Types of Savings Accounts

From Basic Accounts to Savings-Like Alternatives

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A savings account is a great place to keep cash that you don’t plan to spend immediately because it keeps your money safe and accessible while paying you a little bit of interest. There are several different types of savings accounts to choose from, as well as alternative accounts that fill a similar role. Each variation—and every bank or credit union that offers these accounts—has different features, so it’s important to understand your options.

Let's take a look at each of these common places to stash your cash:

  1. Basic savings accounts
  2. Online savings accounts
  3. Money market accounts
  4. Certificates of deposit (CDs)
  5. Checking accounts
  6. Specialty accounts, such as student savings and goal-oriented accounts

Earning interest: All of the accounts described pay interest, which helps you grow your savings—although with the average interest rate on standard savings accounts below 0.1%, the rate of growth will be slow. As you compare options, evaluate the interest rate, which is often quoted as an annual percentage yield (APY), to decide which account is best. You don’t necessarily have to choose the account with the highest interest rate, though; just make sure you get a competitive rate. Especially with smaller account balances, the interest rate is not as important as other account features, like liquidity and fees.

Avoiding fees: Fees are harmful to your savings account’s health. With relatively low interest rates, any charges can wipe out your annual earnings or even cause your account balance to decrease over time. Examine your bank’s fee statement carefully before depositing money there.

Basic Savings Accounts

In its simplest form, a savings account is just a place to hold money. You deposit into the account, earn interest, and take money out when you need it. You can add to the account as often as you like, but there are some limits on how often you can withdraw or transfer funds: up to six times per month for preauthorized withdrawals or transfers but unlimited in person.

There’s nothing wrong with using a plain-vanilla savings account; if your needs are fairly simple, you can probably just open a savings account at a bank you’re already working with and be done with it.

Online Savings Accounts

Highlights of online bank accounts include:

  1. High interest rates on your deposits
  2. Low (or no) monthly fees
  3. No minimum balance requirements
  4. Leading-edge technology

These types of accounts were initially available through online-only banks, but most traditional, brick-and-mortar banks now include online capabilities like online bill payment and remote deposit. Some traditional banks may act more like an online-only bank outside the area where they have a network of bank branches, though—for example, like Capital One—they offer many locations to access cash without a fee. Other banks, including PNC, will reimburse you for ATM fees imposed by another bank, subject to a monthly dollar limit.

Self-service: Online savings accounts are best for self-sufficient, tech-savvy consumers. You can’t walk into a branch and get help from a teller; you’ll do most of your banking online by yourself. However, managing your account is easy, and you can always call customer service for help. Fortunately, you can complete most requests yourself—when and where it’s convenient for you.

Linked account: To use an online account, you usually also need a brick-and-mortar bank account. This is your “linked” account, and that’s typically the account you’ll use for your initial deposit. Once your online account is up and running, you can make deposits from other sources as well. You can even deposit checks to the account with your mobile phone.

Spending money: If there’s no physical branch, you may wonder how you can access cash quickly when you need it. Most online banks also offer online checking accounts that allow you to write checks, pay bills online, and use a debit card for purchases and cash withdrawals. If you need to move the money to your local bank account, that transfer typically happens within a few business days. Plus, some online banks allow you to order cashier’s checks that go out by mail.

Variations on Savings Accounts

If you need more than a standard (or online) savings account, there are other types of accounts that pay interest while offering additional benefits.

Money market accounts (MMAs): MMAs look and feel like savings accounts. The main difference is that you have easier access to your cash: You can usually write checks against the account, and you might even be able to spend those funds with a debit card. However, as with any savings account, there are limits on how many times per month you can make withdrawals. MMAs often pay more interest than savings accounts, but you're also typically required to keep more money in them. They are a good option for emergency savings because you still have easy access to your cash while earning interest.

Certificates of deposit (CDs): CDs are also similar to savings accounts, but they usually pay more. The trade-off is, you have to lock your money up in a CD for a certain amount of time—for example, 6 months or a year and a half. It is possible to withdraw funds early, but you’ll have to pay a penalty, so CDs make sense only for storing cash that you won’t need anytime soon.

Checking accounts: If you want the easiest access to your cash, you might consider opening a checking account instead. Traditional checking accounts pay either no interest or an annual percentage yield of 0.01%. However, some banks, including Huntington National Bank, pay a bit of interest—perhaps an APY of 0.15%—especially if you keep both checking and savings accounts with the same bank. Rewards checking accounts may pay even more, but in order to collect a certain level of interest on your money, you need to carry out a certain number of transactions in a given month. For instance, Axos Bank pays an APY of 0.4166% if you deposit at least $1,000, an additional 0.4166% if you use your debit card 10 times, and an additional 0.4166% if you then use your debit card five more times, for a total APR of 1.25%.

Student Savings Accounts

With the general exception of online banks, savings accounts can be expensive if you don’t keep a large balance in your account. Banks typically charge monthly maintenance fees, and they pay little or no interest on small accounts. For students (who spend most of their time studying, not working), that’s a problem. Some banks offer student savings accounts that don't charge monthly fees.

Be aware that once the account has been open for a certain number of years or the account holder reaches a certain age, a student account will convert to a traditional savings account, and the holder will need to be mindful of fees.

Goal-Oriented Savings Accounts

You can save for anything—or nothing in particular—in a savings account, but sometimes it’s helpful to earmark funds for a specific purpose. For example, you might want to build up savings for a new vehicle, your first home, a vacation, or even gifts for loved ones. Some banks offer savings accounts that are specifically designed for those goals.

The main benefit of these accounts is psychological because you might be more likely to reach a savings goal if a specific account is tied to something you value. You generally don’t earn more—although some banks and credit unions offer perks to encourage regular saving. For example, CIT Bank pays an APY of as much as 1.55% if you deposit $100 into it every month.

Frequently Asked Questions (FAQs)

How many savings accounts can you have?

There isn't a rule that limits that amount of savings accounts you can open. If a bank is willing to let you open a savings account, then there's nothing stopping you. You may even be able to open multiple savings accounts with the same financial institution.

How do high-yield savings accounts work?

High-yield savings accounts offer higher-than-average interest rates. While there's typically a trade-off between interest rates and safety in the bond market, high-yield savings accounts are just as safe as regular accounts as long as they're FDIC-insured. Instead of extra risk, high-yield savings account holders may have monthly withdrawals limited, higher account minimums, or more fees.

If the Federal Reserve were to reduce the federal funds rate, what will happen to savings accounts?

As long as the institution is FDIC-insured, your funds won't be affected by any external events, including any Federal Reserve policy changes. However, you may see your yield fall if the Fed reduces the federal funds rate. In other words, your money is safe, but you might not earn as much on your deposits.

Article Sources

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  2. Federal Reserve. "Regulation D: Reserve Requirements," Page 3. Accessed April 22, 2020.

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  6. Capital One. "What’s a 360 Checking® Account?" Accessed April 22, 2020.

  7. Ally Bank. "Account Information FAQs." Accessed April 22, 2020.

  8. Citi. "Savings, Checking, CDs and Money Market Accounts: What's the Difference?" Accessed April 22, 2020.

  9. Huntington National Bank. "Compare Checking Accounts Chart: Types of Checking Accounts." Accessed April 22, 2020.

  10. Axos Bank. "Rewards Checking." Accessed April 22, 2020.

  11. Bank of America. "Ready, Set, Go. Welcome to Bank of America Student Banking." Accessed April 22, 2020.

  12. PNC. "Virtual Wallet Student." Accessed April 22, 2020.

  13. CIT Bank. "Savings Builder." Accessed April 22, 2020.