Types of Savings Accounts

Automatic savings features allow you to grow your savings without thinking about it. These accounts automate the process of transferring money to savings so your money grows on autopilot.

Here are some of the ways you might be able to save automatically:

• Recurring transfers from checking to savings
• Direct deposit
• Round-ups, which round up debit card transactions to the nearest dollar and sweep the difference into savings
• Bank-assisted savings, meaning the bank looks at your checking account and transfers small amounts to savings that you won’t miss

These money saving hacks can help increase your account balance, whether it’s weekly, bi-weekly, or monthly.

Who is it for?

• People who struggle to save regularly
• Those who want a hassle-free way to build savings

Pros

• Convenience: Automates savings without any manual effort.
• Consistency: Ensures regular savings deposits.
• Goal-oriented: Helps in achieving specific savings goals like a vacation or emergency fund.

Cons

• Potential for overdrafts: If not monitored, automatic transfers could lead to overdrafts in the checking account.
• Limited flexibility: May not suit those with irregular income.
• Minimum balance requirements: Some accounts may have minimum balance requirements to avoid fees.

A traditional savings account is the most basic type of savings account offered by banks and credit unions. These accounts provide a place to store your money while earning a modest interest rate.

Traditional savings accounts are straightforward. You deposit money, earn interest, and can withdraw funds when needed. However, the interest rates are typically lower than those of other types of savings accounts.¹

Who is it for?

• People looking for a simple, low-risk place to save money
• Those who prefer dealing with a physical bank branch

Pros

• Safety: FDIC-insured up to $250,000, meaning your money is protected if the bank fails.²
• Liquidity: Easy access to funds.
• Simplicity: No complex terms or conditions.

Cons

• Low interest rates: Typically offer lower interest rates compared to other savings options.
• Fees: May come with maintenance fees if minimum balances aren’t met.
• Inflation risk: Savings may not keep up with inflation if you’re earning a lower interest rate.

Online savings accounts are offered by online and traditional banks. What typically makes them unique is that you can only open them online, even if you’re dealing with a brick-and-mortar bank.

An online savings account functions similarly to a traditional savings account but with the added benefit of often having higher interest rates. Online banks may charge fewer fees as well.

You can access your money through online and mobile banking. Your bank may also give you an ATM card that you can use to deposit or withdraw cash.

Who is it for?

• Tech-savvy individuals comfortable with online banking
• Those looking for higher interest rates

Pros

• Higher interest rates: Generally offer better rates than traditional banks.
• Convenience: Accessible from anywhere with an internet connection.
• Low fees: Often have fewer fees and minimum balance requirements.

Cons

• No physical branches: Lack of in-person customer service.
• Withdrawal/deposit options: Typically limited to online and mobile banking.
• Dependence on technology: Requires reliable internet access and comfort with digital banking.

High-yield savings accounts offer interest rates significantly higher than traditional savings accounts. Compared to national average deposit rates published by the Federal Deposit Insurance Corporation (FDIC), high-yield savings account rates may be 10 times higher.¹

You’ll most often find high-yield savings accounts at online banks, though some traditional banks and credit unions offer them as well.

Who is it for?

• Savers looking to maximize interest earnings
• People comfortable with online banking

Pros

• High interest rates: Maximizes savings growth.
• FDIC insurance: Provides security for your money.
• Low fees: Often have minimal fees.

Cons

• Withdrawal/deposit options: Withdrawals and deposits may be limited to online and mobile banking.
• May require higher minimum balances: To earn the highest interest rates you may need to have a higher balance in your account than for other types of accounts.
• No physical branches: Customer service is primarily online or over the phone.

A money market account is another savings account example that’s worth a look. Money market accounts can offer a combination of savings and checking account features, including:

• Interest on balances
• Check-writing privileges
• ATM or debit card access

You can find money market accounts at online banks and traditional banks. Rates are usually higher with online money market accounts. Minimum deposit requirements may be higher for money market accounts vs. other types of savings accounts.

Who is it for?

