Research shows that most Americans aren’t doing anywhere near enough saving. In fact, 21 percent aren’t saving anything at all.
There are many ways to save and benefit from knowing about the different types of savings accounts available to you.
We’ll explain the most common account types and their differences.
Do You Need a Certain Type of Savings Account?
One of the most common financial mistakes is not diversifying your savings. It might even be a good idea to have more than one type of account. Here’s why.
1. Keep Track of Savings Goals
Most people aren’t saving for just one thing. If you have multiple goals but only one account for everything, it’s hard to keep track of your progress when it comes to accomplishing each goal.
2. Avoid Overspending
When you have just one account, it’s also easier to overspend. Separating your savings into the right accounts can help you track and achieve your goals faster.
3. Take Advantage of Benefits
Certain types of accounts have different perks attached to them. This includes higher interest rates, new account bonuses, reduced fees, and the ability to join your account with a partner.
4. Enjoy Tax Breaks
Some savings accounts are associated with tax breaks, too. For example, the money you deposit in a Health Savings Account is tax-exempt and can be subtracted from your annual tax bill. If you have a use for this type of account, it’s a win-win.
Different Types of Savings Accounts
The following are the most well-known types of accounts you might want to think about:
1. Regular Savings Account
Tried and true. Most banks offer a savings account you can link to your regular checking account. It’s a great way to separate your money for the things you want to save for.
With a traditional savings account, you will earn a small amount of interest on the money kept in the account (the average is around 0.01 percent annual percentage yield).
The benefit of a regular savings account is that you have easy access to your money. With a few clicks, you can transfer money to another account or withdraw cash from an ATM in no time.
Others, usually called high-yield savings accounts, offer more interest for leaving your money alone, but your funds may take a few days to transfer should you need them. They’re an easy way to save for specific goals, which we’ll cover next. Either of these accounts are also a great place to stash your emergency fund should anything unexpected pop up.
2. Specialty Savings Account
As the name suggests, these savings accounts are meant to help you save for something special. There are all sorts of reasons you might want to have a separate account to save, including:
- Christmas gifts
- College savings accounts, such as 529 plans
- Custodial accounts to help your children learn about money
- Health Savings Accounts, usually offered through work to pay for medical expenses
- Home down payments
- Student accounts offered to those enrolled in college
If any of these options interest you, talk to your bank or credit union to see which types of accounts they have available. If they don’t have the one you want, you can also work with an online bank instead.
3. Money Market Account
If you want to earn interest and save long-term, a money market account is a good alternative to a traditional savings account.
These savings accounts tend to have higher interest rates. On the flip side, they also have higher balance requirements. In most cases, you’ll need to have a balance of at least $1,000 if you don’t want to get hit with monthly fees.
Money market accounts often come with a debit card and checkbook attached to them for easy access to your funds. However, there are usually limits to the amount of money that you can withdraw within a certain period of time.
Because there’s a stock market aspect to the accounts, they aren’t the best for short-term goals. But if you want to save over the long haul, it’s worth looking into them.
4. Certificate of Deposit (CD)
A certificate of deposit (or CD) is a higher-yield savings account than either a regular account or a money market account. There’s a catch to this high interest rate, though.
With a certificate of deposit account, you’ll agree that you will not withdraw any money during a certain time frame (this is known as a term). If you withdraw money before a specific date, you’ll have to pay a fee as a penalty.
Most terms for CD accounts last between six months and five years. Accounts with longer terms usually have better interest rates. If you won’t need your money for a while, this is an excellent and secure way to save.
5. Cash Management Account
If you’re interested in investing, a cash management account is a good type of savings account to consider. This account helps you have cash accessible that you can invest in your retirement or brokerage account.
Many online brokerages offer cash management accounts to investors. The money in these accounts earn interest, often more than what you’d earn through a bank or credit union.
The features of cash management accounts are similar to those of regular checking accounts, too. You can transfer money to different accounts or use the money to write checks or pay bills.
Which Savings Account Is Right for You?
There are lots of different types of savings accounts you can use to safeguard your money or make sure you have access to funds should an emergency arise. Now that you know the different types, which one do you think is a good fit for you?
We hope this gives you ideas for how to save in a way that matches your goals. For more tips, check out our other blog posts.