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A Guide to Savings Account Types
Jenius Bank Team9/5/2023 • Updated 8/21/2024
Understanding how different savings accounts work could help you level up your saving game.Are you looking to protect and grow your savings? Maybe you aren’t sure what account type is best for your plan and long-term goals? With all the savings products available, it’s important to understand the pros and cons of each and how different accounts could integrate into your saving strategy.While you may be familiar with traditional savings accounts available through banks and credit unions, they aren’t your only option. This guide is here to help you better understand which savings accounts and products may work best for you.
Key Takeaways
- Savings accounts are designed to help you save money and earn interest on the money you keep in the account.
- It’s always good to pay attention to the rate the account earns before opening it.
- Some savings accounts have restrictions on the number of withdrawals you can make each month; always read the fine print before opening an account.
What Are the Different Types of Savings Accounts?
There are many types of savings accounts available that could help grow your money over time, but they typically fall into the following categories: traditional, online, high-yield, and money markets.In addition, many choose to use certificates of deposit (CD)s and cash management accounts (CMAs). These are other savings vehicles that have similarities and differences from the typical savings account definition.Traditional Savings Accounts
Traditional savings accounts are the ones you’re probably most familiar with. They’re usually associated with the bank around the corner or the credit union in your town. Many people have one of these savings accounts tied to their checking account, making it easy to transfer money between the two. These accounts are typically best for people who want in-person access to their bank and value the ability to speak to a teller or personal banker as needed.Since traditional banks, by definition, have charters, deposits at these institutions are insured by the Federal Deposit Insurance Corporation (FDIC). Similarly, credit union deposits are insured by the National Credit Union Association (NCUA).Traditional savings accounts usually have rates (expressed as Annual Percentage Yield or APY) under 1.00%. In fact, the average APY on these accounts as of July 2024 is about 0.45%.1 These rates are significantly lower than other savings account types, so while your money may still grow in value, it will likely do so more slowly than it would in a high-yield savings account. To put this in perspective, let’s say you put $1,000 per month in an account for a year, and the account earns 0.45% APY. At the end of the year, you’d have roughly $12,024.73 including earnings.2 In a high-yield account with a 5.25% APY, after a year that same $1,000 per month would equal approximately $12,286.12 with earnings.3 The high-yield account would have earned over $250 more! It’s worth noting that these accounts may have withdrawal limits restricting the number of times you’re able to take money out of the account or the amount of money you may remove at once.4Online Savings Accounts
Online savings accounts are relatively new. They are typically offered by digital banks, which may not have physical locations. Accountholders access and use their funds digitally, through transfers on their smartphones or computers, rather than stopping by a branch in-person for a withdrawal. That said, ATM card usage is likely available to those holding a checking account.Online savings accounts became very popular during the pandemic5 and continue to grow in popularity as savings rates are favorable. Digital banks are likely to have less overhead because they don’t have branches, and as a result, they tend to have higher-than-average rates. When consumers open their online accounts through chartered banks, they also benefit from having their savings FDIC insured.6When considering online savings account options, watch out for neobanks and fintech companies. These organizations may look like regular or online banks, but they lack a bank charter. Deposits held in accounts at non-chartered institutions aren’t protected by FDIC or NCUA insurance, meaning you might not get your money back if the company goes under. Online savings accounts tend to work best for people who are more digitally minded. These folks enjoy electronic access to funds but don’t require cash in-hand as often and aren’t super interested in visiting a teller or personal banker in person.High Yield Savings Accounts
High-yield savings accounts (HYSAs) have a higher-than-average APY. These accounts may be available through traditional banks, but that is less common. Usually these accounts are offered online, through digital-only banks which means that most, not all, online savings accounts are also high-yield. But what distinguishes these accounts most is the rate, not the institution.High-yield rates can be more than 10 times the national average.7 Rates vary from bank to bank, but several digital banks offered rates of 5.00% APY or higher in July 2024.8These accounts may help you build your savings both in the short and long term. A high-yield savings account keeps your money liquid while still earning interest at rates higher than those of other savings products. A HYSA could also be used to boost your retirement savings. Say you’ve maxed out your retirement investment account contributions for the year, you could choose to put additional funds in a high-yield savings account.Money Market Accounts
Money market deposit accounts (MMDAs) have been around since the 1970’s, and they’re like a combination of a checking and savings account—you can write checks from the account and earn interest on the balance.By opening an MMDA, accountholders invest their balances into a pool of securities.9 The funds are typically FDIC or NCUA-insured and earn interest based on the performance of that pool of securities.10The average rate for money market accounts as of July 2024 is 0.66%.11 This is higher than traditional savings accounts, but lower than online accounts and high-yield accounts. As with other savings account types, banks may restrict the number of withdrawals you can make each month and may have minimum deposit requirements in place to open the account.It’s important to pay attention to the type of money market account you’re opening. MMDAs and money market mutual fund accounts are different. MMDAs are deposit products offered by banks and credit unions and have FDIC or NCUA insurance.12 Money market mutual fund accounts are investment accounts offered through investment or brokerage firms and don’t carry FDIC insurance.13Certificates of Deposit (CDs)
Certificates of deposit (CDs) are a type of savings product typically offered through banks and credit unions. Unlike other savings options, CDs effectively lock your money away for a specified period, known as a term. CDs tend to have terms ranging from 3 months to 5 years, and the longer your term, the higher your rate tends to be. Most likely, if you withdraw money during the term, you’ll pay a penalty. There are CD types that offer more flexibility, but usually that flexibility comes with a reduced rate benefit. Additionally, most banks have a required minimum deposit for CDs, meaning you need to have some savings on hand in order to open one.CDs tend to be ideal for people who don’t need their savings to be liquid, at least for a period of time, and are looking for a way to potentially maximize the return on their funds in a relatively safe way.Cash Management Accounts
Cash management accounts (CMAs) are a unique mash-up of savings, checking, and investment functionality. These accounts are usually offered through non-bank financial institutions and may include a checkbook, debit card, or both. They tend to serve as a central location for managing investment funds.Even though CMAs are offered by non-bank institutions, some are still able to provide FDIC insurance for deposit funds. They’re able to do this by working with multiple partner banks. Since CMA deposits may be larger, the non-bank institutions create a network for “extended FDIC protection,” meaning deposits may be covered above the usual FDIC $250,000 limit per depositor, per ownership category, per institution.14Some CMAs have a high minimum balance requirement, meaning they may not be an option for everyone. But these accounts tend to work for people who want to keep their money accessible and don’t want to open additional accounts through different institutions to access additional FDIC insurance.How to Choose the Right Savings Account
With many different account types available, choosing the right one for your needs can be tough. Here are a few key components to look for as you start your search:- Fees (minimum balance, excess transfer, etc.)
- Minimum balance requirements
- Transfer limits
- Monthly maintenance fees
- FDIC insurance
- Tiered rates depending on deposit amount
Final Thoughts
Building your savings is a smart financial move that could help make your long-term goals a reality, and opening a savings account may make it easier for you to achieve those goals.As you start to explore the different types of savings accounts, evaluate how you want to use the account and shop around for the one that will best meet those needs… and of course give you the highest return!Saving & CheckingMoney Management