What Are the 3 Types of Savings Accounts?

Savings accounts provide a secure place for individuals to store funds and grow their money through earned interest. These accounts are offered by financial institutions like banks and credit unions. They hold savings rather than facilitating daily transactions, unlike checking accounts. The interest earned allows the principal to increase over time, making savings accounts a foundational tool for financial planning.

Standard Savings Accounts

A standard savings account holds readily accessible funds. These accounts feature minimal or no initial deposit requirements. Deposits and withdrawals are straightforward, often facilitated by linking to a checking account. However, some financial institutions may limit certain types of withdrawals or transfers per statement cycle, often around six.

Interest rates on standard savings accounts are usually modest, with the national average around 0.38% Annual Percentage Yield (APY). Online banks often provide significantly higher rates, sometimes exceeding 3.00% to 4.00% APY. These accounts are well-suited for emergency funds, short-term savings goals like a down payment on a car, or for individuals beginning their savings journey. While some accounts may have monthly maintenance fees, these are often waivable by maintaining a minimum balance or meeting other criteria.

Money Market Accounts

Money Market Accounts (MMAs) offer a blend of features from savings and checking accounts, often providing higher interest rates than standard savings options. They typically come with higher minimum balance requirements for opening or to avoid monthly fees, which can range from a few hundred to several thousand dollars. The average APY for MMAs is around 0.59%, though competitive accounts can offer rates above 4.00% APY, depending on market conditions.

Many MMAs include limited check-writing privileges and debit card access. This added liquidity allows for easier access to funds compared to a standard savings account, while still earning a competitive yield. Similar to savings accounts, MMAs may have limits on the number of certain transactions per month, often around six, before incurring fees. These accounts are suitable for individuals seeking a better return on their savings than a standard account, who also desire transactional flexibility for larger, less frequent expenses.

Certificates of Deposit

Certificates of Deposit (CDs) are a type of savings account characterized by a fixed interest rate and a fixed term. Funds are deposited for a specific duration, ranging from a few months to several years, such as 3 months, 1 year, or 5 years. In exchange for committing funds for this period, CDs generally offer higher interest rates than both standard savings accounts and many money market accounts, especially for longer terms. For instance, recent rates for 1-year CDs have been around 1.63% APY, with top offers exceeding 4.45% APY.

A drawback of a CD is the penalty for early withdrawal. If funds are needed before the CD’s maturity date, a penalty is incurred, which can be a forfeiture of a portion of the earned interest, or in some cases, even a portion of the principal. The penalty amount often depends on the CD’s term, with longer terms usually having higher penalties, such as several months of interest. CDs are an appropriate choice for savers with defined financial goals and timelines, such as saving for a future down payment on a home, who are confident they will not need access to the funds until the maturity date.