• People looking for a blend of checking and savings features
• Those who maintain higher account balances

Pros

• Higher interest rates: Rates may be higher compared to traditional savings accounts.
• Check-writing/debit cards: Offers flexibility in accessing funds.
• Safety: Money market accounts are a secure place to keep savings.

Cons

• Higher minimum balance requirements: Money market accounts may require substantial balances to avoid fees.
• Transaction limits: Banks may cap you to a certain number of withdrawals per month.
• Potential fees: Can incur fees if balance requirements are not met.

A cash management account functions like a checking account but has the interest-earning potential of a savings account. It’s designed to provide liquidity and flexibility for managing cash.

Cash management accounts are typically offered by brokerage firms and online banks. You can link your cash management account to your brokerage account to hold funds that you plan to invest.

Who is it for?

• Investors looking for a liquid account to manage cash
• People wanting to combine checking and savings features

Pros

• High interest rates: Competitive rates on deposits.
• Liquidity: Easy access to funds with check-writing and debit card features.
• Integration: Often linked with brokerage accounts for seamless transfers.

Cons

• May not be FDIC insured: Not all cash management accounts offer FDIC insurance.
• Complexity: May have more complicated terms than traditional accounts.
• Potential fees: These accounts can include various fees if minimum balances aren’t maintained.

Student savings accounts are just what they sound like: Savings vehicles that are tailored for young adults and students.

You can find student savings accounts at online banks and traditional banks. These accounts often come with lower minimum balance requirements and reduced fees.

They aim to help students develop good saving habits and manage their finances effectively. Some banks may offer added benefits, such as special discounts or access to financial literacy tools when opening an account.

Who is it for?

• Students and young adults
• People looking for low-cost savings options

Pros

• Low fees: Reduced or no fees for students, up to a certain age.
• Low minimum balance: Easy to open and maintain.
• Educational resources: Often provides financial education resources.

Cons

• Limited features: May have fewer features compared to other accounts.
• Lower interest rates: Typically offer lower rates than high-yield accounts.
• Age restrictions: May have age limits for account holders.

Kids’ savings accounts are designed to help children learn about saving money and managing finances from an early age. They might earn a little interest or a lot, depending on the bank.

These accounts are jointly held with a parent or guardian and come with features that make saving fun and educational for kids. This type of savings account can offer an excellent introduction to basic financial concepts.

Who is it for?

• Children and their parents or guardians
• Families looking to teach kids about money management

Pros

• Educational: Teaches kids about saving and financial responsibility.
• Parental control: Parents can oversee and manage the account.
• Low fees: Generally come with minimal fees.

Cons

• Low interest rates: Typically offers lower interest rates.
• Limited access: May have restrictions on withdrawals.
• Parental involvement required: Parents need to manage and monitor the account.

A certificate of deposit (CD) account offers a fixed interest rate for a set term. Once your CD matures, you can withdraw your original deposit, along with the interest earned.

It’s not an untouchable savings account, since you could technically withdraw funds before the CD term ends. However, your bank may charge a penalty for early withdrawals.

CD accounts are best for individuals who can lock away their money without needing immediate access. The longer the term, the higher the interest rate usually is, though it varies by bank.

Who is it for?

• Savers looking for a higher interest rate and willing to commit their funds
• People with long-term savings goals

Pros

• Higher interest rates: Better returns compared to regular savings accounts.
• Predictable returns: Fixed interest rate for the term.
• FDIC insurance: Ensures your money is safe.

Cons

• Early withdrawal penalties: Penalties for withdrawing funds before the term ends.
• Lack of flexibility: Funds are locked for the duration of the CD term.
• Inflation risk: May not keep up with inflation if rates are low.

Individual Retirement Accounts (IRAs) are tax-advantaged savings accounts that are designed with one goal in mind – saving for retirement. There are two types of IRAs to choose from:

• Traditional IRAs, which are funded with pre-tax dollars and allow for tax-deductible contributions
• Roth IRAs, which are funded with after-tax dollars and allow you to make qualified withdrawals tax-free³

You might open an IRA at a brokerage to supplement the money you’re saving for retirement in a 401(k) or to replace one if you don’t have a retirement plan at work.

