There are many types of savings accounts. Money market accounts can earn higher interest rates than traditional savings accounts. But CDs can often earn even higher rates. However, there are pros and cons to each type of account that goes beyond interest rates. Here’s what to know before you deposit your money.
If you have questions about how your savings account fits into your overall financial plan, consider working with a financial advisor.
High-Yield Savings Accounts
High-yield savings accounts are similar in many ways to traditional savings accounts and have many of the same advantages, including FDIC insurance on balances up to $250,000.
As their name suggests, high-yield savings accounts pay interest rates higher than traditional savings accounts. Interest rates change frequently, but generally, that equates to 10-20 times higher interest rates.
Other than interest rates, the biggest difference between high-yield savings accounts and traditional savings accounts is the presence of bank branches. Those that offer traditional savings accounts typically have them, while those with high-yield savings accounts don’t.
The latter is generally offered by online-only banks, and their lack of branches allows them to cut costs and offer better rates to their customers. However, the two are otherwise similar in most ways.
High-yield savings accounts, which at time of writing offered annual percentage yields above 4%, usually have a monthly transaction limit (typically six per month), and they often don’t have ATM access or check-writing privileges. Still, customers can access their money whenever they need it by transferring money electronically.
Money Market Accounts
Money market accounts are another type of saving product that offers higher interest rates than checking accounts and traditional savings accounts. The FDIC also insures balances up to $250,000.
In addition, these accounts sometimes have features like mobile check deposits and ATM withdrawals. Like high-yield savings accounts, there may be limits on the number of monthly transactions.
The best money market accounts generally have interest rates 10-20 times higher than traditional savings accounts. While some require a minimum deposit, several allow you to open an account with $0 to start.
However, some money market accounts may charge fees for maintaining a low balance or making too many withdrawals. Check the fine print and make sure you understand the terms before opening an account.
Certificates of Deposit (CDs)
Certificates of deposit (CDs) are another type of savings product that offers higher interest rates than traditional savings accounts. CDs, which are FDIC-insured, lock up your money for a certain period in exchange for a higher interest rate.
You will usually incur penalties if you want to withdraw your money before the end of the CD’s term. This makes CDs better for medium-term savings goals and for money you won’t need in the immediate future.
However, the best CD rates can be higher than rates on money market accounts or high-yield savings accounts, so keeping your money locked up could be worthwhile if you want the best rate. Plus, some CDs have no minimum to get started, so you can deposit as much as you want.
But unlike savings accounts, you often can’t make additional deposits to the account. Thus, they may not be the best choice if you don’t have a lump sum to deposit. Still, the interest rates CDs offer make them a good choice for those with funds to spare.
Comparing and Contrasting Savings Accounts
There are several things to keep in mind when deciding which type of savings account is right for you. Here are something things to keep in mind:
- Interest rates: If you want to earn a return on your money, interest rates are the first thing to check. High-yield savings accounts, money market accounts and CDs can all offer high-interest rates today, with CDs having some of the highest rates. However, CDs require you to lock up your money for a certain period.
- Fees: Some banks or credit unions might charge you maintenance fees or a fee if your balance falls below a certain level. These fees can eat into your earnings on the account, so it’s important to keep them in mind.
- Minimum balance requirements: High-yield savings accounts, money market accounts and CDs can all have a minimum balance requirement to open an account, depending on the bank. Others might require a minimum balance to earn the highest interest rate.
- Liquidity: The ease of accessing your money may vary depending on the type of account and the bank. For instance, money market accounts and some high-yield savings accounts may allow you to write checks or withdraw money from an ATM. In contrast, CDs usually require you to leave your money alone until the end of the term.
Each type of savings account has its own set of pros and cons. The best choice will depend on your savings goals.
High-yield savings accounts, money market accounts and CDs can all have competitive interest rates that allow your money to grow. The best CDs offer some of the highest interest rates, but they require you to keep your money locked away to earn the best rate. Thus, it’s important to consider not only the interest rate but also factors like fees, minimum balance requirements and liquidity before deciding which type of savings account is best for you.
Tips for Opening a Savings Account
- A financial advisor can help you work through your banking needs and put together a plan that works for your unique situation. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- The best savings accounts pay some of the highest rates and often do away with costly fees. See SmartAsset’s list of the best savings accounts to find one that’s right for you.
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