4 Types of Saving Accounts + When We Should Use Them

Do you remember the moment you first opened a savings account? Most of us likely opened one with our bank who held our checking account and direct deposit at the time. It seemed standard, but the only thing I really thought separated a checking from a savings was that it was money I should not touch. Many of us learned later that we can only withdrawal money from the account 6 times per statement cycle, we might have needed a minimum balance to maintain the account without fees and it yielded us some interest! Pennies usually, but free money, right? There are many types of saving accounts available like high-yield, traditional, money markets and certificates of deposit, to name a few. They are not created equally though and some may be better for specific saving goals that you will have.

A high-yield saving account, HYSA, is great for a fully funded emergency fund or a short-term and risk free savings goal — think a vacation, a home down payment or a new car. They are accounts that yield higher interest. This means the incentive is that it provides you with monthly interest payments. 

Let us do a bit of math — with the average APY on traditional saving accounts at .09%, if you deposited $2,000 initially and let it sit there for 12 months you would have $2,001.80. If instead, you opened a HYSA with a 2.10% APY under the same conditions you would have $2,042.44. Raise your hand if you would take $42 before $2 for doing nothing except choosing a higher yielding account *shoots hand up*, okay!

To go along with that, most HYSA also have no required minimum balance and offer the same rate to all customers. So, the same person depositing $200 will receive the same APY as those depositing $2,000.

A traditional saving account is the most simple, probably many of our firsts, and offer a low annual percentage yield, APY, the .09% average. Still, a traditional savings account is a good place to store a small emergency fund with your current bank or credit union. If an immediate emergency should arise those are funds you would want to be available in the blink of an eye. However, it is easy to be tempted by a savings account when you see it every time you login to view your checking account. While your savings should not be out of mind, it can be beneficial if it were out of sight. With an online high-yield savings account, the funds are easy to transfer to and from your main checking account, but it can take between 1-3 business days before the funds are available.

A money market account, MMA, could also be a good place to store cash for an emergency fund, however this one will depend on how much cash you plan to keep in it. MMAs usually require high minimum balances to receive the highest APY offered and a lower APY for a lesser balance, these are called tiers. For example, Capital One’s 360 Money Market account currently offers a 2.00% APY, but this is on balances of $10,000 or more. On balances under $10,000 the APY sits at 0.85%. If you have $10,000 you are looking to store then that rate is competitive and might be worth while. It is important to keep in mind that if it is an emergency fund and you end up needing to withdraw an amount that puts you under $10,000 you will lose that rate whereas you would not in a HYSA that has no tiers. Another popular online bank is Ally, however their MMAs are tiered as well. They offer 1.00% on $25,000 and 0.90% on anything less. This does not compete with their HYSA at 2.20%, no tiers and no minimum balance, however it does come with a debit card. If you value having swipe access to your savings then you may find it worth the lower rate.

A certificate of deposit, CD, is a little more complex than the other three. Unlike the others, the interest is fixed through the entirety of the promissory note. A promissory note is a promise to pay a specific amount of money, the interest, come a specific point in time, the maturity date. When you open the account you will choose a term, often times terms can range from 6 months to 6 years and you are paid out your initial deposit plus the interest promised when your term is up. You are allowed to withdraw your balance, however in most cases you will pay an early withdrawal fee. This fee eats at the interest you were promised and is one reason it may not be the best place to store your emergency fund. It defeats the purpose if you have to withdraw early and pay a penalty, when you could withdraw any amount with ease and no penalty with a HYSA. Emergencies are unpredictable and can occur within three months of a six month term or within two years of a five year term. If the CD has no early withdrawal fees though, like Goldman Sachs 7, 11 or 13 month No-Penalty CD, then it would be competitive to high-yield saving rates at 2.25-2.35%. Another difference between CDs though is that traditionally they are not set up to make monthly contributions. CDs are truly a set it and ‘forget it’, so if you are still actively saving your emergency fund or any goal, a HYSA provides much more flexibility. With a HYSA you can contribute as much money as you’d like to the account and as often as you’d like.

In general, saving money can be a daunting task, but when choosing the right account it is important to determine your priorities:

  • What am I saving for?

  • Do I need to be able to contribute every month?

  • Do I want access to withdraw money from an ATM?

  • Do I want to yield the highest interest?

  • Am I receiving the most benefit by being in the highest tier?

  • Am I able and willing to meet the minimum balance requirement at all times?

  • If not, am I willing to pay monthly fees?

There are so many options available to us when it comes to saving and it is important you find the right account for your goals. Maybe you will find that you do not only have to settle for .09%! ;)

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