Four Types of Savings Accounts You Should Know About
Explore the key differences between four common types of savings accounts to help you choose the right option for your financial goals.
Saving money is essential for financial stability, but not all savings accounts work the same way. Different types offer varying interest rates, access to funds, and benefits depending on your goals. Choosing the right one can help grow your money more effectively while keeping it accessible when needed.
Basic Savings
A basic savings account is the simplest way to store money while earning a small amount of interest. Banks and credit unions offer these accounts with minimal requirements, often allowing you to open one with as little as $25—or sometimes no minimum deposit at all.
Interest rates on basic savings accounts are low, typically ranging from 0.01% to 0.10% APY. While these rates won’t generate significant earnings, the main advantage is easy access to funds through online banking, ATMs, or in-person withdrawals. Federal regulations previously limited certain withdrawals to six per month, but that restriction was lifted in 2020. Some banks still impose their own transaction limits and charge fees for exceeding them.
Many banks waive monthly maintenance fees if you maintain a minimum balance, usually between $300 and $500. If your balance falls below this threshold, fees can range from $3 to $10 per month. Some institutions also offer automatic transfers from checking to savings, making it easier to build your balance over time.
High-Yield Savings
High-yield savings accounts offer significantly better interest rates than traditional savings accounts, often exceeding 4.00% APY as of 2024. These accounts are primarily available through online banks, fintech companies, and some traditional institutions.
Online banks can offer higher rates because they have lower operating costs without physical branches. While high-yield accounts function similarly to regular savings accounts, they may require electronic transfers for withdrawals or limit customer service to online or phone support.
Interest accrues daily and compounds monthly, allowing balances to grow faster than with traditional savings accounts. However, rates fluctuate based on Federal Reserve policy changes. When the Fed raises interest rates, banks typically increase APYs, while rate cuts lead to lower returns. These accounts are especially beneficial when interest rates are rising.
Money Market Deposit
Money market deposit accounts (MMDAs) combine features of both savings and checking accounts, offering higher interest rates while allowing easier access to funds. Banks and credit unions often require a higher minimum balance, sometimes $1,000 or more, to open and maintain an MMDA.
Unlike standard savings accounts, MMDAs often come with check-writing privileges and debit card access. However, banks may limit the number of withdrawals or transfers per month, with transaction fees for exceeding the limit.
Interest rates on MMDAs are typically tiered, meaning higher balances earn better returns. For example, an account with a $10,000 balance may receive a higher APY than one with only $1,500. These rates fluctuate based on market conditions, particularly in response to Federal Reserve policy changes.
Certificates of Deposit
Certificates of deposit (CDs) offer fixed interest rates in exchange for locking in funds for a set period, ranging from a few months to several years. Longer terms generally offer higher interest rates, with some banks and credit unions exceeding 5.00% APY as of 2024.
A key advantage of CDs is their fixed rate, which remains unchanged throughout the term, protecting savers from potential rate cuts. However, this also means missing out on higher returns if interest rates rise after opening the account. Early withdrawal penalties discourage premature access, often resulting in the forfeiture of several months’ worth of interest.
Some CDs offer flexibility. Bump-up or step-up CDs allow rate adjustments if market rates increase, while no-penalty CDs permit early withdrawals without fees. These options cater to different financial strategies, whether prioritizing liquidity or maximizing returns.