Financial Planning

Types of Savings Accounts

Saving is essential to creating a strong financial framework for yourself. There is honestly no way around it. However, you do have a choice on where you save. There are a variety of options that exist so in this blog post we are going to discuss some of the most popular options you have, the pros and cons of each, and which I prefer. 

Note: This is discussing your options on where to store cash for short term uses or your emergency fund. ROTH IRA’s, brokerage accounts, etc. are investment accounts aimed at long term savings and not an option considered for this. 

Typical Savings Account at Bank 

Traditional savings accounts typically offer you the lowest amount of interest of all the accounts. However, the great thing about these accounts is that they offer liquidity meaning you can access the funds in the account whenever needed as long as you abide by the 6 transfers or withdrawals rule a month. 

One thing to beware of is that some traditional savings accounts have minimum requirements where you will be a charged fee every month you fall below that minimum. This fee can end up cancelling out any interest earned, so try and find an account without minimum requirements or do your best to not let you balance fall below it. 

Traditional savings accounts are also FDIC insured if the bank the account is at is FDIC insured. 

Pros = Liquidity, Ease of setting up, FDIC insurance (if bank is FDIC insured)

Cons = Low interest rate, Minimum requirements at times, Variable returns 

Money Market Account 

Money market accounts are basically a combination of a checking and savings account since you can get checks or a debit card to pay directly from the account. These accounts typically have higher interest rates and minimum requirements than traditional savings accounts and also abide by the limit of 6 transfers or withdrawals per month. However, some transactions like withdrawing money from an ATM do not apply. 

Money market accounts are also protected if they are held at a FDIC-insured bank or credit union. These should not be confused with money market mutual funds at Fidelity or Vanguard, those accounts are different. A money market fund is an investment that is sponsored by an investment fund company which leads to no guarantee of principle. A money market account is a type of interest-earning savings account offered by financial institutions.

Pros = Higher interest rate, FDIC insured (if bank is FDIC insured), Can pay directly from account, Liquidity, Ease of setting up

Cons = Higher minimum requirements, Fees for using checks, Variable returns

Certificates of Deposit (CD)

CD’s tend to come with high interest rates, but the catch is the money is not liquid. When you put your cash into a CD, you are agreeing to not take that money out until the CD matures. Common lengths of time are 6 months, 12 months, 24 months, or 5 years. The longer the time frame, the more interest you tend to receive. 

The length of the CD can create a problem for you if you end up needing before the expiration because you would have to pay a penalty to take the funds out before the CD matures. 

CD’s are also FDIC insured if they are held at a FDIC-insured bank or credit union.

Pros = High interest rate, Fixed returns, FDIC insured (if bank is FDIC insured), Range of timeframes, No fees as long as you wait until the CD matures

Cons = Lack of liquidity, Minimum requirements, Penalties for withdrawing early

High Yield Savings Account 

High yield savings accounts are very similar to traditional savings accounts except they come with higher interest, hence the name. Typically, high yield savings accounts are at online banks and offer somewhere between .6% and 2% interest per year. These accounts also offer liquidity and abide by the 6 transfers per month rule.

High yield savings accounts are also protected if they are held at a FDIC-insured bank or credit union. 

Pros = Higher interest rates, FDIC insured (if bank is FDIC insured), Liquidity, Ease of setting up

Cons = Variable returns, Can have minimum requirements

My Preference

For me, I prefer to take advantage of accounts that offer both liquidity and high interest rates. If 2020 has taught us anything, it’s that we have no idea what is going to happen in the next few months or years of our life, making liquidity a top priority.. Additionally, I want an account that offers the highest interest rate for my savings so I can try and keep up with inflation.

Let’s look at the difference between using a traditional savings account and a high yield savings account for your emergency fund of $25,000. 

Traditional Savings AccountHigh Yield Savings Account
Interest Rate.01%.6%
Interest/Year$2.50$150
Ending Value $25,002.50$25,150
Note: This is a hypothetical example using an average number for each account.

As you can see, if you chose to use a high yield savings account, you would end up gaining $147.50 more in interest. I don’t know about you, but I will take an additional $150 any time I can get it. That is a pretty big difference.

As you try to determine what is the best option for you, look for low/no fees, a competitive interest rate, liquidity, as well as FDIC insurance to back the account. As long as you do that, you are in a good spot, but make sure to earn some interest on your hard earned money so you don’t lose purchasing power due to inflation.

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