Different types of savings accounts: Which is best for me?

Young woman in a cafe wondering which type of savings account to openImage: Young woman in a cafe wondering which type of savings account to open

In a Nutshell

If you want to open a savings account, you have different types to choose from. What makes sense for you depends on your needs and money goals. For example, you’ll want to consider how much access to your money you might need, and how quickly you want your savings to grow. And remember: You’re not limited to just one type of savings account — you can open a number of them to maximize the benefits.
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Deciding which type of savings account to open might seem overwhelming. But it doesn’t have to be — if you learn a few things upfront.

Three of the most common types of savings accounts you can use to store and grow your money are …

  • Deposit savings accounts
  • Money market accounts
  • Certificates of deposit, or CDs

In this article, we’ll explain these three types of savings accounts. And we’ll explain why it matters where you choose to open your account. Here’s what you need to know.

Types of savings accounts

A savings account is designed to earn you some interest with little or no risk. It’s a lot different from a checking account, which typically offers no interest but gives you easy access to your cash — or an investment account, which has more interest-earning potential but involves more risk.

Checking vs. savings accounts

3 main types of savings accounts

1. A deposit savings account is what most people think of when they think about opening a savings account. You can easily open one of these accounts with a small deposit at a bank, credit union or online alternative. While these types of accounts almost always pay you some interest, the interest rate can vary from one institution to the next. You’ll also want to pay attention to whether this account type has fees. Depending on the requirements to open your account, you may be charged transaction fees or minimum deposit fees among others — you’ll want to scope out an account with as few fees as possible.

2. A money market account is a savings account option that may pay a higher interest rate than a deposit account, depending on where you have the account. The catch is that these accounts generally require you to maintain a higher balance. There are other benefits with this type of account, though: You can write checks against your balance (which you can’t do with a deposit savings account) — though not as freely as with a checking account. Certain transactions including check-writing are limited to six per month. (Note that a money market account is different from a money market fund, which is a type of investment account.)

3. Certificates of deposit, often called CDs, require you to effectively lock your savings away for a set time. During that time, you can’t get the money out without paying a penalty in most cases. And when that time period ends, also known as the “maturation of your term,” your financial institution will typically reinvest your funds in a new CD for the same term unless you withdraw your money. Why consider tying up your money like that? Traditionally, CDs have offered the highest interest rates of any savings account type. Typically, the longer the CD term, the higher your interest rate.

You may also consider opening a high-yield savings account. This type of account may be available through your bank or credit union, or with an online provider. With high-yield savings accounts, you may have to pay monthly maintenance fees or maintain a minimum balance. But if you’re looking to earn the most interest on your savings, you’ll want to check out this account type.

Where you open your savings account matters, too

Where you save might be just as important as how you save.

Bank savings accounts

Traditional brick-and-mortar banks are one option.

While they typically pay lower interest rates and may charge higher fees, your account is always “liquid.” This means that you can access your funds at any time, either in person or by using ATMs — though you may be limited to a certain number of monthly transactions.

Traditional bank savings accounts are typically insured by the Federal Deposit Insurance Corp., or FDIC, for up to $250,000 per depositor, per insured bank, for each account ownership category.

Credit union savings accounts

Local, regional or national credit unions may offer a similar personal banking experience but also may offer slightly lower fees and/or slightly higher interest rates.

Since credit unions are nonprofit co-ops owned by their members, their focus is geared more toward their members and offering additional services.

With federal (and some state) credit union savings accounts, your funds are insured by the National Credit Union Administration, or NCUA. Up to $250,000 of your savings account will be insured with a participating credit union.

Online savings accounts

If in-person access to your money isn’t important to you, you may want to consider a savings account with a reputable online bank.

Online banks typically don’t have to pay to maintain large networks of branches, so you’ll often find that they don’t charge monthly maintenance fees.

Which savings account is right for me?

The type of savings account that’ll work for you comes down to your needs and financial goals.

Compare options for account type and where you want to have your account.

Looking for the highest interest rate and don’t care about accessing your money? A CD may be ideal. Prefer face-to-face interactions while earning a reasonable interest rate? A money market account at a local credit union may be the best option.

Keep in mind that you’re not tied to just one account type or location. If it makes sense for you, you can open multiple types of accounts with different institutions so that some of your money is more accessible and some is earning higher interest.

How much money do I need to open a savings account?

The amount of money you need to open a savings account depends on the account type you want to open — and where.

Most deposit accounts require a pretty small sum to start. Others call for a higher initial deposit and may also require a minimum daily balance.

To open an account, you’ll typically have to provide identifying information like your Social Security number or driver’s license number. Usually you’ll also give your address, date of birth and email address. If you plan to open a savings account linked to your checking account, having the routing and account numbers handy can make things smoother.

Keep in mind that a financial institution may require a hard credit inquiry as part of the process.

Hard and soft credit inquiries: What they are and why they matter

Alternatives to savings accounts

Not sure if a savings account is right for you? Depending on your money goals, you may find better options elsewhere.

If your primary goal is to set up an emergency fund, keeping some of that savings accessible is a good idea. During natural disasters, power outages could prevent you from getting cash out of an ATM and also keep vendors from processing credit card payments. In these cases, it’s always good to have some cash on hand.

But if you’re looking for growth, you’ll likely get a much better return by investing your money. Before opening an investment account, though, make sure you understand the risks and have a backup plan in case you unexpectedly lose value, especially over shorter time frames.

What’s next?

It’s always a good time to start saving.

How and where you save your money can make a big difference in whether — and how fast — you achieve your financial goals. Consider how your options can help you toward your goals, and select a savings account that fits.

If it turns out that a savings account isn’t the right path for you, explore other options, like using a checking account or investing the money, instead.

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About the author: Lance Cothern is a freelance writer specializing in personal finance. His work has appeared on Business Insider, USA Today.com and his website, MoneyManifesto.com. Lance holds a Bachelor of Business Administration in … Read more.