Types of Savings Account
Much as its name suggests, a savings account is for saving money, not withdrawing and spending it. It is better to have a savings account to save money, and a checking account to spend money. When choosing a savings account it is important to keep a few things in mind: look for the best interest rates you can find, and be wary of hidden fees. Every bank will have its own savings account policies and fees.
- Typical Savings Account: This account is nothing simple and relatively basic. It has some similarities to a checking account in the sense that you can easily withdraw money from it generally without any penalties. However, since this type of account generally requires very little of you, it will give you very little in return. In large banks, a typical savings account won’t build up any interest. You won’t have any ability to write checks and the opening balance may be a bit high.
- Money Market Account: Similar to the previous type of account, a MMA generally accrues more slightly more interest, but also costs you more. With an MMA there is usually a higher opening and daily balance fee. MMA’s also allow for check writing, but they limit the amount of withdrawals which can be made.
- Online Savings Account: This type of account goes hand in hand with online banking. Online banks cost less to run, hence they generally allow a higher interest to accrue on your money. You can check out the link here for a website which shows online bank rates on savings accounts. Something to look for is hidden fees, and make sure the online bank is FDIC insured. You never want to place your money in a bank, online or off which isn’t insured. Some online banks allow for earmarking of portions to save for large purchases or a vacation. The only downside to online banking is it may take 1 to 2 business days for money to be transferred and physically withdrawing from a bank isn’t an option.
- Certificate of Deposits (CD’s): No…not for music. This is a savings certificate which allows the owner to earn and collect interest upon its maturity date. A CD may gain interest for a period of 30 days or even five years on a fixed interest rate. CD’s are perfect for money you won’t be using for a long period. They allow you to lock away money risk free and watch it accumulate and grow. The only drawbacks are you can’t add or withdraw money from the CD without penalty fees or possibly losing any interest gained. A CD would be good for a high school freshman who puts aside money for their four years before using it upon graduation, or even moving the money to a new CD once the old one has matured. CD’s will also have a limit on how much money can be placed in it. Generally, you’ll want to place the maximum amount possible to accrue the most interest. A CD shouldn’t be considered however if you plan on using the money you would put into it.
I'm attaching below a pdf from TD Bank which gives you a visual of a Savings Deposit and Savings Withdrawal slip so that if you go to the bank to use a savings account, you'll know what to expect.
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Fees
You know the types of accounts, but what do you want to look for when choosing one from various banks? There are some things you want to look at and compare across the board for different banks and savings accounts:
- Monthly Fee: how much will it cost for you to maintain this savings account? You might want to compare this to how much interest you’ll make and determine if it’s worth it.
- Withdrawal/transaction limits: As mentioned in the types of savings accounts, some have limitations on withdrawals and transactions. MMA’s limit the amount of withdrawals, and online banking takes a few business days to transfer money. Hand in hand with limitations is the ease of transfers and withdrawals. Does your bank make it easy to transfer and withdraw or bog you down with fees?
- ATM fees: This is important to look for, especially if you plan on using ATM’s frequently. Depending on the amount of cash you want to be using and carrying, investigating how much a bank will charge you to withdraw from a savings is important. You’ll also want to consider the availability of ATM’s associated with your bank. If they are few and far between, then you probably won’t be using them very often.
- Opening & Minimum Balance: This may be one of the first things which catches your eyes. This is the balance necessary for starting the savings account. You may look at an offer to open a savings account and see that the Opening Balance is $1,000. This means you’ll need to put $1,000 in the account to get it up and running. Just as there is an opening balance needed to start the account, generally your bank will require a minimum balance within the account to keep it up and running.
- Interest Rate: This is relatively self-explanatory. The higher the interest rate, the more money you’ll accrue over time, the lower the interest rate, the less you’ll make over time. When looking at interest rates, there are two things to keep in mind/use. Firstly, how often does the bank compound interest? Is it annually, monthly, or daily? Here’s an example: Let’s say I have $1,000 and my bank compounds the interest annually, meaning once a year. That means the interest would be added to my account only once a year. So, if my interest rate is 1%, and the end of the year I will have $1,050. Now, let’s go back and say my bank compounds interest daily. At 1% with $1,000 I would accrue 14 cents by the end of day one. This may not seem like much, but on day two, the interest would build off of the $1,000 and 14 cents. Over time this money will grow, and by the end of the year you’ll have $1,051 and 27 cents. Still not a large amount, but given time it will grow. The interest compiled in savings accounts is much like delayed gratification. It requires patience and growth to show signs of benefit. If you're still confused about compound interest, check out the video below. If you want to determine how long it takes for your money to double or increase between interest rates, there’s a handy equation known as the “Rule of 72”. To understand how it works, check out the video bellow. After watching the video, try it out yourself.
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Remember, never look at each of these factors alone, group them together to make an informed decision. Creating a spreadsheet to compare these factors across banks is a great way to determine what is best for you. For an activity along these lines, head to the activity page.