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Four types of savings accounts (and tips on where to stash your cash)

Most people know the importance of good money management, but being responsible with money involves more than paying your bills on time. It also involves keeping some of what you earn. This is how you prepare for the future and save for big purchases.

Savings accounts, however, aren’t all the same. And with so many different types of savings solutions, a question I’m often asked is: “What is the best type of savings account?”

In all honesty, the answer really depends on how you plan to use funds in the account. So today we’re looking at four different types of savings options, including how these accounts work, pros and cons of each, and when these accounts make sense.

1. Regular Savings Account

Most people are familiar with this account, and it’s often the first account we open as a child, teenager, or young adult.

They’re easily accessible, so you can choose any local bank or credit union and then open an account in-person or online. This account is a great place for cash you don’t need for living expenses.

Some people make the mistake of keeping all of their money in their checking account. But personally, I think this is a huge mistake – especially if you have a problem with impulse control. 

Checking accounts are often tied to debit cards. So if you keep too much cash in this account, there’s a tendency to overspend and not save anything.

I always recommend “only” keeping what you need for expenses in your checking account – and maybe a small cushion – and then keeping the rest of your funds in a savings account.

Pros of a regular savings account:

• Most regular savings accounts are FDIC-insured, so your funds are protected up to a certain amount
• You have quick access to your money in an emergency
• There’s an opportunity to earn interest on your money
• Low opening deposit requirement

Cons of a regular savings account:

• Even though you’ll earn interest on your money, these accounts don’t earn a lot

When does a regular savings account make sense?

Although regular savings accounts don’t earn much interest, these accounts are great for holding a small rainy day fund ($1,000 to $2,000), and funds you’ll need in the near future.

Keep in mind that some regular savings accounts have monthly service fees. However, a lot of banks provide ways to avoid this fee. They might waive the fee if you maintain a minimum daily balance, or if you have an automatic transfer or direct deposit into the account.

2. Online Savings Accounts/High-Yield Savings (HYSA)

These accounts are like a regular savings and serve a similar purpose. It’s a place to safely stash funds you don’t need for living expenses. The difference, though, is that you’ll typically find high-yield savings accounts with an online bank.

Pros of a high-yield savings account:

• You’ll earn a much higher rate compared to a regular savings account. At the moment, savings account rates are low. But while a regular savings might earn 0.01%, many online savings accounts earn about 0.40%. So there’s an opportunity to grow your account faster
• Many accounts don’t have minimum deposit requirements when opening an account, and some don’t charge a monthly fee
• Funds in a high-yield savings are also FDIC-insured

Cons of a high-yield savings account:

• Some high-yield savings accounts don’t include a debit card, so funds aren’t as accessible as a regular savings (which can be a pro or con, depending on how you look at it)
• It usually takes about two days to transfer funds from a high-yield savings account, hence the important of keeping a small emergency fund in a regular savings account for immediate use

When does a high-yield savings account make sense?

Since these accounts earn a higher rate, high-yield savings accounts are a good place for the majority of your savings (emergency fund, down payment fund, sinking funds, etc.) You might keep $1,000 or $2,000 in a regular savings, and then keep the rest of your money here.

Banks offering high-yield savings accounts include Varo, Discover, Ally, American Express, and so many others. Make sure you shop around since accounts vary.

One account I recommend is CIT Bank’s Savings Builder account. This account is a little different, though, because it does require a minimum opening deposit of $100, and you must deposit at least $100 into your account every month to earn the higher rate.

Some people don’t like these minimum requirements. But if you’re not disciplined or if you have trouble sticking with your savings goals, these requirements add a layer of accountability – helping you save on a consistent basis.

3. Money Market Accounts

These interest-bearing accounts are similar to savings accounts, and they’re also available at many banks and credit unions. Current rates in the money markets (which trade short-term loans) determine these account rates.

What’s interesting about a money market account is that it’s a hybrid of a savings account and a checking account. So it comes with a checkbook and you’re allowed to write a limited number of checks from the account each month.

Pros of a money market account:

• Earn more interest compared to a regular savings account, but rates are typically the same or “only slightly higher” than a high-yield savings account
• These accounts include a debit card and check writing ability, giving you quicker access to funds

Cons of a money market account:

• You’re often limited to six checks per month without penalty
• Some accounts have high opening deposit requirements, sometimes starting at $1,000 or $2,500

When does a money market account make sense?

This account makes sense if you want check writing abilities and a debit card, but it’s not a good idea if you have impulse control issues. You might dip into the account too often, slowing your savings growth. If you foresee writing a lot of checks, you might consider an interest checking account instead.

4. Certificate of Deposits (CDs)

This is a type of savings account, too, but it differs because it’s a time deposit. So it’s a more restrictive form of saving.

When you open an account with a financial institution, you’ll choose a CD term – 6 months, 12 months, 5 years, etc. – and the idea is to keep your money in the CD until the end of your term. Since you’re locking away your money, these accounts earn a higher savings rate.

Pros of a CD:

• It’s low-risk, so you’ll get back your investment plus interest earned
• Higher rates compared to a regular savings account, but not higher than a money market or HYSA

Cons of a CD:

• You’ll pay a penalty if you withdraw the money early
• Some CDs require a minimum opening deposit of $500 (or more)

When does a CD make sense?

These accounts are great if you need help saving, and when you don’t need the cash in the near-term. But it probably isn’t the best place for an emergency fund since you’ll pay a penalty for tapping the account early.

Did you find this information helpful, or got a question about different types of savings accounts? Let us know ↓↓