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What Types of Savings Accounts Are Available?

Saving money is a foundational piece to any sound financial plan. How much money you should save is subjected on many variables. But, without question, it’s a good idea to have money in a savings account.

There are a lot of different types of savings accounts. If you’re looking to get on the right financial track, it’s important to understand what options and benefits you have. 

How Do Savings Accounts Work?

A savings account is something you can set up with ease. You can either visit your local bank branch, or set the account up online. Many banks will have a minimum balance one must keep in the account, typically ranging from $25 to $50. 

You can deposit money directly in this account as you please. You can also direct some, or all, of your paycheck to be deposited in your savings account. 

If you have more than $250,000 in your savings, make sure the bank or credit union is FDIC or NCUA insured. That insurance guarantees you will never lose that money, even if the bank went bankrupt! 

What Is the Goal of Saving Money?

Saving money has numerous benefits! Foremost, if anything were to happen to your income, a savings account would grant you a safety net. The unforeseen circumstances that may occur in life may hinder one’s ability to earn income for a period of time. In case something happens, one can always tap into their savings account to pay rent and put food on the table. 

Secondly, having money saved gives you flexibility. If you’re living paycheck to paycheck, you may not have flexibility to do what you want. For instance, perhaps you want to travel or find a new job. If you don’t have money in savings, you will not be able to do the changes you want to make.

What Is Interest & Why Does It Matter With Savings Accounts?

Interest is something that can’t be overlooked. Simply put, interest is the amount of money you earn on your existing money. For example, if one could invest $100 and earn a 10% interest rate, their ending balance would be $110. 

The greater the interest rate potential is, the greater the risk. You can invest in stocks and earn a lucrative return, but you could also lose money. 

Saving accounts have an interest rate associated with them, but in today’s age, the interest rate is typically below 1%. Said differently, the bank will pay you less than $1 for every $100 you have in your savings account. 

Why is this a bad thing?

Inflation tends to grow at a faster rate than the interest rate you’re getting in your savings account. Many financial experts would agree there is such a thing as having too much money in a savings account. If you have too much money in your savings, you’re missing the opportunity to earn a return on it. The bank will pay less than 1% to have your money in savings, however, a safe investment may pay 5%. That delta is lost profit! 

How Many Savings Accounts Can I Have?

Even though there isn’t a limit on how many savings accounts you can have, more accounts may be more challenging. 

How Many Savings Accounts Should I Have?

Unfortunately, there isn’t a one size fits all approach here. You need to find a system that helps you manage your money and hit your goals. A common approach would be 3 accounts, each serving a unique purpose.

Account 1: Emergency account. Having $1,000 – $2,000 in an emergency reserve account can help keep you out of debt. If your car broke down or you had a medical expense, this account can help manage the emergency. 

Account 2: Living Expense Reserve. Depending on your career, goals, and lifestyle, you should have X number of months saved in cash reserves. Some financial experts recommend having a minimum of 3 months of living expenses saved up. Whether as, others recommend having 6 month cash reserve. This reserve is designed to maintain your quality of life for a specific number of months if you had no income. 

Account 3: Goals. Perhaps you want to take a family vacation, or put a pool in your backyard. If you have a goal that requires money to achieve, having an account dedicated to this goal is a good idea. 

Types of Bank Accounts

Whether you use an online bank, a local bank, or a credit union, there are a variety of account options available.

Checking Accounts

A checking account is quite different from a savings account for numerous reasons. 

What Is a Checking Account? 

First, let’s look at what a checking account is. A checking account is an account where owner can deposit money, write checks, spend money, or withdraw cash. 

How Does a Checking Account Work? 

More often than not, a checking account is funded through one’s paycheck. They either allocate all, or part, of their paycheck to be deposited into this account. Once there is money in the account, the account owner can start using it to pay for various life expenses. 

Benefits of Checking Accounts

There are numerous benefits to using a checking account. These benefits include:

  1. You no longer need to carry cash. Because of this, you will have access to all the money in your checking account. This access is granted through a secured pin-protected debit card. 
  2. You can enroll in direct deposit and have your paycheck automatically deposited in such an account. 
  3. Various bills can be paid through the checking account, as long as the funds amounts can be covered. For example, instead of remembering to pay for the cable bill on the 12th of each month, the cable company can automatically charge your account. 

