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Types of Savings Accounts
Everybody needs a savings account in one form or the other. These accounts not only help you set aside money for emergency or planned expenses, but also earn you interest which is a very nice change versus having to pay it.
As you compare savings accounts, look at the most important features: the interest rate (APY) and any fees you'll pay. You'll obviously end up with more if you minimize fees and earn a decent interest rate. However, especially with smaller account balances, the interest rate might not be as important as you think; a competitive rate is a good rate – you don't necessarily need the highest rate. Finally, safety is important, make sure any savings account is insured.
The Basic Savings Account
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. There are some limits on how often you can withdraw funds (up to six times per month for preauthorized withdrawals – but unlimited in person), and you can add to the account as often as you like.
Traditionally, that was about it: you'd open a savings account at the same bank that had your checking account, and you'd store excess cash there. There's nothing wrong with using one of these plain-vanilla accounts, but there are other types of savings accounts that might benefit you. Those other accounts are all variations on the traditional savings account.
Online Savings Accounts
The next step up is an online savings account. These are accounts offered by online-only banks (although some brick-and-mortar banks offer online-only savings accounts that offer higher rates). The main reason to use an online savings account is the interest rate; you'll generally earn more from an online bank, plus fees
and minimum balance requirements are rare.
Online savings accounts require a bit more self-sufficiency. You can't walk into a branch and get assistance from a teller – you'll have to most of your banking online. However, managing your account is easy, and you can always call customer service for help (note that some brick-and-mortar banks limit how often you can call customer service, and they may charge fees for getting help from a human being).
To use an online account, you usually also need a brick-and-mortar bank account (almost any checking account will do). This is your “linked” account, and that's the account you'll use for initial funding. Once your online account is up and running, you can make deposits from other sources as well – you can probably even deposit checks to the account with your mobile phone.
Online savings accounts are a great place to keep cash, but it can be difficult to spend your money if you need it quickly. Fortunately, some 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. It's generally easy and fast to move funds from your savings account to your checking account at the same bank.
Student Savings Accounts
With the exception of online banks, savings accounts can be expensive if you don't keep a large balance in your account. Banks charge monthly 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 which help students to avoid fees until they get a job and can qualify for monthly fee waivers.
If you're a student, a student savings account at a brick-and-mortar bank or credit union is a great option for your first bank account.
Oriented Savings Accounts
You can save for anything – or nothing in particular – in a savings account, but sometimes it's nice to earmark funds for a specific purpose. For example, you might want to build up savings for a new auto, 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. You generally don't earn more on your savings (although some banks and credit unions offer perks to encourage regular saving), but you might be more likely to reach savings goals if a specific account is tied to something you value. If that sounds like something you'd benefit from, look for “savings club” (or similar) programs. You can also design your own program: Paula Pant describes how to do this at SmartyPig, and you can create “subaccounts” or multiple accounts (with descriptive nicknames) at most online banks.
Variations on Savings Accounts
What if you need a bit more than a savings account can offer? There are other types of accounts that pay interest (like savings accounts) while offering additional benefits.
Money market accounts (MMAs): money market accounts 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 with a debit card. However, like with any savings account, there are limits on how many times per month you can make withdrawals. Money market accounts often pay more than savings accounts, but they also require larger deposits. They are a good option for emergency savings because you have access to your cash, but you still earn interest.
Certificates of deposit (CDs): CDs are also similar to savings accounts, but they usually pay more. The tradeoff? You have to lock your money up in a CD for a certain amount of time (6 months or 18 months, for example). It is possible to withdraw funds early, but you'll have to pay a penalty, so CDs only make sense for cash that you won't need anytime soon. For more information, read about the basics of CDs.
Interest checking: if you really need access to your cash (and you still want to earn interest), you might get what you need from a checking account. Traditional checking accounts don't pay interest, but newer types of accounts allow you to earn and spend at the same time. Online banks offer checking accounts that pay a little bit of interest (typically less than a savings account). Reward checking accounts pay even more, but qualifying can be difficult.
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