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Saving money is difficult for many people. When all of your funds are in one checking account, you may be tempted to spend the money left over after you pay your monthly bills. Plus, the money in your general account rarely earns much if any interest. A savings account is an excellent way to save money and earn interest on these savings. Although most savings accounts allow you regular withdrawals, you may be more hesitant to touch your money if it’s in a special account.
These accounts are a practical way to save money while still allowing you fast access to the funds if you need them. Before you create an account, you need to study the available types of savings accounts and choose the ones that will give you the features and financial return that you seek. The six basic types of a savings account include the following:
You can open a traditional savings account at your local bank branch or credit union. These accounts are easy to open, usually allow you six or more withdrawals a month and pay interest on your money. They are good for both short- and long-term financial strategies and require only a small initial deposit. You may choose a traditional savings account if you are looking for a simple way to save money for future purchases or as a safety net.
The interest rates for a traditional account are generally lower than those delivered by other money products. This type of savings account encourages you to save money but does not offer big returns. Opening an account takes only a few minutes and allows you to bank online or in person. You also know these accounts as “regular” savings accounts.
High-yield savings accounts are tailored to people who are comfortable banking online. Some of the best-known high-yield accounts include Capital One 360, Chime Savings Account and Discover Online Savings Account. Most of these accounts can only be opened online but are FDIC backed, so they are a safe choice.
High-yield accounts pay a higher rate of interest than standard savings accounts. Online banks can afford to pay more because they do not have the overhead that comes with maintaining a physical facility. Also, many of these accounts do not demand a minimum deposit, so you can start one with $50 or less. The bank may not require you to pay a service fee for this type of savings account either.
A money market account is another good way to save and earn interest on your money. MMAs, also known as money market deposit accounts (MMDA), usually pay a higher interest rate than traditional savings accounts. Many of these accounts also let you write checks on the account and come with a debit card. However, the bank will probably limit you to six transactions a month and may also require that any checks you write be over a certain amount. The interest rate is variable, so your return will depend on the state of the financial landscape.
You should not confuse these accounts with money market mutual accounts that are issued through a brokerage firm or mutual fund firm and are not FDIC insured. The FDIC does protect MMAs.
You can open a certificate of deposit account at a bank or credit union. These accounts generate a premium interest rate because you agree you will not touch your lump-sum deposit for an agreed-upon period. If you withdraw your money early, the financial institution will charge you a penalty.
The interest rate varies widely for CD accounts, so you need to comparison shop for the best deal. Some financial institutions offer special promotional deals on CDs with longer deposit requirements. If you can afford to put aside money for six or 18 months or more, then you can earn a significantly higher rate of interest for these financial products.
A cash management account is not a true savings account. These accounts allow you to deposit and retain cash that you may decide to invest in a brokerage or retirement account. Brokerages and other investment platforms sometimes offer these accounts to their clients and pay them a higher rate of interest than a bank would on a savings account.
You may be allowed to write checks from the account or transfer money from it to your regular bank account. These accounts are really hybrid checking and savings accounts. If they are offered by a third-party bank, they may also be FDIC insured.
If you have specific savings goals, then a specialty savings account may be for you. Perhaps the best-known specialty account is the holiday account. People with these accounts deposit a certain amount of money each month so that they will have funds to spend on gifts during the holiday season.
These accounts are convenient but come with some drawbacks. Depending on the type of account you open, you may face restrictions on withdrawals. Kids’ accounts and holiday accounts may earn a lower rate of interest than another type of savings account would.
Financial institutions offer you several savings choices. In fact, you may decide to open several types of savings accounts in order to fulfill your personal financial goals. Remember to weigh the account restrictions against the interest rate and other benefits before you open an account. In general, saving money is always a positive step. Some types of savings accounts are more financially lucrative, however.