Downsides of Checking Accounts 

Despite the benefits of a checking account, there are some downsides. These downsides include:

  1. It’s easy to spend money. When you swipe your debit card to pay for something, you do not physically see the money leaving your account. Whereas, if you paid for something in cash, you can physically see the exchange of currency. Debit cards can lead to an increase in discretionary spending. 
  2. Some banks have fees on their checking accounts. If your account balance dipped below their acceptable minimum balance, you may get hit with a fee. 
  3. Little to no interest. Checking accounts earn little to no interest. If you keep a large amount of money in a checking account, chances are that money is not growing at the same rate of inflation. 

How To Open a Checking Account 

Opening a checking account is easy! If you visit your local branch you can open an account in just a few moments. You can even open checking accounts online! You’ll need to provide 1-2 forms of identification, and the initial deposit, typically $25 – $50, and you’re good to go! The bank may issue you a temporary debit card on the spot, or it may take a couple weeks to get your permanent debit card. 

Traditional Savings Account

Now that we went over a checking account, let’s dive into a traditional savings account. 

What Is a Traditional Savings Account?

A savings account is another type of bank account you can set up at your bank or credit union. This is a secured account that typically earns interest. The interest on the account is low, therefore this is not an investment account. 

How Does a Traditional Savings Account Work?

You set up a savings account at a bank or credit union. The primary purpose of this account is to save money, whereas a checking account is used to pay for expenses. Money can be physically or automatically deposited in this account at the account owners will.

Benefits of Traditional Savings Accounts

Without question, a traditional savings account has numerous benefits. 

  1. Saving accounts are safe. Instead of keeping the money under your mattress, you can keep it secured at the bank which insures up to $250,000. 
  2. The money is out of sight and out of mind. If you are trying to save X amount of money, putting it in a savings account can help you do just that. You don’t need to link the savings account to any bill, so nothing will automatically withdraw money from the account. 
  3. You can save for various goals. If you want to save up to purchase a car, or take a vacation, you can create a savings account strictly for that purpose. 
  4. The money is still liquid and accessible. It is not tied up in a security that you can’t withdraw against for X number of years. Whenever you want, you can access all the money in the savings account – up to 6x per month. 

Downsides of Traditional Savings Accounts 

  1. Many banks have a minimum account balance. If the minimum balance isn’t met, you may get fined. 
  2. The interest rate is low. Keeping too much money in a savings account can cause you to lose purchasing power over time due to inflation. 
  3. There are withdrawal limits. You are only allowed to withdraw money out of this account six times per month. 

How to Open a Traditional Savings Accounts 

Opening a savings account is similar to opening a checking account. Visit your local banking branch or credit union, provide them with the required identification, and meet the minimum account balance. 

Money Market Savings Account

Although they are similar, a money market savings account differs from a traditional savings account. 

What Is a Money Market Savings Account? 

Generally speaking, a money market account pays a greater amount of interest than a traditional savings account. The interest rates in a money market account fluctuate depending on where the federal government sets them. 

How Does a Money Market Savings Work? 

The account owner deposits money into a money market account and the bank keeps the money secured. The bank will also pay interest on this money, which will be highlighted in the terms and agreement. The account owner can withdraw money from the account up to six times per month. 

Benefits of Money Market Savings Accounts 

A money market account has all the same benefits as a savings account, however, they typically earn greater interest. 

Downsides of Money Market Savings Accounts

Even though the interest rate is typically higher than a traditional savings account, it’s still not as high as other forms of safe investments. These investments include CD. 

How To Open a Money Market Savings Accounts

There’s no secret here, opening a money market account is just like opening a checking or savings account. Each bank may require slightly different forms or account balances, but you can get this account set up in just a few minutes. 

Certificates of Deposits (CDs)

Banks have some type of advertisement surrounding CD’s, but many people don’t fully understand what a CD is, or why they’d want one. 

What Is a Certificate of Deposit (CD)? 

A certificate of deposit, also known as a CD, is used by a bank or credit union. This is when someone gives the bank or credit union money, for a specific period of time, and receives interest on their money. 

How Do Certificates of Deposits (CDs) Work? 

Unlike a checking or savings account, where you can withdraw money numerous times a month — a CD does not have that luxury. Instead, the depositor agrees to give the bank their money for a specific period of time, and they are not allowed to withdraw this money without penalty. 

