Choosing the Right Savings Account for Your Needs

A savings account can provide a safe way to stash some cash for short-term and emergency needs. With so many options available, however, it can be difficult to know which one is the best one for you. Here are three steps you can take to determine which savings account is best for you based on your needs and the features that you want in a financial product.

Choose the Type of Savings Account That Fits Your Needs

Believe it or not, there are several different types of savings accounts from which you can choose. Each one comes with its own set of features, so it’s important to know how you plan to use the account to determine the right fit.

Traditional Savings Account

Usually offered by traditional banks and credit unions, these savings accounts are the standard option available. The financial institutions that offer them typically also offer checking accounts, and you can easily transfer money back and forth between the two. Traditional savings accounts usually offer interest, but the annual percentage yield (APY) is usually low. According to the Federal Deposit Insurance Corporation (FDIC), the average savings account interest rate is just 0.37% as of March 2023.

High-Yield Savings Account

High-yield savings accounts are often offered by online banks, though some traditional banks and credit unions also offer them. These accounts work the same as traditional savings accounts, but they typically offer a much higher APY on your balance. In March 2023, for instance, you can find high-yield savings accounts with APYs exceeding 4%. Note, however, that online banks which offer high-yield savings accounts may or may not also offer checking accounts, which means that it can take longer to make transfers between your checking and savings accounts.

Money Market Account

A money market account acts as a hybrid between a checking and savings account. While you’ll get check-writing privileges and possibly even a debit card, you may be limited on how many transactions you can make each month. Money market accounts also typically pay interest, with some banks and credit unions offering rates that rival high-yield savings accounts.

Certificate of Deposit

A certificate of deposit (CD) may offer a high APY—sometimes even higher than high-yield savings and money market rates—in exchange for you leaving your money in the account for a set period of time. Depending on the financial institution, CD terms can range from one month to 10 years. Once you open a CD with a deposit, you generally can’t add money to it. What’s more, you typically can’t withdraw money from the account until it matures. Otherwise, you may be charged an early withdrawal penalty. In some cases, banks and credit unions offer CDs that allow you to withdraw money without penalty, add money to the account after the initial deposit or change your rate to the current rate once during your term.

Understand the Key Features of a Savings Account

Savings account features can vary wildly depending on where you look. In general, though, here are some features to watch out for:

APY

The annual percentage yield on a savings account is the effective rate of interest that you’ll earn in a given year. The APY is typically higher than the account’s base interest rate because most banks compound interest on a daily, monthly or quarterly basis. APYs are generally variable, which means they can fluctuate over time. With a CD, however, your APY is fixed for the term at the time you open the account.

Balance Requirements

Some banks may require you to deposit a certain amount to open an account or maintain a minimum balance to avoid a monthly fee. In some cases, the APY you earn will depend on your balance, so it’s important to read the fine print.

Access to Your Money

Depending on the bank or credit union, you may be able to access your savings through a bank transfer, an ATM withdrawal or, in the case of a money market account, a paper check or debit card. With some online high-yield savings accounts, a bank transfer may be your only option.

Multiple Accounts

Some banks may allow you to open multiple savings accounts or subaccounts, which you can use to work toward and track different savings goals.

Money Management Experience

Depending on the financial institution, your experience managing your money online or from a mobile app may be different. Looking up customer reviews and app reviews can help you get an idea of what to expect.

Insurance

Most savings accounts are federally insured up to $250,000 per person by the FDIC or the National Credit Union Administration (NCUA). However, some online banking providers may partner with multiple banks to increase the amount of insurance coverage.

It’s also important to keep an eye on fees. While most savings accounts don’t charge a monthly fee, for instance, some may assess one if you don’t maintain a minimum balance, make regular transfers or link an eligible checking account.

Other Potential Fees

Wire transfer fee: You typically won’t be charged a fee to receive incoming wire transfers, but you may need to pay a fee if you send one. International wire transfers tend to be more expensive than domestic transfers.

Excessive withdrawal fee: The federal government no longer sets a maximum of six withdrawals from a savings account per month, but some banks still maintain that limit and may charge you a fee for each withdrawal or transfer above it.

Early withdrawal fee: If you open a CD, make sure you know what the penalty is if you withdraw your money before the account matures. Common early withdrawal fees are 90, 120 or 180 days’ worth of interest on the account.

Overdraft fee: If you opt in to overdraft coverage, you may be charged a fee if a transaction puts your account in the negative.

Paper statement fee: Some traditional banks may charge you a fee to receive paper statements on your account. Fortunately, you can avoid this by choosing to receive electronic statements.

Compare Savings Accounts

Using the features listed above, take some time to research and compare savings accounts from several different banks and credit unions to determine the best fit for your needs and preferences. While it may be convenient to go with a financial institution that offers both checking and savings products, consider spreading out your money across multiple banks and credit unions to take advantage of the different features they offer. You may also want to have multiple savings accounts so you can track multiple financial goals over time.

The Bottom Line

Having the right savings account for your needs can make it easier to manage your money and make the most of the money you’ve put aside for short-term financial needs. Before you open an account, shop around and compare options from multiple sources, including traditional banks, online banks and credit unions, to get the right one for you. Be sure to remember, though, that savings account features—particularly APYs—can fluctuate over time. So, an account that works well for you now may not be the best fit for you in the future. Don’t be afraid to make adjustments to your savings approach as needed.

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