What are the primary types of savings accounts?
Most banks and credit unions that you will visit will offer all of the classic savings accounts. There are three primary categories of savings vehicles:
Regular savings account
A savings account is a deposit account that accumulates interest on balances. These come in a wide variety of flavors depending on the frequency of interest posting, minimum deposits (if any), size of the account, and other features adopted by individual institutions.
Money market account (MMA)
Bank and credit union money market accounts typically pay higher interest rates than regular savings accounts, usually have a minimum deposit determined by the institution, and allow restricted activity, particularly withdrawals during each monthly period.
Do not confuse this account with money market mutual fund accounts (MMFAs) offered by investment firms. MMFAs are just short term investments in a variety of mutual funds with which they have relationships.
Certificate of deposit (CD)
A CD is a contractual agreement between you and your bank or credit union. You agree to deposit a specific amount of money for a stated period of time with your institution. Your bank or credit union agrees to pay you a guaranteed interest rate during the term of your deposit agreement (typically 6 months to five years).
While most CDs offer a fixed interest rate and do not allow any additions or withdrawals during the contractual period, some institutions offer a few more creative products. Explore the options if seeking a CD to invest your money.
Understand the differences
It is important to understand that all savings accounts were not – nor were they intended to be – created equal. Interest rates, terms, restrictions, and permissions are determined by individual banks and credit unions. You will become a smarter shopper if you understand why rates and terms vary – and sometimes can change often – at individual institutions.
Banks and credit unions use their deposits, primarily those in savings accounts, to make loans to other customers. When they have sufficient deposits to meet their loan demand, they typically lower their savings, CD, and money market interest rates.
If their loan demand is strong and they need more funds for borrowers, they often increase their interest rates or make some terms more liberal to attract more savings dollars.
Because of this changing need for deposit funds, all savings accounts are not equal. You can find excellent offers from some institutions, particularly in their CD choices, at different times during any given year.
Since CDs are specific deposit agreements, you need not be concerned about long-term loyalty to one institution or another to take advantage of a higher than market interest rate offered.
You can maintain your loyalty to your primary financial institution for your transaction (checking) and other accounts, while still taking advantage of earnings opportunities offered by another bank or credit union providing excellent rates on CDs.
How to choose the right savings account
There are neither good nor bad savings accounts. Yet, some types may be better for you in certain situations. Typically, the best way to learn what types of savings accounts may be right for you is to ask yourself a few questions.
What purposes and goals do you have for your savings accounts?
Do you want a savings account just to "park" money and earn interest? Are you saving for emergencies, future major purchases, education, etc.?
What type and frequency of access to your savings money do you need?
Is the ability to have constant access to your money required? You'll probably want a regular savings account without transaction restrictions.
Can you live with limited access to your funds?
A money market account that permits a limited number of transactions each month will typically earn you higher interest. If you don't foresee the need to access some savings dollars for longer periods of time, a certificate of deposit might be your best choice.
You'll normally earn the highest rate of interest and your account will not be subject to market changes during the contractual period of your deposit.
Have you created some type of savings plan for yourself?
Your plan need not be complex or sophisticated. Some type of plan is always better than no plan at all. Use a "pay yourself first" philosophy to maximize your savings dollars. Decide on a minimum amount to deposit in a savings account every pay period, just as you would for a recurring bill (mortgage, rent, auto payment, etc.).
Find the right savings vehicle
Indeed, not all savings accounts are created equal. Understanding the similarities and differences and how each type of savings account may fit into your savings plan will help you select the right one or ones for you.
Recommended resource: Compare savings rates