more likely you are to reach your goals.
