What do you do with money that you want to save toward a goal or have as a financial cushion? For most people, the answer is some form of savings account. Here’s a rundown of what’s available and how to decide which one is best for you.
Note: Depositors’ money is generally insured up to certain amounts in money market and savings accounts offered by FDIC-insured banks and in credit unions covered by the National Credit Union Administration.
Savings accounts. This is the traditional place to build up a nest egg. These accounts typically offer a relatively low interest rate and, while you can withdraw funds either in person or through an ATM, you usually can’t write checks.
- Consider having a set amount automatically transferred from your checking to your savings account each month. You’ll be surprised how quickly your savings balance grows!
- Find out if the account has minimum daily balance requirements, limits on how many withdrawals you can make in a month or a regular maintenance fee. Will the rules suit your needs? Hint: setting up an automatic transfer can sometimes waive different requirements and fees, in addition to helping keep you on the savings path.
- Research online options. Online savings accounts frequently offer higher interest rates than brick-and-mortar banks, and some don’t have balance minimums or maintenance fees.
- If you plan to deposit or build up a large balance, look for banks that offer tiered rate accounts, in which higher balances receive better rates. For example, you may earn 1% for balances under $1,000, 2% for balances up to $2,000, and so on. Keep in mind that other savings options may have better rates as your balance grows, and that you could slip back to a lower rate after a withdrawal.
Money market accounts. These are like savings accounts, but you may be allowed to write a very limited number of checks. Money market accounts also may have minimum balances.
- While the ability to write checks is a convenience, you’re limited to no more than six checks or ATM or other withdrawals each month. These accounts probably aren’t a good fit if you need regular access to your cash. Consider an interest-bearing checking account instead.
- The limited access to funds might be an advantage if you want to avoid dipping into your savings too often.
- Rates on these accounts may be higher than for savings accounts, but they are still generally quite low.
- These accounts should not be confused with money market funds, which can gain or lose money based on market changes.
Bank certificate of deposit (CD). With a CD, you invest your money for a certain period, which can range from one month to several years. You receive interest when the term period is over—or when the CD “matures”—but you may face a penalty if you need to withdraw your money sooner. Some banks may require a minimum deposit amount.
- CDs may be a good choice if you want an FDIC-insured investment and won’t need your money before the CD matures.
- Typically, the longer the CD term, the higher the interest rate.
- CD interest rates may be higher than those for savings or money market accounts, but will still likely be lower than many other types of investments. Higher-yield investments may carry greater risk, however.