Saving money can be tough, but having savings is essential to financial health. You can start building your savings lots of different ways, but do you know what to do with your savings once you have some? We’ll help you learn where it’ll do the most financial good.
Why you need a savings account
Your checking account is not a savings account and shouldn’t be used that way. If you keep your savings in your checking account, you may be more likely to spend it or to forget how much you saved and for what. You may earmark money that was already earmarked for something else, leaving you short on your goals. A savings account creates an extra barrier between you and the money. Yes, of course you can spend it. But withdrawals are limited each month (by federal law), and your debit card isn’t attached to the funds. Also, most checking accounts don’t pay interest but savings accounts generally do.
By keeping your savings in one or more savings accounts you’ll not only earn interest but can also keep better keep track.
Savings accounts vary in their terms and benefits. You’ll find a wide range of interest rates and differences in logistics – how you access, deposit, and transfer the money.
How do you find the right savings account for yourself?
First, decide what is most important to you. Interest rates are obviously an important consideration, but you also need to decide whether you need a brick-and-mortar bank or can use an online-only bank.
Some people like being able to talk to a real person, in person. But don’t shy away from online banks because you think their services are more limited. You should be able to handle most transactions online, on your mobile device, or at an ATM.
You can use Credit Sesame to compare different savings accounts. From your Credit Sesame account dashboard, choose Banking from the Loans drop down menu. Then you can compare interest rates and any minimum required balances.
An interest rate around 1% is good for a savings account right now. In fact, many major banks (especially those with physical branches) offer interest rates of just a few one-hundredths of a percent. Minimum balances range from zero to $10,000 to earn the rate shown. Balances lower than the minimum still earn interest at most banks, just not the best rate.
Online banks vs. traditional brick-and-mortar banks
One drawback to online-only savings accounts is that they generally do not accept cash deposits. Brick-and-mortar banks that offer online access, on the other hand, usually accept cash through their ATMs in addition to inside the branch. The trade-off is that the bank with physical locations is likely to pay a lower interest rate on your savings.
Inability to deposit cash can be a serious obstacle if you need to deposit cash regularly. You can work around the issue by purchasing money orders and depositing those or by maintaining a different account that does accept cash deposits and transferring the funds electronically.
If you normally fund your account via checks, transfers or direct deposit, ignore the cash drawback. Base your choice on personal preference or on interest rates.
Should your savings account be at the same bank as your checking account?
When you want to build savings you probably have one or more specific goals in mind. Ultimately, you’ll want to access your funds. The speed at which you want to access your savings can affect your choice of bank.
Pros to having one bank:
Usually can get immediate access to savings accounts via a transfer
Can see all of your accounts in one place
May be rewarded for bank loyalty
Cons to having one bank:
Easier to access means it is easier to spend
You are already a customer, so the bank may not offer new account rewards/bonuses
Bank may not offer the best interest rate
Should your savings account be at a different bank than your checking account?
Using different banks comes with upsides and downsides as well.
Out of sight, out of mind, making it easier for your savings to continually grow
Can pick and choose banks for the best interest rates or convenience factors
Possible delay of 2 or more business days when you want to transfer funds from one bank to another
Money is split across multiple locations, making harder to see the big picture
Savings account vs. Certificate of Deposit (CD) vs. money market account
A savings account is the traditional place to keep your savings, but other options may help you grow your money faster. Certificates of Deposit and money market accounts can be great options for keeping and growing your savings. These types of accounts pay interest, and like savings accounts, limit the number of transactions you can perform each month. Some accounts place restrictions on when you can withdraw your money.
When we talk about savings accounts, we are talking about Savings Deposit accounts. The rules and regulations differ from those that apply to checking accounts, which is actually a Transaction Account. Savings accounts usually earn interest, and checking accounts usually do not (if you’ve got an interest-earning checking account, that’s great). By law, savings accounts are limited to six transfers or withdrawals per month or statement cycle. If you regularly exceed the limit, the bank will either close your account or convert it to a transactional account, most likely a checking account.
Certificate of deposit (CD)
Certificates of Deposit, commonly referred to as CDs, are a type of savings account. It works a little differently. The customer deposits an amount of money for an amount of time in order to earn a specific interest rate. After the set time has lapsed, you get the money you deposited plus the interest.
The benefit of a CD is that you can lock in an interest rate and guarantee earnings. Even if interest rates drop you will earn the promised rate. The flipside is that if interest rates rise you may not be eligible to earn the higher rate.
The time period for a certificate of deposit can vary from as little as three months to as long as 10 or 20 years or longer. The length is set by the bank. Most CDs range from one to five years. The interest rate you earn depends on the length of the CD term and the amount you deposit. Longer terms and higher deposits pay more.
If you withdraw CD funds early, you can incur penalties and forfeit all or part of the earnings. These penalties are often calculated as days’ worth of interest. For example, Bank of America will charge 90 days’ interest as a penalty for early withdrawal from a 12-month CD. The early withdrawal penalty fee varies from one institution to the next. Ally bank will only charge 60 days worth of interest as an early withdrawal penalty from CDs good for up to 24 months.
If you can park your money, even for a year, you stand to earn significantly more with a CD than a traditional savings account. One-year CDs currently pay 1.3% or more; five-year CDs are available for 2.3% or more (as of April 2017). You might not feel comfortable leaving your money untouched for five years. In that case, a CD ladder might work for you. You open several CDs of different lengths, so that every year a different CD matures, giving you access to the funds. You can start with smaller amounts and shorter terms to gradually work your way up to larger, longer-term accounts that pay the most.
If you want to learn more, start here, our post on the best places to open a CD.
Money market accounts
A money market account shares many of the same traits as a savings account in that you can earn interest and are limited to six transfers and withdrawals per month or statement period. However, there are a few differences. For example, some money market accounts allow you to write checks against the funds or access your money via an ATM card. A money market account may offer a bit more flexibility when it comes to access.
The additional flexibility of a money market account may come with a trade-off. For example, Capital One® currently offers a 0.6-1.0% variable interest rate on money market accounts, depending on the balance, and a 0.75% variable interest rate on savings accounts.
If you want or need the flexibility a money market account provides, then even with a lower interest rate, money market accounts are a great place to keep and grow your savings.
Which savings account is best?
The best savings account depends on your savings goals. An emergency fund should be accessible, so a savings or money market account is preferable to a CD. If you’re saving for the down payment on a home, a CD with a higher interest rate might help you reach your goal faster while ensuring that you don’t spend the money on something else in the meantime.
All of the accounts we’ve discussed are presumed to be held at FDIC-insured institutions, so there is virtually no associated risk, such as there is with stocks or other kinds of investments. FDIC-insured institutions insure each customer up to $250,000, so that is the limit to how much you should save at any one bank.
No matter what your goals are, using any one of these accounts is better than letting the money sit in your checking account. By not using a savings, CD, or money market account you could lose out on money that can help you achieve your savings goals faster.
A few tips to help you save
No matter what type of account you use to stash your savings, the most important thing is to save. The more you make saving money a habit, the more money you’ll have set aside, giving you more options when life starts throwing curve balls.
An easy way to make a habit of saving is to let technology do it for you. If you have a savings or money market account, set up automatic transfers from your checking account or via direct deposit split if your employer allows it. If your income is variable and you’re not sure how much you can save each month, use an app like Digit to set aside small amounts of money automatically each month.
Treat savings like a bill to pay. The only difference between this bill and any other bill is that when you save, you pay your future self. Set clear savings goals. Without clear goals, you may not be able to determine the type of account that will offer the greatest benefit.