Types of savings accounts
When you’re trying to save money, it helps to know the right savings account to use. Most banks offer three main types. The sooner you start saving, the more your money will earn in compound interest.
Regular savings accounts
Interest and quick access to funds
A savings account earns interest — unlike many checking accounts — and provides easy access to your money, but you’ll want a checking account for everyday spending. In fact, per a federal regulation, you can use certain methods — such as online banking — to withdraw or transfer money from a savings account six times per month. There are no federal limits on some other transfer or withdrawal methods, including in-person requests at a branch.
» MORE: Best savings accounts
Money market accounts
Better rates with higher balance requirements
Money market accounts tend to pay higher rates than savings accounts, but they typically require a balance of $1,000 or more to avoid monthly fees.
Unlike savings accounts, money market accounts might come with the ability to withdraw money with a check or debit card. You’ll still have the six-per-month limit on certain kinds of withdrawals.
» MORE: Best money market accounts
Certificates of deposit
Top rates, but limited access to funds
CDs tend to pay the highest interest rates of the three accounts.
But there’s a catch: You must agree not to withdraw the money in your CD for a certain amount of time, called a “term.” If you take your money out early, you’ll likely pay a fee.
CD terms typically range from six months to five years. The longer the term, the better the interest rate. Institutions also offer higher rates for large deposits.
CD LADDERING: HEDGING YOUR BETS
A practice called “CD laddering” can help you take advantage of long-term CD rates while providing better access to your funds. Here’s an example of how it would work with three CDs:
- Put part of your money — say, one-third of the total — into a one-year CD, another third into a two-year CD, and the rest in a three-year CD. The CDs with longer terms should earn more interest.
- When your first CD matures after a year, open another three-year CD. Or you could collect your money if you need it.
- You’ll have the same decision to make each year, as long as you keep opening three-year CDs.
The bottom line
- Regular savings account: earns interest and offers quick access to funds
- Money market account: typically earns more interest than a regular savings account in exchange for higher balance requirements; some provide check-writing privileges and ATM access
- Certificate of deposit: usually has the highest interest rate among savings accounts and the most limited access to funds
Different kinds of savings accounts are designed for different purposes, be it ease of access or long-term savings.
The better you understand each option, the more easily you can make the best use of each.