Did you know that over half of Americans are unable to cover an unexpected $1,000 expense with savings? That means most people are living paycheck to paycheck, with little or no cushion for emergencies, let alone long-term goals. If you’re one of them, you might be wondering how to change that. How can you save more money and make it work for you?
Saving money is not only a smart financial move, but also a way to improve your quality of life. Having savings provides stability, opens doors to major milestones, and gives you options. It can also reduce stress, increase happiness, and boost your confidence. However, saving money is not easy for many people. Many people don’t know what types of accounts are out there, how they differ, and what they are best used for. Some people think that saving money means sacrificing everything they enjoy, or that they need a lot of money to start saving. These are false beliefs that can hold you back from achieving your financial goals.
In this guide, we’ll explore common savings account types, their features, and ideal uses. We’ll also show you how to earn the most interest on your hard-earned savings while keeping your money accessible for future goals. Whether you’re saving for a rainy day, a big purchase, or retirement, this guide will help you find the best savings account for your needs.
DEFINING KEY TERMS
First, let’s define a few key terms that banks use to describe savings accounts and their related features:
- APY or Annual Percentage Yield represents the total interest your account will earn in one year assuming compounding. This allows direct comparison of returns across account types.
- Interest compounds when it accrues on both your original deposits and previously earned interest. Compounding frequency impacts how quickly your money grows.
- Minimum balance is the lowest amount you’ll need to keep on deposit to earn interest and avoid monthly fees.
- Limitations reference how many withdrawals and transfers you can make monthly before incurring penalties.
Now, let’s explore the most common savings vehicles.
The rates listed in this blog were collected as of October 16, 2023. You can see current national averages by visiting the FIDC’s website. Please note that, “Savings and interest checking account rates are based on the $2,500 product tier, while money market and certificate of deposit rates represent an average of the $10,000 and $100,000 product tiers.”
TRADITIONAL SAVINGS ACCOUNTS
This first account type likely comes to mind when you think of savings. Traditional savings accounts provide flexibility to deposit and withdraw funds while earning a small amount of interest.
- Interest Rate/APY – . Rates are variable.
- Minimum Balance – Most banks don’t require one but may limit interest earning to balances over $300 – $500.
- Perks – Easy to open, no lock-up period for funds.
These accounts provide complete flexibility, making them ideal for:
- Building an emergency fund
- Accumulating savings for intermittent expenses like medical bills or car repairs.
- Setting aside funds you may need quick access to.
While traditional savings accounts are accessible, their returns are lackluster. Savers looking to maximize interest should consider other options.
HIGH-YIELD SAVINGS ACCOUNTS
High-yield savings provide the convenience of a savings account with amplified interest earning potential through higher rates – often 0.50% – 1.00% APY or more.
- Interest Rate/APY – High-yield accounts offer APYs of up to 5% or more, if you shop around.
- Minimum Balance – Typically there is a set minimum balance required to earn the highest APY.
- Perks – Higher returns while still allowing access to your money.
Banks incentivize larger deposit balances with higher interest rates. In exchange, you’ll need to maintain significantly higher minimum balances. Uses for high-yield savings include:
- Building an emergency fund quickly.
- Accumulating larger savings like a house down payment.
- Maximizing returns on excess cash not needed for daily spending.
Pro Tip: Compare offers from multiple banks and credit unions when choosing a high-yield savings account. Look for the highest APY with the lowest minimum balance requirement.
MONEY MARKET ACCOUNTS
Money market accounts offer an attractive blend of savings account convenience with returns closer to short-term investment vehicles.
- Interest Rate/APY – These accounts provide similar returns to high-yield savings accounts, averaging around 0.65% APY currently.
- Minimum Balance – Money market accounts require heftier deposits to start earning interest.
- Perks – Combine savings account cash availability with investment account-esque interest.
With easy access plus slightly amplified rates compared to basic savings, good fits include:
- Parking cash for frequent or upcoming expenses like medical bills.
- Maintaining your emergency fund for quick access when needed.
Downside? Minimum balance requirements limit money market accounts’ utility for smaller savers.
CERTIFICATE OF DEPOSIT (CD) ACCOUNTS
CD accounts take a different approach by rewarding savers who commit to locking up funds for a set period. In exchange, they offer notably higher interest rates than other savings vehicles.
- Interest Rate/APY – Commonly 22% to 1.79% APY based on CD term length.
- Limitations – Early withdrawal results in financial penalties, negating interest upside.
- Perks – Top interest rates on short-term savings products.
CDs incentivize long-term commitments, making them advantageous when:
- Saving for known future expenses like a down payment due in twelve months.
- Building funds for a large purchase like a wedding or dream vacation.
- Earning higher returns on extra cash not needed for daily expenses.
Before opening a CD, determine when you’ll need access to the funds. Optimal uses line up with its maturity/term length.
Pro Tip: Take advantage of “CD laddering” by opening multiple CDs with staggered maturity dates. This provides access to some funds each year while ensuring you always have one CD earning the high, locked-in rates.
SAVING ACCOUNT LIMITS TO KNOW
It used to be that all deposit accounts had federal limits in place to protect financial institutions, but this is no longer the case. The Fed now allows for unlimited transfers and withdrawals from savings accounts, but individual financial institutions may still have limits in place.
Next, federal insurance protects deposit account balances up to $250,000 per person, per bank. This applies to combined savings, checking, CDs and money market funds.
For proper insurance coverage on large savings balances:
- Maintain less than $250K in any single institution.
- Open accounts at multiple banks to distribute funds.
- Joint account holders get separate $250K coverage (i.e., spouses with combined $500K insured).
MAXIMIZING SAVINGS ACCOUNT INTEREST EARNINGS
Now that you understand the account options, let’s discuss tips to maximize your interest earnings:
- Shop around – Interest rates and features vary widely across banks. Research accounts offering the highest APYs for each type of account.
- Increase your balance – The higher your average daily balance, the more interest you’ll earn each month. Make regular contributions and leave funds in longer.
- Prioritize compounding – Choose accounts with daily or monthly compounding rather than quarterly or annual. This increases your returns faster.
- Ladder CDs – Open multiple CDs with different maturity dates to always have one earning a high rate.
- Link to checking – Connect your savings to checking for easy transfers to maximize balances.
WHICH ACCOUNT IS RIGHT FOR YOU
Here are quick tips on choosing the optimal savings account for common goals:
- Emergency Fund – High-yield savings or money market to earn solid returns with quick access.
- Irregular Expenses – Traditional savings provides flexibility for medical bills, car repairs, etc.
- Down Payments/Big Purchases – CDs maximize interest when you know your timeline.
- Parking Cash – High-yield savings provides healthy returns on excess funds while keeping them liquid, a term used to describe if cash is easily accessible.
Don’t let your savings sit idle. Make them work for you! With the right savings approach, you can achieve your financial dreams and enjoy peace of mind even in today’s low-interest environment. Avoid settling for little to no interest by using the strategies in this guide. Remember these key points when opening and managing savings accounts:
- Shop around and compare APYs frequently. Account features and rates change often.
- Align account types with your specific access needs and timeline.
- Maximize returns through increased balances, smart compounding, and CD laddering.
Saving regularly is the first step, but if you’re already there, it’s key to start optimizing where you keep your hard-earned funds.
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