Since the early 1800s, Americans have been depositing money in dedicated savings accounts. Now, of course, savers in the U.S. enjoy a number of options for storing money — everything from a traditional savings account and a certificate of deposit to a money market account.
Here’s an overview of the types of savings accounts available, including the pros and cons of each kind.
Traditional Savings Account
A traditional savings account is the most basic type of savings account. You can open one of these interest-bearing accounts at a bank or credit union. You might set up a traditional savings account to create an emergency fund, accumulate cash for a down payment on a car or put aside money for a vacation.
Who it’s best for: Someone who wants easy access to cash for basic needs and isn’t focused on earning interest.
Pros
— Potentially low amount required for an initial deposit
— Generally no restrictions on when you can withdraw money
— Deposits generally insured by the FDIC or NCUA up to a certain dollar amount
Cons
— Low interest rate
— Possible minimum monthly balance required
— Potential monthly fees
[Read: Best Savings Accounts.]
High-Yield Savings Account
offer annual percentage yields that are well above the national average for all savings accounts. The FDIC reports the national average rate for all savings accounts is 0.39% as of April 2023. Meanwhile, you can find high-yield savings accounts with interest rates as high as 5%. A high-yield savings account can be opened at a bank or credit union.
A high-yield savings account may be ideal for goals like establishing an emergency fund or racking up interest on surplus cash.
Who it’s best for: Someone who wants to achieve short-term financial goals and earn a high APY.
Pros
— Higher APY than average savings accounts
— Potentially no monthly fees
— Deposits generally insured up to a certain dollar amount
Cons
— Historically lower returns than some other investment options, such as stocks
— Potentially high minimum balance required to earn a higher APY
— Possible fees for exceeding monthly withdrawal limits
[See: Best High-Yield Savings Accounts]
Certificate of Deposit
A certificate of deposit allows you to deposit money for a set period of time, such as six months or five years, and earn interest on the money. When you cash in a CD, you get back your original deposit plus interest. The APY is fixed, so it remains the same for the entire CD term. This is a positive when interest rates are likely to fall, but negative when rates are likely to rise.
Banks and credit unions offer CDs. In most cases, average interest rates for CDs are higher than rates for savings accounts.
Who it’s best for: Someone who wants to reach short-term financial goals while earning interest on their cash for a fixed period and won’t need to access their money during that time.
Pros
— Potentially high APY (perhaps more than 5%)
— No monthly fees
— Deposits generally insured up to a certain dollar amount
Cons
— Limit on the number of deposits
— Penalties for early withdrawal of money
— Possible minimum balance required
[See: Best CD Rates]
Money Market Account
, available at banks and credit unions, are a cross between a checking and savings account. They typically have APYs in line with savings accounts, but you’ll also have check-writing capabilities. As of April 2023, the average national interest rate for a money market account was 0.57% — higher than the average rate for savings accounts but lower than the average rate for most CDs.
You might use a money market account to set up an emergency fund or save for a larger purchase like a down payment on a home.
Who it’s best for: Someone saving for a short- or long-term need who wants to earn a decent APY.
Pros
— Potentially attractive APY
— No penalties for withdrawing money
— Deposits generally insured up to a certain dollar amount
Cons
— Potential minimum initial deposit required
— Potential minimum monthly balance
— Potential monthly limit on withdrawals and transfers
[Read: Best Money Market Accounts.]
Cash Management Account
Cash management accounts are an alternative to savings accounts, CDs and money market accounts. Like other savings vehicles, cash management accounts pay interest. But there’s one big difference: Cash management accounts are nonbank accounts. In other words, investment advisory firms and brokerages typically offer these accounts instead of banks or credit unions.
Who it’s best for: Someone who wants to earn interest in an account that may offer access to debit cards and checks and can be linked to an investment account for easy fund transfers.
Pros
— Potentially attractive APY
— Combination of checking, savings and investment account features
— Less risky than investing in stocks and some other investment products
Cons
— Possible monthly fees
— Potential minimum monthly balance
— Deposit insurance more complicated than other savings products
Specialty Savings Account
Specialty savings accounts are designed for specific purposes rather than serving as places to hold money for general needs.
Who it’s best for: People with a savings goal for purposes ranging from health care and education to retirement and weddings.
Types of specialty savings accounts include:
— Health savings account: Holds pretax money to pay for qualified health care expenses
— Holiday shopping account: Covers holiday gift purchases
— Wedding account: Pays for wedding expenses
— IRA savings account: An interest-bearing account that provides a safe place to put money while enjoying the tax advantages of an individual retirement account
— Custodial account: Saves for children or grandchildren under age 18
— 529 plan: A state-sponsored, tax-advantaged account designed to cover education expenses for a beneficiary
— Summer savings account: Covers summertime expenses for school and college employees
— Senior savings account: For older customers who may receive benefits such as no monthly fees and no minimum balance
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Types of Savings Accounts originally appeared on usnews.com
