This article is part of an original iGrad series, Figuring Out Finance, written by knowledgeable finance expert Ted Jenkin, founder and co-CEO of oXYGen Financial, Inc. Ted Jenkin is one of the foremost knowledgeable professionals in giving financial advice to the X and Y Generation.
From students getting right out of college to owners of companies, these days it’s become more confusing than ever for anyone to dissect the myriad of savings accounts that are out there in the marketplace. With many checking accounts earning next to zero or nothing at all, the question that keeps coming up at this time is what the best type of savings account is to put your money into. With that thought in mind, let’s break down the different types of savings accounts so you can figure out which one is right for you.
What is a Basic Savings Account?
A savings account can generally be opened with a low amount of money and is one of the easiest financial vehicles to understand. Most people I have worked with over the years use some type of savings account in conjunction with a checking account where they can easily transfer funds from one to the other. This is especially true now that checking accounts don’t earn very much interest. Most savings accounts won’t have a ceiling on what you can put into the account and generally won’t have a limit on what you need to keep in the account. Since you have immediate liquidity of this money and there are no minimums, they generally offer lower interest than other types of savings vehicles. You can open savings accounts (sometimes called a ‘share’ account) at credit unions, large banks, community banks, and online banking institutions. You’ll find that the credit unions and online banks will normally offer the most attractive rates.
What is a Money Market Account?
Money market accounts look and feel a lot like savings accounts, but they can normally only be opened with a minimum balance like $5,000. Money market accounts will also offer flexibility to allow you to transfer money to savings or checking accounts, but can have fees if you don’t maintain minimum balances or make too many withdrawals. Interest rates will often be higher on these accounts than on savings accounts, but expect rates on these to adjust nearly as fast as savings accounts depending on what is happening in the economy and the overall interest rate environment.
What is a Certificate of Deposit (CD)?
These days it might be more appropriate if CD stood for crummy deal. However, if you ask your parents or grandparents, they will tell of the glory days in the 1980s when CDs were paying a double-digit rate of return. CDs generally offer an interest rate on your savings commensurate to the amount of time you are planning to lock the money up with the bank. I’ve seen CDs offered for three months, six months, nine months, one year, eighteen months, two years, three years, and five years length of time. Sometimes banks will tease you with an introductory rate on a CD so they can generate new relationships with a lost leader type product. CDs can be a great way to save for a shorter-term goal as they are guaranteed and FDIC insured (up to 250k). If you need accessibility to your money, however, you could pay a penalty for pulling it out early, so be sure you have the time to lock it up.
You will see a host of other types of savings accounts, including NOW accounts, brokerage accounts with a money market feature, or other terminology that essentially means a savings account. One thing that people sometimes forget is that even the IRS can be a savings account. When you get a refund on your taxes, you have basically given the IRS an interest-free loan for the year and they ‘refund’ the extra money that you over-withheld during the course of the year. If you are the type of person that keeps dipping into your savings account, in this case even the IRS can be your friend.
Want to contribute by becoming an iGrad author yourself? Let us know!