A savings account can be useful for many purposes. It provides you with the ability to earn interest on your funds while maintaining an emergency fund, saving for a major purchase and more. After making the decision to open a savings account comes the task of deciding which type of savings account you should open. A closer look at the features and benefits of the different types of savings accounts can help you to make an informed decision.
The Different Types of Savings Accounts
A savings account generally is a low risk, low interest account. These accounts often are FDIC-insured, and many feature a guaranteed rate of return. However, beyond these similarities, the different types of accounts can vary significantly.
Traditional Savings Account: These accounts are available at most local and national banks and credit unions. They allow you to deposit money at your leisure at local branch locations, but the number of withdrawals may be limited. Some banks and credit unions require you to maintain a minimum balance in the account to avoid paying fees. Generally, this type of account has the lowest rate of return compared to other options.
Online Savings Accounts: These accounts are similar to traditional savings account except that there is not a brick and mortar bank where you can make deposits and withdrawals. The funds are all moved electronically. The benefit of these accounts is that the online banks have less overhead, and this generally creates a situation where savings account holders enjoy a higher interest rate.
Certificate of Deposit (CD): These accounts are ideal for those who do not need access to their money in the immediate future. A CD is an investment with a specified term length, and the term length may be as short as a few months or as long as five years or more. There is a penalty for withdrawing funds early, but the rate of return is usually superior to traditional and online savings accounts.
Money Market Savings Account: A money market savings account usually has a higher minimum required balance and lacks online banking features like electronic funds transfers. Most money market accounts allow you to access funds by writing a check, and the number of transactions permitted each month is limited.
Unique Features to Look For in Savings Accounts
Some financial institutions offer unique features with certain savings accounts that may be beneficial to you. For example, some have online or mobile banking features to make managing your account easier. Some feature financial planning tools that can make achieving your financial goals easier. In some cases, you can create sub-accounts under your main savings account, and this enables you to more easily save for various things by easily allocating money to different types of accounts. Some savings accounts allow you to set up regular automated deposits.
Making Your Decision
In order to make a decision about which type of savings account is best for you, you should consider what your plans for the funds are. Do you want to save a lump sum of cash in a higher yield account? Do you want to make regular contributions to your account? Are you trying to save money for several different purposes? Will you be able to maintain a minimum balance in your account? Do you plan to make frequent deposits and withdrawals with your account? By defining what your needs and goals are for opening a savings account, you can more easily determine which account is best for your needs.
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