From students getting right out of college to owners of companies, it seems these days it’s become more confusing than ever to dissect the litany of savings accounts that are out there in the marketplace. With many checking accounts earning nothing or next to zero, the question keeps coming up around what is the best type of savings account to put your money into these days. With that thought in mind, let’s breakdown the different types of savings accounts so you can figure out which one is right for you.
What is a basic savings account? A savings account is can generally be opened with a low amount of money and is one of the easiest financial vehicles to understand. Most people I have worked with over the years use some type of savings account in conjunction with a checking account where they can easily transfer funds from one to the other. This is especially true now that checking accounts don’t earn very much interest. Most savings accounts won’t have a ceiling on what you can put into the account and generally won’t have a limit on what you need to keep in the account. Since you have immediate liquidity of this money and there are no minimums they generally offer lower interest than other savings type vehicles. You can open savings account (sometimes called ‘share’ account) at credit unions, large banks, community banks, and on line banking institutions. You’ll find that the credit unions and on line banks will normally offer the most attractive rates.
What is a money market account? Money market accounts look and feel a lot like savings account, but they normally can only be opened with a minimum balance such as $5,000. Money market accounts will also offer flexibility to allow you transfer money to savings or checking accounts, but can have fees if you don’t maintain minimum balances or make too many withdrawals. Interest rates will often be higher on these accounts than on savings account, but expect rates on these to adjust close to as fast as savings accounts depending on what is happening in the economy and overall interest rate environment. Remember, when borrowing money is cheap so will the rate you get on your short term savings and money market accounts?
What is a CD? (Certificate Of Deposit) I guess in these days it should stand for crummy deal. However, if you ask your parents or grandparents they will tell of the glory days of the 1980’s when CD’s were paying a double digit rate of return. CD’s generally offer an interest rate on your savings commensurate to the amount of time you are planning to lock the money up with the bank. I’ve seen CD’s offered for 3 months, 6 months, 9 months, 1 year, 18 months, 2 years, 3 years, and 5 years length of time. Sometimes banks will tease you with an introductory rate on a CD so they can generate new relationships with a lost leader type product. CD’s can be a great way to save for a shorter term goal as they are guaranteed and FDIC insured (up to 250k). However, if you need accessibility to your money you could pay a penalty for pulling your money early so be sure you have the time to lock it up.
Other Accounts? You will see a host of other types of savings accounts including NOW accounts, brokerage accounts with a money market feature, or other terminology that is essentially a savings account. One thing that some people forget is that even the IRS can be a savings account. Wait! The IRS? Yes, the IRS. When you get a refund on your taxes, essentially you have given the IRS an interest free loan for the year and they ‘refund’ the extra money that you over-withheld during the course of the year. If you are the type of person that keeps dipping into your savings account, even the IRS can be your friend in this case.
What Kind Of Costs Are Involved? We know that when it comes to investing, there is simply no FREE lunch. Banks will usually charge some type of fees for having a savings account. They need your deposit money as the more deposits they have on hand the higher degree of likelihood that they can make some money by loaning it out at a higher interest rate. With each account you open, you should always shop around locally and on the internet to see where rates are and who is offering the most competitive package. Consider looking at fees, service charges, ATM withdrawal fee at other banks, minimum balance requirements, check reorder fees, and the interest you will be receiving.
What Do I Do Once I Get A Savings Account? In the old days, savings accounts cam with a register and the banks used a really cool stamp (kind of like a passport) every time you make a deposit or a withdrawal. Now that younger people use online and mobile phone to check everything, you should go ahead and set up your user name and password for your online account. Each month, you should review your monthly statement to make sure all deposits, withdrawals, and interest crediting looks appropriate. The bank does not need to notify you when you change rates, so keep an eye on this as the rate you started with may not be the same today. Other than that, you can just kick your feet up and watch your money grow albeit that it will grow really slow today. One good rule of thumb on how fast your money will grow is the rule of 72. If you take the number 72 and divide it by the interest rate your bank is giving you it will tell you how long it will take the account to double without you adding any additional funds.
Many of the banks are competing fiercely for your money, so make sure to do your homework. Ask friends or family the banks that they use and type of interest rates and service they are getting. I’ve always liked the idea of working with a community bank or a credit union locally in your area as they will give you more personal service than the bigger banks today and will generally have fewer fees if you are just beginning. Look at ING Direct, Ally, Everbank, and American Express who all have a good online banking presence. Most of all get your savings to come systematically out of your paycheck. The best way to save is out of mind, out of sight. It will be the one smart money move you make that will lay the foundation for a strong financial future.
Ted Jenkin, CFP®, AAMS®, AWMA®, CRPC®, CMFC®, CRPS®
Co-CEO and Founder of oXYGen Financial, Inc – The Leaders in Gen X & Y Financial Advice and Services
Visit to www.oxygenfinancial.net to request a free consultation with the leading financial experts for people in their 20’s, 30’s, and 40’s in the country.
Securities and Investment Advisory Services offered through NFP Advisor Services, LLC (NFPAS), Member FINRA/SIPC. Oxygen Financial is not affiliated with NFPAS. NFPAS does not provide tax or legal advice. This site is published for residents of the United States only. Registered Representatives and Investment Advisor Representatives of NFP Advisor Services, LLC (NFPAS) may only conduct business with residents of the states and jurisdictions in which they are properly registered. Therefore, a response to a request for information may be delayed. Not all products and services referenced on this site are available in every state and through every representative or advisor listed. For additional information, please contact NFPAS Compliance Department at 512-697-6000. PLEASE NOTE: The information being provided is strictly as a courtesy. When you link to any of the web sites provided here, you are leaving this web site. NFP Advisor Services, LLC makes no representation as to the completeness or accuracy of information provided at these web sites. Nor is NFP Advisor Services, LLC liable for any direct or indirect technical or system issues or any consequences arising out of your access to or your use of third-party technologies, web sites, information and programs made available through this web site. When you access one of these web sites, you are leaving our web site and assume total responsibility and risk for your use of the web sites you are linking to.