Types of Savings Accounts

Bank savings accounts are a dependable way to put money aside because they are safe, liquid, and low cost. These types of deposit accounts are sometimes called share accounts, usually at credit unions.¹ The Federal Deposit Insurance Corporation (FDIC) or National Credit Union Administration(NCUA) secures these accounts up to $250,000, which means even if the bank fails you still get your money back. You can open one with a small initial deposit.²

Bank savings accounts are highly liquid – you can add to them or withdraw from them at any time. However, there may be limitations on the number of “convenient” withdrawals that you’re allowed each month. Regardless of limits on “convenient” withdrawals, in-person and ATM transactions that are considered “inconvenient” are effectively unlimited, though certain banks may have stricter requirements.¹

Many people use bank savings accounts to put money aside for short-term needs, like holiday spending, vacations, house down payments, or emergency funds. Some people even like to open multiple deposit accounts to separate funds for different goals. You can link them to a checking account for automatic transfers, bill payments, or debit card access.

A tradeoff for high stability is low interest rates.² If maximizing interest income is important to you, compare Annual Percentage Yield (APY) from online banks in addition to traditional banks. In July 2023, APYs on savings accounts ranged from 0.01% to around 5%, with the highest rates coming from online high-yield savings accounts.⁴       

The main difference between regular deposit savings accounts and online high-yield savings accounts (HYSAs) is that with HYSAs you get higher returns. Because these accounts are online, all the transactions are electronic and some banks may subject transfers to a limit, like six times per month.³ But it’s important to check the requirements with your bank before signing up if you may need to transfer funds more frequently. Since electronic transfers may take two or three days to complete, you need more time to get your money than at a physical bank branch, where you can just walk away with it.

With returns of around 5%, though, HYSAs are an option to consider for people who are putting savings away for the long term.³

Many people think of money market accounts (MMAs) as a hybrid of deposit and checking accounts because they are relatively safe, liquid, pay interest, and let you write checks.

MMAs are FDIC/NCUA insured and they may require minimum deposits, although not all do.⁴ Most MMAs charge fees if balances fall below the required minimum.⁵ Depending on the bank, MMAs may follow the same regulations (and exclusions) on transactions as deposit savings accounts. Mutual fund money market accounts, which sound similar, are not insured.⁴

Interest earnings are higher with MMAs than many savings accounts because of a higher stated interest rate than regular savings accounts, which can make a big difference on large balances.⁶

People may use MMAs to save for infrequent expenses large enough to meet account minimums and earn meaningful interest, like emergency savings, tax payments or current tuition payments.

Certificates of Deposit (CDs) offer safety and, compared to savings accounts, high interest rates. The tradeoff is low liquidity. CDs tie up your funds for a set amount of time. You make one initial deposit and no withdrawals. All CDs offered by banks and credit unions are FDIC/ NCUSIF insured.⁷ Most CDs share a few common parameters:

• A set maturation period, sometimes called a term or duration.⁷
• Penalty charges for early withdrawal.⁷
• Minimum deposit required, although amounts vary significantly depending on the type of CD.⁸
• CDs may automatically roll over at the end of the term, after a grace period during which you can take the money back.⁹
• Fixed interest rate for the entire term, usually with higher rates for longer terms.¹⁰

Interest compounding frequency differs by bank, so looking at the APY is a better way to compare your options because that measure takes compounding into account. CDs that are opened in an IRA account also may have tax advantages.¹¹

A common strategy to maximize interest earnings and increase liquidity is to “ladder” CDs, which means spreading a deposit over several CDs with different maturation rates and then reinvesting each into a longer-term CD as it matures. This approach lets you earn the higher rates associated with longer terms and gives you periodic windows to access your money without penalty when each CD matures.¹²

Some CD variations exist, with a common tradeoff for additional options being lower initial interest rates.¹¹

• Liquid CDs (or No Penalty CDs) allow early withdrawal of funds without penalty, which is beneficial if you believe market rates may increase before the CD matures.
• Bump-up CDs include the option to switch to a new, higher-rate CD within the same bank if one becomes available.
• Step-up CDs have built-in interest rate increases at set points.
• Jumbo CDs require high minimum deposits, usually over $100,000, and offer higher initial interest rates.

CDs are used for saving money for purchases that will be made at a set point in the future, like a home renovation, or a down payment for a car or mortgage. Some people use short-term CDs to earn more interest on their emergency fund.