Since childhood, we’ve all been taught that a healthy savings account is the cornerstone of financial security. But if you’re new to saving, the sheer variety of accounts can be a little intimidating. Whether you’re putting money away for retirement, education, or just a rainy day, it’s important to choose the right account for your needs. Here are the most common types of savings accounts and how they can work for you.
Regular Savings Accounts
Interest rates are not very high on the traditional savings accounts, but a it offers the greatest flexibility in how much you save and when you can make transactions. This it is the best choice if you’re saving to cover emergencies and need access to your money on short notice.
Most banks don’t require much in the way of a minimum deposit or minimum balance. Some can be opened with just$5, making them ideal for savers just starting out. Also, a regular savings account generally doesn’t require a minimum balance. Small amounts can easily be transferred each month from your checking account to establish a painless, saving habit. The most important feature of a basic savings account is that you can withdraw your money whenever you need it.
Certificates of Deposit
A certificate of deposit account, or “CD,” is a savings account that offers a much higher rate of interest than a regular savings account. It’s a safe investment, with all deposits FDUC-insured, or insured by the NCUA if your account is with a credit union.
The catch? You must take out a CD for a fixed amount of time (a “term”) which can be anywhere from a month up to five or more years in length. If you need to withdraw money before the term is up, you’ll be subject to punitive fees. The minimum deposit to open a CD is usually a lot higher than a regular bank account. A traditional CD will require you deposit the full amount you wish to save at the beginning of the term, “locking in” an interest rate for the length of the CD.
This is a newer type of CD which allows a little more flexibility while retaining most of the benefits of a regular certificate of deposit. Differences can vary between institutions, but some popular options include:
- A one-time chance to “jump up” to a higher interest rate for the remainder of the term
- Freedom to add on to the account at various points in the life of the CD
- A limited number of penalty-free withdrawals of a portion of the principal.
- Access to a portion or all of the interest earned
These concessions usually come at the price of a slightly lower rate of interest, but you will still be earning significantly more than with a traditional savings account.
A money market account falls somewhere between a regular savings account and a CD in terms of flexibility and rate of return. Like a CD, a money market account will have a significantly higher minimum balance, but like a traditional savings account, you can withdraw money whenever you need it. Generally, a money market account is limited to between three and six withdrawals a month, with high fees assessed if you withdraw more often. The more you deposit in the account, the higher your interest rate. Interest is usually compounded daily and paid monthly. If you leave your money untouched, it can grow quickly. Money market accounts also allow for regular deposits to grow your nest-egg even faster.
As the “newest kid on the block,” e-savings accounts are attracting a lot of attention. Many e-savings accounts have no minimum balance, no fees, instant access, and an attractive rate of interest made possible by the lower overhead associated with an online-only account. It’s possible to link most of these savings accounts with a checking account, and some even offer ATM cards, making accessing your savings convenient. It sounds ideal, but it pays to do your research and look out for hidden penalties. Some no-fee e-savings accounts will not pay interest on any month where you make a withdrawal. On the other hand, impressive introductory and bonus interest rates are routinely offered to new e-savings account customers. If you’re savvy and are willing to move your money around, you can earn a very good return on your savings.
This article was written by Lana Cooper on behalf of Conestoga Bank. With locations across southeastern Pennsylvania, Conestoga Bank offers savings accounts in Philadelphia, including e-savings, CDs and money market options.