Saving money can be tricky at the best of times, but if you’ve lost your job, had your hours at work cut back, or are simply in a situation where you’re trying to make ends meet, it can be even harder. But this doesn’t mean that it’s impossible.
One of the most important things that you can do on your quest to save money is to understand the tools that may be available to you. Along with your budget, one of the foundations of your savings will be the accounts that you put this money in. But there’s a little more to it than that. The reality is that there all sorts of different types of savings accounts out there, and if you’re going to leverage their benefits, you’ll need to understand the differences between them.
Today, we’re going to start by discussing what a savings account is in broad terms, and then we’re going to go over some of the more common types of accounts. Understanding the differences between these accounts is the first step to using them properly, so let’s get started!
What is a Savings Account?
When you have money on hand that you don’t want to spend right away, a savings account is often a great place to put it in. Your money will be kept safe while simultaneously growing in interest over time. Generally, they aren’t designed to be used on a daily basis. They’re a place for you to invest your money in the short or long term, depending on the type of account. You might use one as a vehicle to save for things like vacations, home renovations, and more.
In most cases, you’ll be able to withdraw money as needed from a savings account, but depending on the type of account, there may be a limit on the number of transactions you can make each month. This means that you’ll really only want to withdraw money when you really need it, otherwise you may have to pay an extra fee for exceeding your limit.
7 Types of Savings Accounts
Like we’ve said, there are all sorts of different types of savings accounts out there, and understanding the differences between them and what their intended uses are can go a long way in helping you to pick which one might be best suited to your particular needs.
While this list doesn’t include every type of account, we’re going to go over some of the more common ones.
1. Traditional (or Basic) Savings Account
There’s a good chance that when you think of a savings account, what you’re picturing is a traditional savings account that you would open at a credit union or a bank.
These types of accounts are basically what we’ve described in the previous section. They’re a place to store money that you’re not likely to use in the short term. Your money will earn a small amount of interest which will typically be less than what it would earn in different savings accounts. While you should be able to withdraw your money when needed, there’ll likely be a monthly limit on how many withdrawals you can make.
A lot of banks may allow you to open one of these accounts even without a substantial amount ready to be deposited, which makes them relatively easy to open. They can be useful for someone who is just getting started on their savings journey and is only able to deposit a small amount of money to begin with.
2. Money Market Account (MMA)
A money market account shares characteristics with a normal checking account and a traditional savings account. One of the main distinctions between an MMA and the first account on this list is that with an MMA, you’ll typically have an easier time using your money. You’ll likely be able to use it to write checks and it may even come with a debit card. But there will still be some restrictions, specifically in the form of a monthly withdrawal limit similar to what you would have with a basic savings account.
In some cases, a money market account may yield more interest than a traditional savings account, but the caveat is that you may need to keep more money in it. Because they yield a good amount of interest but also allow you to access your funds fairly easily, they may be a good option when you’re looking to start an emergency fund. Overall, they may be a good choice if you want to grow your money but still want to have some level of access to it.
Want to learn more about how to build an emergency fund? Click here!
3. High-Yield Savings Account
A high-yield savings account is very much what it sounds like. It functions in a similar way to a basic savings account, but you’ll be earning more interest. However, the rate at which this interest accumulates is variable, meaning that it will fluctuate over time. So, even if the interest rate is really high when you first open the account, it can change over the course of the account’s lifespan[1].
Either way, there’s a good chance that even with the fluctuations, your money will still grow at a higher rate in a high-yield account than it would in a traditional savings account. And just like a traditional account, you’ll be able to access this money when you need it, albeit with a limit to the number of transactions you can make each month.
4. Traditional and Roth IRAs
Individual Retirement Arrangements (IRAs) are designed to help you save money for when your working days are behind you. They typically come in the form of either a traditional IRA or a Roth IRA.
Generally, with a traditional IRA, you can make contributions that are tax-deductible, and the earnings that you make from what you’ve contributed won’t be taxed. However, when you do eventually withdraw this money once you’ve retired, you’ll need to pay taxes on the money you’ve withdrawn.
A Roth IRA is designed for the same purpose with the main difference being that your initial contributions won’t be tax-deductible. But when you eventually withdraw your money, you won’t have to pay taxes on it. Ultimately, it becomes a decision of when you think you’d gain more from getting a break on your taxes[1].
5. Traditional and Roth 401(k)
Like an IRA, a 401(k) is an account through which you can make contributions to your retirement fund. The main difference here is that these are offered through employers, and the contributions you make to this account will be matched by your employer. They may match your entire contribution or just a portion of it.
The distinction between a traditional versus Roth 401(k) is similar to the differences between those two types of IRAs. With a traditional 401(k), your investment earnings won’t be taxed until you withdraw the money, while with a Roth 401(k), your withdrawals won’t be taxed [2].
6. Student Savings Account
If you’re a student looking to save money, you’re in luck! Student savings accounts are meant specifically for people in school. They can come with perks like low balance requirements and more.
If you’ve been saving up for college throughout high school, you’ve been squirreling away every dollar you’ve gotten from holidays or birthdays, or you’re a college student working a summer job, putting your money in a student savings account can be a great way to save your money, earn interest, and avoid the temptation to spend it. It can also be a great opportunity for young people to learn more about some of the important financial ins and outs of opening and maintaining a bank account. This could include things like the importance of comparing different rates from different banks, and even regularly making contributions to your savings and keeping track of your finances. You’re never too young to start learning about the principles of financial responsibility!
7. Certificate of Deposits (CDs)
With some of the types of savings accounts that we’ve mentioned – like a traditional or high-yield savings account – you’ll be able to access your money when you need it. But in some cases, you may find that you have some extra money lying around that you know you won’t need for some time, whether that’s for several months or even multiple years. In this instance, you may want to consider putting it into a certificate of deposit (CD).
In essence, the idea of this type of account is that you’ll make a commitment to not touch the money you deposit for a specific amount of time in exchange for a higher interest rate than you would generally find with a more traditional savings account. Typically, the more time this money stays in this account, the more interest you may earn. Just keep in mind that if you need to take this money out before the designated period of time is up, you’ll likely need to pay some sort of penalty.
Consider Your Options Before Opening a Savings Account
Like we stated at the beginning, there are plenty of different types of savings accounts out there and picking one can be an overwhelming prospect when you don’t know where to start. That’s why it’s important to take your time and do your research before making any decisions.
Keep in mind that you’re not restricted to using just one of these accounts. Your goals may be varied, and you may want to save for your retirement while also saving up for a vacation. To save for these significantly different goals, you may want to break your savings up into different accounts.
If you stay patient, review your options, and assess your personal situation, you can hopefully find the savings account that’s best suited to you. We hope this article helps!
Disclaimer: This article
provides general information only and does not constitute financial, legal or
other professional advice. For full details, see CreditFresh’s Terms of Use.
[1] https://www.cnbc.com/select/high-yield-savings-account/
[2] https://www.investopedia.com/retirement/roth-vs-traditional-ira-which-is-right-for-you/
[3] https://www.investopedia.com/terms/1/401kplan.asp
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