Which Type of Savings Account is Right for You?

When planning your financial future, saving money can be the foundation of a successful strategy. In order to choose the best savings account for your goals, it’s important to understand what each account can offer.

 As part of our "M is for Money" content series, here’s some information to help you decide which savings account is right for you:

1. Traditional savings account

As one of the most common and versatile options for saving money, traditional savings accounts can be useful for day-to-day or long-term financial planning.¹ Available at most banks and lending institutions, these accounts typically offer a low interest rate but more flexibility than other savings alternatives.² However, if you need to withdraw money, you can make up to six transactions per month before the bank or lending institution can charge fees, convert it to a checking account or close the account altogether.³

Here are some potential advantages and disadvantages of a traditional savings account:

Advantages

• Low or no cost to open
• Up to six transactions per month with no penalty
• Up to $250,000 insured by FDIC⁴
• Potential to connect directly with checking account

Disadvantages

• Low interest rates
• Potential for monthly fees
• Opening balance requirement
• Minimum balance requirement

Conclusion

If you’d like a simple and straightforward place to save your money, a traditional savings account could be your best option.

2. Money market account

Money market accounts are similar to traditional savings account but vary in a few ways. For example, both accounts provide access to your funds but money market accounts allow you to use checks and debit cards.⁵ This can be especially useful if you plan to use the account for an emergency fund. And while interest rates are typically higher with money market accounts, the reason is usually due to the higher opening and minimum balance requirements.⁶

Here are some potential advantages and disadvantages of a money market account:

Advantages

• High interest rates
• Access to funds via check and debit card
• Up to six transactions per month with no penalty
• Up to $250,000 insured by FDIC⁷

Disadvantages

• High opening balance requirement
• High minimum balance requirement
• Monthly fees
• Interest rate fluctuation

Conclusion

If your primary goal is to gain interest on your money, but you’d also like the ability to make a withdrawal if necessary, a money market account could be a great option.

3. Certificates of deposit (CDs)

Certificates of Deposit offer a different approach to saving money. Instead of an account format, CDs are a one-time deposit in the form of a promissory note, or certificate.⁸ The amount and maturity date are up to you, but CDs with more money and longer terms could be assigned higher interest rates.⁹ Once the CD matures, you can withdraw the entire principal balance and interest earned.¹⁰ If you choose to withdraw money before the maturity date, you will most likely incur an early withdrawal penalty.¹¹

Here are some potential advantages and disadvantages to Certificates of Deposit:

Advantages

• Fixed rates for a fixed term
• Low risk investment
• Up to $250,000 insured by FDIC¹²
• Up to seven CD options to choose from

Disadvantages

• Low interest rates
• Low liquidity
• Early withdrawal penalty
• Interest may not keep up with rate of inflation¹³
  

Conclusion

If you’d like to set aside a certain amount of money for a long period of time, CDs could provide a better return on investment than other savings accounts.

4. Online savings account

Although some brick-and-mortar banks offer free online access to a standard savings account, online-only banks conduct 100% of their business through their website. This may be a deterrent for customers who prefer banking at a physical branch, but the lack of operating costs is what allows online-only banks to offer higher interest rates.¹⁴ Also, the websites are often more advanced which could be an incentive for customers who prefer conducting their business online.¹⁵

Here are some potential advantages and disadvantages of an online savings account:

Advantages

• High interest rates
• Low fees
• 24/7 access to account
• Up to $250,000 insured by FDIC¹⁶

Disadvantages

• No physical branches
• Limitations on making deposits
• Technical issues could limit access to money
• Documents requiring a signature must be mailed

Conclusion

If you favor the convenience and accessibility of the internet over physical branches, an online savings account could be what you’re looking for.

The choice is yours

The decision of where to save your money can depend on a variety of personal preferences. We hope this article helped you compare and identify which type of savings account could be right for you.   

1. Rubin, Michael. “The Advantages of Having a Traditional Savings Account.” TheBalance.com.https://www.thebalance.com/the-advantages-of-having-a-traditional-savings-account-2894337 (accessed May 19, 2017).
2. Rubin, Michael. “The Advantages of Having a Traditional Savings Account.”
3. Murakami-Fester, Amber. “Savings Account Withdrawal Limits? Blame Reg D.” Nerdwallet.com. https://www.nerdwallet.com/blog/banking/how-regulation-d-affects-your-savings-withdrawals/ (accessed May 19, 2017).
4. Murakami-Fester, Amber. “Savings Account Withdrawal Limits? Blame Reg D.”
5. Marquit, Miranda. “Personal Banking 101: Money Market Accounts.” DepositAccounts.com.
https://www.depositaccounts.com/blog/personal-banking-101-money-market-accounts.html (accessed May 19, 2017).
6. Radcliffe, Brent. “Money Market Account.” Investopedia.com.
http://www.investopedia.com/terms/m/moneymarketaccount.asp?lgl=myfinance-layout (accessed May 19, 2017).
7. Murakami-Fester, Amber. “Savings Account Withdrawal Limits? Blame Reg D.”
8. Investopedia Staff. “Certificate Of Deposit - CD.” Investopedia.com. http://www.investopedia.com/terms/c/certificateofdeposit.asp?lgl=myfinance-layout (accessed May 19, 2017).
9. Investopedia Staff. “Certificate Of Deposit - CD.” Investopedia.com.
10. Ibid.
11. Ibid.
12. Murakami-Fester, Amber. “Savings Account Withdrawal Limits? Blame Reg D.”
13. Amadeo, Kimberly. “Certificates of Deposit: Pros and Cons.” TheBalance.com.
https://www.thebalance.com/certificates-of-deposit-3305913 (accessed May 22, 2017).
14. Vohwinkle, Jeremy. “Pros And Cons Of Online Banks.” TheBalance.com.
https://www.thebalance.com/pros-and-cons-of-online-banks-1289898 (accessed May 22, 2017).
15. Vohwinkle, Jeremy. “Pros And Cons Of Online Banks.” TheBalance.com.
16. Murakami-Fester, Amber. “Savings Account Withdrawal Limits? Blame Reg D.”