Outside of a checking account, a savings account is one of the most basic services that a bank provides. It’s a virtually risk free, FDIC insured account for stashing money.
It provides a good vehicle for short or mid-term goals, like saving for a vacation, or establishing an emergency fund. There are several different types of savings accounts available, and to choose the right one for you, it’s important to understand the function of each.
1. Regular savings account
This type of account is one that almost all banks offer. It’s a no frills, simple place to store and save money. It’s similar to a checking account, in that if you need your money it’s available for immediate withdrawal, most of the time without penalties.
However, you won’t have check-writing abilities, and it might come with a higher opening balance. This account is sometimes called a statement savings account, or a normal savings account. You can add or withdraw funds at your own discretion, but this account tends to have a very low interest rate.
2. Money Market deposit account
This account can be used like a regular savings account, with a few differences. It normally has a minimum daily balance requirement, and only a certain number of withdrawals are allowed per month. Many accounts have check-writing abilities but also a small monthly fee charged to them. The interest rate is higher than a regular savings but less than an online savings.
3. Online savings account
This type of savings deals exclusively online by internet access (and sometimes over the phone). You won’t have any monthly fees to pay, there’s no minimum balance and normally you have an unlimited amount of transactions.
Even with the best online savings accounts, it can, however, take 1-2 business days for your money to transfer between accounts, and you won’t be able to withdraw your money using a teller or a physical bank branch.
Since the company doesn’t have to pay for a building or overhead costs, this account generally has a very good interest rate. This is a decent account to use, if you want to make a few dollars on money you don’t need instant access to your money.
4. Certificates of Deposits (CD’s)
Sometimes called CD, a certificate of deposit is a savings certificate giving the owner the right to earn and collect interest upon the maturity date. The maturity date and term can be set anywhere from 30 days to five years, with a fixed interest rate.
This is a great vehicle for saving money you will not be touching for a certain time period. You can lock in one of the best interest rates, with no risk, and watch your balance grow. A couple drawbacks are that you can’t add more money or withdraw funds without paying penalties and possibly forgoing the interest already earned.
Keep in mind that a savings account is just that; for saving money!
It’s not particularly geared towards producing decent income or increasing your investment. It’s a simple account, used as a means to an end.