HOW DO I CHOOSE A SAVINGS ACCOUNT?

Did you have a savings account as a kid? You probably at least had a piggy bank to save your birthday money or allowance. Maybe your parents opened an account for you at their bank so you could deposit your piggy bank money or your birthday money. Savings accounts are places to keep your money for a long period of time for a specific purpose. That purpose may be to pay for a vacation in the future, to buy a car, or to save for college. You might even need a savings account for longer term goals, like retirement or buying a home someday. Savings accounts through financial institutions offer interest on your money, depending on your balance. This is called APY (Annual Percentage Yield) and can vary from bank to bank, from time period to time period. Sure, you can keep adding money to your piggy bank to save for a car, but wouldn’t you rather put that money somewhere that is harder to access and also earns a small percentage? Sounds great, but there are certain things you should look for first!

The first thing you should do is decide what your purpose is for saving money. There are long term and short term goals, and you should save appropriately for each. If you are putting money aside for emergencies, then you need to be able to access that money as soon as you need it. You also have to decide for yourself what constitutes an emergency. Does your checking account get too low and you have to replenish it several times a month with your savings funds? Or do you plan on not touching it until you have a major repair to pay for? Different accounts will allow you to withdraw your money based on restrictions, so you have to understand your needs before you choose.

Most savings accounts are insured by the FDIC (Federal Deposit Insurance Corporation) for up to $250,000 per account per person. This makes putting your money into a savings account safe and reliable. You should definitely shop around different banks and different types of accounts before making a decision to make the most of your money, but most people I know just open a savings account with the same bank they have their checking account with and that is okay too. It makes it more easy to manage online and to transfer money when needed.

TYPES OF SAVINGS ACCOUNTS

1. The first type of savings account is the most basic traditional/regular savings account. This type of account can be used for long term or short term savings. Most banks and credit unions offer traditional savings accounts, which offer a low APY and usually a monthly maintenance fee. A smaller minimum deposit is generally required. Typically, you are allowed up to 6 withdrawals a month with a penalty if you go over. If you are someone who needs more access to your savings account, this might not be for you. These types of accounts are easy to open by either visiting your local branch or going online through your existing bank.
2. A high yield savings account is for people who want to earn a higher APY with less fees. Usually found through online banks, these accounts may or may not have access through ATM withdrawals. The APY can change at any time, so there might not be consistent growth with your money, but you will never lose your money (as you could with investments). Banks use compound interest instead of simple interest, which means you are earning money based on what you have each month after gaining interest, instead of just on the original amount. Some high yield savings accounts can be accessed just as often as a traditional savings account, making this option a good choice for emergency savings. The drawbacks are that usually you need a higher minimum deposit, maintain higher balance requirements, and pay monthly fees.
3. Money market accounts (MMA) can combine the features of savings accounts with those of checking accounts. With MMA’s you might be able to access your account through ATM/debit card withdrawals, as well as with checks. There may be limitations imposed on how often you can withdraw from your account, but there is also a higher interest rate earned than with a traditional account. A higher minimum deposit is often required, but a higher balance kept can reward you with higher interest rates. Monthly fees may be imposed, depending on your bank.
4. If you are putting a large sum of money away for an extended period of time, and you want that money to earn a high interest rate, a certificate of deposit (CD) may be for you. This type of savings is based on time, which means that you cannot access your money until the required time is up. This type of savings is good for large purchases later on (down payments on house) or for long term savings. Once the time is up (the CD matures), you can withdraw or roll it over into another CD. Online banks usually offer better interest rates than branch banking, but it is best to shop around to make sure. The longer you leave your money in, the better the rates will be. If you need to withdraw at an time before it matures, you will be forced to pay a penalty. The good news is there are no monthly fees. While some accounts (MMA’s for example) may change their APY depending on the Federal Reserve, CD’s offer a set interest rate.
5. If you are someone who is trying to save up enough money to invest in a retirement account or a brokerage, you may want to look into a cash management account. This isn’t a typical savings account, it just keeps your cash set aside to accumulate and gain a little interest before you invest it in something else. Your cash management account may offer you checking privileges like transferring funds and paying bills. This is the only type of account that is not guaranteed to be FDIC insured, so it may be risky, but you should weight the risk versus benefit for yourself.
6. Specialty savings accounts are the type you probably remember as a kid. These are, as the name implies, savings accounts for a specific reason. Kids savings accounts, custodial accounts, student savings, and Christmas clubs are all a specialty savings accounts. Also included as: 529 college savings, traditional and Roth individual retirement accounts, and HSA (health savings accounts). Oftentimes, these accounts come with restrictions about when and how often you can withdraw your funds.

As you can see, there is a lot to think about when it comes to savings accounts. If you think a savings account is right for you, look around, compare rates, and decide which approach works best for your needs. You do not have to limit yourself to one type of account, either. If you are trying to save for a long term goal, but also want money that can be easily accessed, then look into several types of accounts in several places. You want to always make your money work for you, so make sure you do your research and choose what’s best.

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