The 3 Types of Savings Accounts and How They Work

February 12, 2021

Was your New Year’s resolution to get your finances in order and save more money? If so, you’re in good company. Getting in better financial shape is one of the most common resolutions heading into the new year, and there’s no time like the present to get started with healthy financial habits to set yourself up for success. If you’re just beginning to work on your finances, saving money is the most important first step, and choosing the right savings to account for your situation can make the process that much easier.

Why it’s important to save money

According to the Federal Reserve (please include footnote or annotation for this stat), 39% of Americans don’t have enough savings to cover an unexpected expense of $400. If you already have that much saved up, you’re ahead of the game! And if you’re still working on it, you’re definitely not alone.
Saving money is one of the cornerstones of financial health and wellness. Having a hefty savings account balance can help you weather economic uncertainty, afford milestone purchases, and provide a cushion in case of unexpected accidents and expenses.

Types of Savings Sccounts

If you already have a little cash saved up in your checking account and are wondering where to store it, there are several different options you should consider. These savings accounts all have different benefits and drawbacks depending on your specific situation, including when you’ll need the money and what you’re saving for.

Standard savings account

A standard savings account is one of the most common places for individuals to store their extra cash. Savings accounts are available at most banks and credit unions, and often have minimal fees and costs associated with them as long as you maintain a minimum balance. Savings accounts are great places to store three to six months’ worth of emergency savings, as well as any cash you might want ready on hand in case of an unexpected expense. Savings accounts typically earn a minimal amount of interest, although some high yield savings accounts have more competitive rates.

Certificate of Deposit (CD)

If you’re looking to grow your money but aren’t willing to tolerate too much risk, a Certificate of Deposit is a great option. CDs are savings accounts in which you invest a certain amount of money for a specific period of time, such as six months or two years. During this time, you don’t have access to your savings. After the term limit ends, you can redeem your CD for the original amount plus interest.
CDs are a great option for medium-term expenses like the down payment for a house, a new car, or another significant purchase that you know is on the horizon. CD interest rates vary, but most have a modest return rate of about 0.5-0.8%. CDs aren’t a great option for safety nets or emergency funds, and they’re not as potentially lucrative as other investment options. That said, they’re a great choice for medium-term savings if you’re looking to earn a little extra interest.

Money Market

Money market accounts are another great savings option if you’ve already saved up an emergency fund and are looking to earn more interest on your savings. Sometimes also called money market deposit accounts or money market savings accounts, these accounts are offered by many banks and credit unions, and they earn interest over time. Rates are typically higher than a typical savings account, but there are limits on how many times you can withdraw money per month. Some banks also require a minimum deposit in order to open a money market account.

What’s Next?

Traditional savings accounts, CDs, and money market accounts are all great ways to save money and earn a modest amount of interest. If you’re looking to grow your wealth, however, you’re probably interested in a higher rate of return than that offered by these lower income types of accounts. Once you’ve built up a decent savings balance, you should consider investing your money in order to earn more income on your savings. While investing involves a greater degree of risk than traditional savings accounts, it’s also a great way to make your money work for you! Beanstox can help you with that.

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