Unlike other savings accounts, IRAs are subject to annual limits on contributions. Income limits apply when determining who can contribute to a Roth IRA.

Who is it for?

• People saving for retirement
• Those looking for tax-advantaged savings options

Pros

• Tax benefits: Offers tax advantages to encourage saving.
• Retirement focused: Designed to help you save for retirement.
• Wide investment options: Can invest in various assets.

Cons

• Contribution limits: Annual limits on how much you can contribute.
• Withdrawal restrictions: Penalties for early withdrawals.4
• Complex rules: Requires understanding tax implications and rules.

College savings accounts are designed to help you set aside money for education expenses. There are a few options for college savings, including:

• Coverdell Education Savings Accounts (ESAs)
• 529 college savings plans
• Prepaid tuition plans

These accounts provide targeted benefits and tax advantages for education savings. Coverdell ESAs are meant to be used for higher education, while the IRS allows some flexibility in using 529 plans for elementary or secondary education expenses.⁵^,⁶

Who is it for?

• Individuals with specific savings goals
• Those looking for tax advantages for certain expenses

Pros

• Targeted savings: Helps save for a specific goal.
• Tax benefits: Withdrawals for qualified education expenses are tax-free.⁷
• Flexibility: Can be used for a variety of education costs.

Cons

• Usage restrictions: Funds must be used for specific purposes.
• Contribution limits: May have limits on how much you can save.
• Complex rules: Requires understanding of specific regulations and qualifications.

Health Savings Accounts (HSAs) are designed for individuals with high-deductible health plans (HDHPs) to save for medical expenses.

HSAs offer triple tax benefits:

• Contributions are tax-deductible
• Earnings grow tax-free
• Withdrawals for qualified medical expenses are tax-free

Similar to IRAs, HSAs have annual contribution limits. Both you and your employer can contribute to your account, but the total amount cannot exceed the annual contribution limit for your plan type.⁸

Who is it for?

• People with high-deductible health plans
• Those looking to save for medical expenses

Pros

• Tax benefits: Contributions, earnings, and withdrawals are tax-advantaged.
• Flexibility: Funds can be used for a wide range of medical expenses.
• Portability: Remains with you even if you change jobs.

Cons

• High-deductible requirement: Must have an HDHP to qualify.
• Contribution limits: Annual limits on contributions.
• Usage restrictions: Can only be used for qualified medical expenses.

Choosing the right savings account depends on your financial goals, lifestyle, and preferences. Doing your research can help you narrow down the possibilities when deciding where to save.

Consider these steps:

1. Assess your goals: First, determine what you’re saving for—emergencies, retirement, education, etc.
2. Evaluate interest rates: Compare the interest rates offered by different types of savings accounts.
3. Check fees: Look for accounts with minimal or no fees.
4. Consider accessibility: Decide how often you need access to your funds and what methods (online banking, mobile banking, ATMs, etc) you prefer.
5. Understand terms and conditions: Read the fine print to avoid surprises.

You might be wondering what the point of a savings account is if you already have a checking account. If you don’t have a savings account yet, there are several reasons to consider opening one.

• Protect your cash: Savings accounts are FDIC-insured, protecting your money up to $250,000.¹ That means in the unlikely event that your bank fails, you won’t lose all your money. A savings account at a bank is also a more secure place to keep your cash instead of under your mattress.
• Earn interest on your money: Savings accounts offer the benefit of compounding, meaning you earn interest on your interest. The higher your savings account rate, the more room your money has to grow.
• Encourages good money habits: Having a separate account for savings helps prevent unnecessary spending. It also gets you into the habit of transferring money from checking to savings regularly.
• Prepare for emergencies: Approximately 54% of Americans have a three-month emergency fund, which means nearly half the population is financially unprepared for the unexpected.⁹ Having a rainy day fund can help you cover life’s curve balls without having to resort to using credit.

Savings accounts can help you get ahead financially and fund your big and small financial goals. Familiarizing yourself with the various types of savings accounts is a good place to start if you’re ready to take charge of your money.

If you’re looking for ways to supercharge your savings, you might try a money challenge or implement some spending rules. Learn how the 30-day saving rule can help you cut out impulse buys.