What is a savings account?
A savings account is a deposit account offered by a financial institution that earns interest and allows withdrawals. It is the most common type of bank account and probably the first type of account you’ll open or have opened for you by a parent. Many financial institutions such as banks or credit unions offer savings accounts.
Savings accounts are the most accessible and have higher liquidity.
Types of savings accounts
Basic savings accounts
These are the basic types of savings offered by many banks, credit unions, and online financial institutions. These accounts are easy to open, typically have small minimum deposit requirements, and earn interest. Deposit savings accounts have transactional monthly limits. Federal regulations limit electronic withdrawals or transfers to six transactions per month. Fortunately, in-person transactions do not count towards this limit.
Money market accounts
Money market accounts are like savings accounts but often have higher interest rates. But, they also have higher deposit minimums. A key differentiator is the ability to write checks against the balance of the money market account. Money market accounts are also limited to six electronic withdrawal and transfer per month including any checks written.
Certificate of deposits
Certificates of deposit tend to offer higher interest rates. They are abbreviated as CDs and may also be called timed deposits. This type of savings account locks your money with a maturation period. This period is often called a term. The term period can be from 30 days to 10 years. With certificates, you must meet the minimum balance to open the account, but can choose the term. Certificate terms can be broken but can incur fees.
Online savings accounts
Typically offered by online-only banks or financial institutions. These savings accounts may offer highly competitive rates compared to traditional banks and credit unions. Online savings accounts are offered by financial services companies that have little physical infrastructure reducing their operational expenses. This affords them the ability to pay more for your savings. Access to online savings accounts may require linking to a traditional banking account or direct deposit. Transactional limits of 6 per month may also apply due to federal regulations.
Alternative savings accounts
There’s a growing number of interest-bearing hybrid accounts with check-writing or debit cards. These accounts are offered by nonbanks or online brokerage firms. Alternative savings may also be called “spend and save” accounts or cash management accounts. These alternative savings may come with federal deposit insurance using an account sweep method. Read the terms to determine if these hybrid accounts is a good alternate savings account.
Are savings accounts federally insured?
Most savings account are used to save money as opposed to a checking account where funds are withdrawn often. Savings accounts are also insured by the FDIC (for FDIC banks and the NCUSIF for credit unions). Verify if your financial institution is associated with these government agencies.
