If all of your money is kept in a single checking account, but you don’t intend to spend a large chunk of it any time soon, then it’s probably time to open up a savings account. Having a savings account to supplement your checking account can be a great long-term investment, and it doesn’t have to cost a dime.
Depending on which type of savings account you choose, the money you put into savings can accrue interest at a rate of .5-3% per year while still remaining accessible when you need an injection of extra funds–that’s loads better than no interest, which is what almost every checking account offers. While you’re looking, it’s important to avoid fees at all costs so that your new account remains a worthwhile investment. Here’s a guide to the types of savings accounts and the unique advantages of each.
Traditional Savings Account
If you’re not sure when you’ll need your savings and you don’t have much to put away, you’ll want to open an ordinary savings account. There are no limits on the number of deposits you can make on this account, and withdrawals or remote money transfers can happen up to six times per month. Usually, these accounts have no minimum balance, which means you can open one even if you only want to put away $100.
Best of all, if you open up a traditional savings account, you can link it to your checking account with a few simple steps. This can be a valuable asset for handling personal finances–with linked accounts, you’ll have an easy time transferring funds between accounts wherever you are. And if you open the two accounts with the same bank, you can arrange to have your checking account automatically withdraw from your savings account before it tries to overdraw. This feature gives you an added layer of security against overdraft fees or bounced checks. If you slip up and spend beyond your means, your checking account will simply reach into your savings to make up the difference. This great article sums up the advantages of linking your savings and checking accounts, whether they’re at the same bank or at separate institutions. Interest rates for traditional savings accounts vary pretty widely, from 0.01% to about 1.5% APY. So be sure to pay attention to the interest rates before choosing an account.
Online Savings Account
Online savings accounts provide almost all of the resources you expect in a traditional savings account, with one major exception—there’s no physical branch that you can go to. This means that every type of transaction–transfer, withdrawal and check deposit–must be performed on your phone or computer. Because of this, each online savings account has to be linked to an established checking account, which you can use to deposit and withdraw funds in person. If having a physical branch that you can go to is not that important to you, then getting an online savings account is probably a smart move. Since they have less overhead costs, online accounts almost always offer higher interest rates than savings accounts at brick-and-mortar institutions. Some online accounts, called high-yield savings accounts, offer interest rates as high as 1.5-2.05% APY. This article does a great job at giving the low-down on how high-yield online accounts work, and this one will help you figure out which one is best for you.
Money Market Account
A money market account gives you the chance to freely access your savings while accruing interest at a rate somewhere between 1.8% and 2.25%. Up to six times per month, you can draw money directly from this account by using a check or a debit card provided by the bank. This will give you an extra resource to turn to if you’re ever in a pinch. What you gain in higher interest rates, though, could easily be lost through fees—if your account dips below the minimum balance (usually somewhere between $1,000-$2,500), you’ll be charged a sizable amount.
Certificates of Deposit (CDs)
CDs tend to have the highest interest rates out of any savings account, but you must agree not to access your money until the end of your deposit’s term, which is usually between six months and five years. The longer your term is, the higher your interest rate–some 5-year CDs carry an APY around 3%, while shorter ones tend to be around 2.25%. Withdrawing funds early from a CD is possible, but it comes with a hefty penalty, so make sure you’re confident you won’t need the money you put into your CD until the end of the term. Otherwise, there’s no point. Check out this article to learn more about Certificates of Deposit.
Having an account where your extra savings can amass interest is a great way to earn an easy buck, but there are so many ways to do it. In addition to the options above, it might be worth considering some less traditional options: interest checking accounts provide maximum flexibility if you need to access your savings more than six times a month, and student savings accounts are specifically tailored for the needs and lifestyle of a full-time student. Once you’ve established your savings account, you might also want to think about starting an account that’s designed to have longer-term benefits, such as a Roth IRA, a 401(k), or a trust fund. Take your time investigating the variety of options, and make sure to pick the type of account that best matches your needs. How many bank accounts you should have is another question entirely–we give you the basics in this article.
The Bottom Line
Having a savings account is always a great idea, but which type of savings account you open depends entirely on your personal financial outlook and the resources you have. And while you’re thinking about which type of savings account to open, you might want to check out one of these great financial blogs for quick tips on how to make those saved bucks go a whole lot further.