Whether you are putting away money for a rainy day or saving up for a special purchase, savings accounts are a great way to do this. Compared to other types of investments, savings accounts are an excellent way to earn a guaranteed return and securely store your money.
What is a Savings Account?
A savings account is a deposit account that gives you security of the principal amount, with an interest rate payment. They are opened at a bank or financial institution.
Savings accounts are considered ‘liquid” (easily convertible to cash) when compared to other assets, although they are not generally used for everyday transactions.
Who are Savings Accounts for?
Savings accounts can be used by everyone, from students to working individuals to retirees. For anyone that needs a place to store cash securely, savings accounts are a great solution.
If you currently have debt, however, you may want to allocate your funds towards to eliminating this first. This is because the interest earned on your savings may be outweighed by the interest payments on your debt.
Some reasons for using a saving account are:
- Saving up for big ticket items: such as a holiday, or a down payment for your home
- Saving for an emergency – unexpected expenses such as medical bills, car repairs, or home maintenance.
- Saving for a child’s education – college tuition fees
- Teaching the value of saving – opening a kid’s saving account can teach children good habits when it comes to managing their money.
Things to Consider When Choosing a Savings Account
When deciding on which type of savings account to select, here a few things to consider:
- The Interest Rate – are you satisfied with the rate the bank is offering? Is it competitive with other offers? Is the rate variable or fixed?
- Online or In-person – Would you prefer to deal with a bank in-person, or are you comfortable with a bank that only operates online?
- FDIC Insurance – Is the bank you are considering insured by the FDIC? If not, you could lose your savings in the event of a bank failure.
- Account Restrictions – Be mindful of the restrictions certain savings accounts might have. These restrictions may include limits on the number or amount of withdrawals, minimum balance required, or notice required before making a withdrawal.
Types of Savings Accounts
Online Savings Accounts
These are also called ‘high-yield interest accounts”. Typically, these types of accounts are offered by online banks, since their costs are generally lower they can afford to offer higher rates.
Benefits of online savings accounts:
- For people who like the convenience of banking online
- Need quick access to their funds
- Low or no minimum balance to open an account.
- Opening an account is quick and can be done online
Money Market Accounts
These types of savings accounts are invested into money market instruments such as treasury bills, bonds, notes, etc. They often pay a higher interest rate than conventional savings accounts, but they do come with some restrictions. These restrictions include a larger initial deposit, and a limit on the withdrawals you can make within a month.
Benefits of money market accounts:
- Higher interest rate
- Flexibility of a checking facility
- Invested in secure short-term holdings
- No penalties on early withdrawal
Certificates of Deposit
Certificates of deposit (also known as term deposits) are a type of savings account that offers a fixed interest rate over a predefined period. This usually means the bank can offer a higher rate, since the funds are locked in for a time period between 3 months to 5 years.
Benefits of a Certificate of Deposit:
- Interest rate is fixed, doesn’t change over the term
- Secure because of FDIC insurance
Although savings accounts might not have the profit potential of other assets, they do offer a safe and consistent way to secure your savings and build your wealth.