How To Choose the Best Savings Account

Banker meets with a client
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A savings account is an account you open through a bank or credit union, in which you can deposit funds and accrue interest over time. Savings accounts are FDIC-insured up to $250,000 per account, providing a safe place to store money while helping you save for financial goals.

When opening a new savings account, there are many things to consider. Learn about the different types of savings accounts, how to find the best rates, and what to watch out for. Knowing how to choose the best savings account for you can help you make the most of your savings potential.

Key Takeaways

  • A savings account is a safe place to store your money while earning interest.
  • High-yield savings accounts help your money grow faster.
  • Some savings accounts have minimum balance requirements and costly fees.
  • Online accounts tend to offer higher interest rates than traditional brick-and-mortar bank accounts.

Interest Rates

Choosing the best savings account starts with comparing interest rates. You can look up and compare interest rates by visiting the websites of several banks or credit unions. When comparing savings accounts, you may notice two rates: the simple interest rate and the APY. Simple interest is the money you earn based on your deposits and does not include compounding. APY is the total interest you earn in one year, including compounding interest.

Compounding interest means you earn interest on the money you save and the interest that money earns.

Traditional savings accounts at a brick-and-mortar bank pay lower interest rates than other types of accounts, such as a certificate of deposit (CD). Online banks tend to offer high-yield savings accounts with interest rates above the national average. Depending on the bank and type of account, interest may compound daily, weekly, monthly, or annually. The more frequently the interest compounds, the faster your money will grow.

For example, putting $10,000 in a savings account with 0.08% APY that compounds monthly will earn you $8 after one year, totaling $10,008. However, that same $10,000 in a high-yield account with 1.00% APY will earn you $100—$10,100—after 12 months of compounding.

How To Calculate Your Yearly Earnings

Many savings accounts use compound interest. To calculate how much money you can earn in one year on an account with $1,000 that compounds monthly at a 1% interest rate, you would use the following formula with the following variables:


A = P x (1 + r/n)nt

  • A = the total earning you are trying to determine
  • P = your opening deposit ($1,000)
  • r = your interest rate converted to decimal format (divide 1 by 100 = 0.01)
  • n = the number of months it would compound (12 months = 12 times a year)
  • t = your total interest earned in one year

Plug the numbers into the formula:

A = 1,000 x (1 + 0.01/12)(12x1)

Next, use a calculator or pencil and paper to get the total of $1,010.05. So your earnings would be $10.05 in one year if you did not withdraw or add any additional money.

Account Minimums, Fees, and Other Costs

To open a standard savings account, most banks and credit unions require an initial deposit ranging from $5 to $100. However, it’s also important to be aware of any additional costs or fees you may encounter. For example, many savings accounts may have minimum balance requirements that trigger a fee anytime your balance drops below that number. Fees can be more than just an inconvenience; they can diminish your interest-earning potential and reduce the amount of money you save.

Other common fees to look out for include:

  • Monthly account maintenance fee: These can range from $5 to $25 per month.
  • Excess withdrawal fee: Banks can charge from $3 to $25 per transaction for too many withdrawals—typically if you make more than six in one month.
  • Inactivity fee: Some banks charge a fee if your account still has a balance but remains dormant for 12 months.
  • Returned item fee: A bank may charge a fee if you deposit a check into your account that gets returned for insufficient funds.

On April 24, 2020, the Federal Reserve suspended the six-withdrawal limit on savings accounts mandated by Regulation D. Therefore, banks are no longer required to charge beyond six withdrawals. However, they still have the option to do so.

Types of Savings Accounts

Choosing the savings account that will work best for you depends on your financial goals. Aside from a traditional savings account, here are some of your options.

Cash Savings Account

Cash savings accounts function similarly to high-yield savings accounts. However, these accounts are generally offered through a nonbank financial institution and are FDIC-insured, sometimes up to $1 million. If you prefer the freedom to make unlimited withdrawals without having to pay fees, while still gaining interest, a cash savings account may be a good alternative.

Money Market Account

A money market account (MMA) is a high-yield savings account that may come with check-writing privileges or a debit card, similar to a checking account. It often requires a higher minimum balance and typically limits the number of transactions per month. Because it earns a higher interest rate than a traditional savings account, this may be an ideal account if you want your money to grow while still maintaining its liquidity.

Retirement Account

A retirement account is an investment vehicle that allows you to contribute money that will grow into financial security for your retirement. Choosing the best one may depend on the age you start, when you plan to retire, and how aggressively you wish to save. Retirement accounts offer tax advantages, they earn interest, and the sooner you start, the more your money can significantly compound over time.

Speaking with a financial advisor may help you determine which option is right for your specific retirement goals. However, most people find that having a combination of accounts is what best meets their needs. Here’s a look at the many options available:

  • Individual Retirement Arrangements (IRAs)
  • Roth IRAs
  • 401(k) plans
  • SIMPLE 401(k) plans
  • 403(b) plans
  • SIMPLE IRA plans (Savings Incentive Match Plans for Employees)
  • SEP plans (Simplified Employee Pension)
  • SARSEP plans (Salary Reduction Simplified Employee Pension)
  • Payroll deduction IRAs
  • Profit-sharing plans
  • Defined benefit plans
  • Money purchase plans
  • Employee stock ownership plans (ESOPs)
  • Governmental plans
  • 457 plans

CDs

A CD, or certificate of deposit, is a savings account that allows you to lock money away at a guaranteed interest rate for a fixed amount of time. Standard CDs can range from six months to five years. Your money earns a higher interest rate than a traditional savings account. However, you cannot withdraw money before the end of the term without paying a penalty. CDs may work well if you want to earn a higher interest rate on a larger sum of cash that you won’t need access to anytime soon.

Opening a New Account With a Familiar Institution

Keeping multiple accounts at the same bank or credit union can make managing your finances simpler. Here’s how:

  • You only need to log into one bank to access your account.
  • You can transfer funds easier and faster between accounts.
  • You’ll have a convenient snapshot of all your accounts in one place.
  • You can build a great relationship with the financial institution.

Your bank or credit union wants to keep your business, so it may offer additional perks for opening new accounts, such as lower fees and better interest rates. Still, you should always shop around and compare the services of other financial institutions to learn your options before making a final decision.

Frequently Asked Questions (FAQs)

What is the best reason to have a savings account in addition to a checking account?

The best reason for having both a checking and a savings account is because each serves a different purpose. Your checking account acts as the workhorse for your finances by allowing you to manage your day-to-day expenses while typically earning little or no interest.  Meanwhile, your savings account will enable you to earn interest and watch your money grow as you save for financial goals.

What is the best interest rate you can get on a savings account?

Interest rates change quickly. When you’re ready to open a new savings account, here are some tips to help you find the best rate:

  • Research online to find the top savings account interest rates available.
  • Compare different banks; typically, online banks have higher rates than brick-and-mortar.
  • Read the fine print for requirements such as minimum balances or additional fees.
  • Avoid temporary teaser rates that may expire within a few months.

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Article Sources

  1. Federal Bank of St. Louis. “Types of Savings Accounts,” Page 8.

  2. FINRA. “Savings Accounts.”

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  5. Bank of America. “7 Common Bank Fees Explained.”

  6. Bank of America. “Bank of America Advantage Savings.”

  7. Federal Reserve. “Savings Deposits Frequently Asked Questions.”

  8. Betterment. “Betterment Cash Reserve.”

  9. IRS. “Types of Retirement Plans.”

  10. Capital One. “What Is a CD?