Benefits of Certificates of Deposits (CDs)

There are numerous benefits and reasons why someone would be interested in setting up a CD. 

  1. It’s a forced savings mechanism. Even though a savings account restricts the number of times you can withdraw money per month, it’s still rather easy to pull out your cash. A CD does not have this luxury, which forces people to save money. 
  2. The other main benefit is the interest rate on a CD is greater than the interest rates on any other savings accounts. If you know you won’t need the money for the duration of time the CD is, why not earn more interest on it? 

Downsides of Certificates of Deposits (CDs) 

The biggest downside of a CD is also one of its greatest benefits. You are not able to withdraw money against the CD, and if you do, you will get penalized with a fee. It’s impossible to predict all of your future financial needs, and sometimes an emergency happens that you weren’t prepared for. If your money is tied up in a CD, it may force you to make a financial decision that does not benefit you in the long run. 

How to Open a Certificates of Deposits (CDs)

Unlike a checking or savings account, there is more nuance with choosing the right CD. Firstly, you can open a CD at any bank, even if it’s not the bank you do your primary banking with. 

Secondly, CD’s have different terms and conditions. Find the CD that’s best suited for you. Perhaps you want a CD that’s 12 months long, or 60 months. 

Lastly, once you’ve decided where to open the CD, the terms and conditions of the CD, and how you’ll collect your interest payments — it’s now time to fund the certificate of deposit. 

High-Yield Savings Accounts

There are other saving account options available to you as well. 

What Is a High-Yield Savings Account? 

A high yield savings account is a savings account that earns a greater yield (or return) compared against a traditional account. 

How Does a High-Yield Savings Account Work? 

Similar to a traditional savings account, a high yield savings account works by the account owner depositing money in the account. This money incurs interest over time, and that interest is paid back into the account at the agreed upon interval. 

Benefits of High-Yield Savings Accounts

The main benefit of a high-yield savings account is the interest rate you’ll earn. Interest rates on high yield savings accounts are greater than the interest rates available on regular checking or savings accounts. 

Downsides of High-Yield Savings Accounts 

Despite the interest rate being greater than a checking or savings account, it’s still not enough to keep up with inflation. Additionally, these accounts typically come with a greater minimum deposit requirement, and can have higher monthly fees. 

How To Open a High-Yield Savings Accounts 

Setting up a high-yield savings account isn’t complicated. You can set this account up at your local branch or through various online banks. If you meet their requirements, you can have an account set up in minutes. 

Specialty Savings Accounts

Earlier in the article we discussed having a savings account for various goals. If you’re looking for a more nuanced and tailored savings approach, considering using a speciality savings account. 

What Is a Specialty Savings Account?

There are many different types of speciality savings accounts. These include:

Each account has its own nuance. Some provide  tax benefits, and others have high fees if you withdraw money against the account. The interest rate will vary by account. 

How Does a Specialty Savings Work? 

Each one of the accounts mentioned above works slightly differently. Depending on your goal, and saving duration, the account will have a tailored approach. It’s best to consult with a financial advisor to understand the mechanics of each account, and which account is best suited for you. 

Benefits of Specialty Savings Accounts 

Having specific accounts for specific goals is the greatest benefit these accounts provide. This will keep your money organized, and will allow you to dedicate a specific money of money each week or month to funding this account. Additionally, some of these accounts, such as a 529 college savings account, have various tax benefits. 

Downsides of Specialty Savings Accounts 

Some people don’t like having their money in numerous accounts because they cannot see how much money they have in the bank. Managing numerous accounts can be time consuming! Additionally, there can be large tax implications or fees if the account owner needed to withdraw funds from the given account. 

How To Open a Specialty Savings Accounts

Considering the various purposes each speciality savings account serves, there’s not a one size fits all approach to opening them. An HSA account can be set up through your employer, whereas a Roth IRA or traditional IRA can be set up through your local bank. 

What Are the Best Savings Accounts? 

We can all agree, saving money is a requirement, not a goal! But how you save money can differ per individual and goal. There are numerous saving account options available, and selecting the right one may feel a little overwhelming. 

The best way to hit your financial goals is to work with a professional financial advisor. Financial advisors exist to review your current financial situation, and your desired future financial situation. They’ll identify any gaps you may have, and will tell you the best way to bridge those gaps. Financial advisors can remove the complexity of the banking/finance world, and will get you on the right path!