The Types of Savings Accounts: Which Is Right For You?

by Matt Bell on 6 August 2012 5 comments

Stashing money into a savings account isn’t a whole lot of fun, especially with today’s interest rates barely registering a pulse. However, we all need money set aside as an emergency fund and for short-term goals, so here are your options. (See also: 37 Savings Changes You Can Make Today)

Traditional Savings Account Options

In the past, when most people thought about places to park their savings, they thought about these four options.

Basic Savings Account

This type of savings account typically requires the least of you — just a small opening deposit and a low daily balance. In return, of course, it typically gives you the least. For example, Chase is currently paying one one-hundredth of a percent interest no matter what your balance. No, that isn’t a typo. On a $1,000 balance, you’ll earn a whopping 10 cents after a year.

Money Market Account

This type of account may require a bit more from you, such as a slightly higher opening deposit and daily balance. In return, it pays slightly higher interest, but we’re still talking about super small amounts. Sticking with Chase as an example, its money market account is currently paying five one-hundredths of a percent on balances below $10,000. Sure, that’s five times better than its basic savings account, but you’ll still only earn 50 cents on your $1,000 after a year.

Money Market Fund

This is a mutual fund, offered by brokerage companies such as Fidelity and Vanguard. Such funds usually have fairly hefty minimum initial investment requirements, such as $2,500 for Fidelity's Cash Reserves money market fund and $3,000 for Vanguard's Prime money market fund. While money market funds are typically very safe, they do come with some slight risk of loss since they have no FDIC protection.

You would think that with a higher opening balance requirement and more risk would come more return, and that has been the case with money market funds in the past. However, today’s money market funds are paying pretty much the same as the most basic bank savings accounts. In fact, Fidelity’s Cash Reserves money market fund is paying exactly what Chase’s basic savings account is paying, so right now there is no advantage to a money market fund.

Certificate of Deposit

CDs are less liquid than money kept in a savings or money market account since you usually have to opt for at least a one-year term in order to beat the rates offered by savings accounts. If you take the money out before the term is up, most CDs charge a fee equal to a number of months’ interest. While the interest rates on CDs are a little more favorable than savings accounts right now, they’re not much more favorable. Consider a CD only if you truly won’t need to access the money before the term is up. 

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Options for Better Rates

If you’re intent on earning a little more on your savings, here are some options to consider.

Online Banks

Their lower cost of doing business is one key reason why online banks are able to offer better interest rates. Bankrate.com lists some online banks offering one percent interest with no minimum balance requirement. After a year, a $1,000 balance would earn you a more respectable $10.

Most online banks are FDIC insured (but check to be sure), and some offer another key benefit for savers — the ability to specify goals for your savings. In most cases, you only need one actual account, but you can earmark portions of the money in the account for specific purposes such as an upcoming vacation.

Credit Unions

Because credit unions are not-for-profit organizations, they, too, usually offer better rates than brick-and-mortar banks. While membership is often restricted to employees of certain organizations, an increasing number of credit unions are loosening their membership requirements. The Credit Union National Association can help you find a credit union near you that you may be able to join.

High-Interest Checking Accounts

These accounts are all the rage right now since savings account interest rates are in the tank. Just be sure to read the fine print. You will probably have to use your debit card a certain number of times each month and maintain a relatively high minimum balance.

And here’s the main watch-out — keeping savings in a checking account can defeat the purpose. It’s just too easy to spend money sitting in a checking account. It’s usually better to keep emergency fund or short-term goal money in a separate savings account. 

While there isn’t much money to be made from your savings these days, keep in mind that the main benefits you need from a savings account are safety and accessibility. At least those benefits are still readily available.

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Guest's picture
Nancy

Savings accounts don't even keep up with inflation these days, so our savings actually lose value over time. I'm just about to buy some I-bonds (Individual Savings bonds issued by the US Government) because they pay a fixed interest rate plus an adjustment to cover inflation. Currently they are paying 2.20% through October 31, 2012. Minimum purchase is only $25. Downside is that, while you can cash them in after one year if you need to, you have to hold them for five years to get the maximum interest.

Guest's picture
Timothy

I don't bother with a savings account because the interest is so small at most banks now.

I have a checking account that I keep a few thousand in for convenient spending and paying bills. My checking account is through Chase because of their locations throughout the nation and excellent online resources. I also have my credit cards through chase so it keeps it all in one convenient place. I have a money market account I use for holding money I withdraw from larger investments.

Don't worry about that amount you keep circulating in and out of your checking. After someone has saved an amount they feel comfortable with as emergency funds they should seek higher paying investment options.

Guest's picture
take_flight

I personally keep my emergency fund and my youngest daughter's college savings in an online high-yield account. There is not enough money in my youngest daughter's savings yet to invest, so when there is enough it will be invested. I know interest rates are extremely low right now, but the interest still grows regardless. (Interest is "free" money after all.)

As far as my emergency fund goes, the same goes for the interest, plus it takes 2 days to transfer funds to my brick-and-mortar checking, so it's unlikely to be spent on something that's not a true emergency.

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NancyH

Thanks for your perspective. I especially like the idea of sequestering the emergency fund so it's less convenient to tap into.

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LD

I think money market accounts have a lot of benefits that people don't know about, including the ability to write checks while earning a decent return on their money.