A savings account is one of the best places to store money you don’t plan on spending soon. But before you open a savings account, you should have a good understanding of why you need one and how the various types of accounts work so you can find the best savings accounts for your needs.
As we’ll discuss, it may serve you to have more than one type of savings account. This guide will walk you through the differences among some of the most common types of savings accounts, including standard and high-yield savings accounts, certificates of deposits (CDs) and retirement accounts.
What is a Savings Account?
A savings account is designed to hold your money in the long term. Common features of savings accounts include limited monthly withdrawals, limited transfers and a decent APY. Every savings account collects interest over time — the main difference between types of accounts is how quickly they gain value and how liquid the money you keep in the account is.
Standard savings accounts are offered by most traditional banks and can be linked to your checking account. High-yield savings accounts, frequently offered by online banks, investment firms and credit unions, may charge maintenance fees or come with minimum balance requirements but can earn a higher return than standard accounts. Any FDIC-insured savings account is considered the safest place to store liquid (spendable) money long-term.
So, do you need a savings account? Most financial advisors would say yes. Savings accounts can help you to separate your savings from your monthly spending. Long-term savings are crucial to set yourself up for future financial success, though over half of Americans don’t have more than three months' worth of emergency savings set aside. Savings accounts also offer varying levels of interest to help your savings hold value even as the dollar depreciates over time.
To break it down a little further, here are the pros and cons of opening a savings account.
Savings Account Pros and Cons
- Earns interest
- Prevents overspending
- Most are free
- Helps to reach your financial goals
- Withdrawal limits
- Can come with a fee
Pros and Cons explained
Even in a traditional, low-interest savings account, your money will gain interest to make up for any value lost due to inflation.
Unlike a checking account, a savings account usually comes with limits on withdrawals and transfers. That can help you avoid overspending.
Most are free
Most savings accounts are free, though some high-yield savings accounts may require you to maintain a minimum balance.
Helps to reach your financial goals
Keeping your money in a savings account helps you to stay on top of your financial goals and watch your wealth grow.
Most savings accounts, whether traditional or high-yield, come with monthly withdrawal limits and may charge a few dollars if you exceed those limits.
Can come with a fee
Depending on the account type and your balance, you might have to pay a monthly maintenance fee.
The most Common Types of Savings Account
There are quite a few different savings accounts you can use to grow your wealth.
The next section will go over eight of the most common types. All of these savings accounts can be opened at any time, regardless of your income.
Traditional Savings Account
Best for: Anyone just starting to build their savings or who wants quick access to emergency funds.
If you’re thinking about opening a savings account, a traditional or regular account is probably what you have in mind. These types of savings accounts are offered by all traditional banks. They do collect interest, but generally just enough to keep up with inflation (or less). You won’t see your savings significantly gain value in a traditional savings account.
Most banks allow you to make up to six withdrawals from your savings account per month. Beyond that, you may be charged a penalty fee per withdrawal. Your savings account might have a small monthly maintenance fee, but your bank or credit union will likely waive that fee as long as you maintain a minimum balance.
To open a standard savings account, most banks allow a one-dollar deposit. However, some may require a higher opening deposit of $500 or $1,000.
High-Yield Savings Account
Best for: Someone who wants to earn competitive rates on their savings.
A high-yield savings account offers a higher APY (annual percentage yield) than a traditional savings account. You can access these types of accounts through traditional banks, online banks or credit unions, but online banks typically offer the highest interest rates.
A high-yield savings account won’t make you rich overnight — you won’t see your savings triple within a few years. But you can see growth of up to 3-5% per year, depending on the rate of interest you start out with and how much it fluctuates. If you’re wondering how high high-yield savings rates can go, it’s best to talk to a financial advisor or a representative of your bank.
Not all traditional banks offer high-yield savings accounts. If your bank doesn’t have a high-yield option, you can search for the best high-yield savings account rates online and opt for an online bank or credit union.
Certificates of Deposit (CD)
Best for: Someone looking for a high-interest savings account who doesn’t need to access their funds right away.
A CD is a savings account that collects interest over a set period of time. That period of time is known as a term. During the term — anywhere between 30 days and 60 months — you can’t access your initial deposit without being charged an early withdrawal penalty. Once the term of your CD is over, you can choose to withdraw your funds and do whatever you like with them. You might even decide to put them into another CD.
Certificate of deposit accounts are great for setting aside savings you know you won’t need to access for a few months or years. They have no monthly service fees and are guaranteed to collect interest. You can open a CD with your traditional bank or an online bank, but online banks generally offer a higher APY.
The main downside of this type of account is that you’ll have to pay a considerable penalty if you withdraw your funds before the term of your CD is over. You shouldn’t put all your savings into CDs unless you have an emergency fund set aside in another account.
Health Savings Account (HSA)
Best for: Someone who wants a tax-advantaged account to save for routine or emergency medical expenses.
A health savings account is like a traditional account, but specifically for medical costs. It collects some interest and funds can be easily withdrawn when you need them.
So, what is a health savings account useful for? Unlike normal savings accounts, an HSA isn’t subject to federal income tax. There are no fees and any funds you don’t spend in your account roll over every year.
This type of account isn’t available to everyone. There are health savings account “rules”: You need a high-deductible health plan to open one, and deposits are limited to around $3,650 for individuals and $7,300 for families.
College Savings Account
Best for: Parents saving up for their children’s college tuition.
529 plans, or college savings accounts, are long-term savings accounts that come with tax benefits when they’re used to pay for higher education. Similar to 401(k) retirement plans, you can contribute to them through mutual funds — or deposit cash directly and your funds will be invested on your behalf — and your investment will grow over time.
A 529 plan helps you avoid the cost of student loans and makes college or private high school more affordable for your child. You can open one at any point in your child’s life and will be able to access the funds when it’s time to make a tuition payment.
Money Market Account
Best for: Anyone looking for high savings account interest rates who wants greater liquidity.
A money market account combines the benefits of checking and traditional savings accounts. You can open this type of account through your traditional bank or an online institution.
Money market accounts, or MMAs, come with higher interest rates than traditional accounts. Some banks offer rates similar to a high-yield savings account. The main difference is that you can access your MMA funds at an ATM or through checks.
However, you can’t use an MMA like a standard checking account. Most banks have a limit of six withdrawals per month and may charge a service fee if you exceed the maximum. Those fees range in the $5 to $10 range. However, some withdrawals don’t count towards your maximum, including transactions you make in person at a branch office.
Best for: Anyone saving up for retirement, either with the help of their employer or on their own.
There are multiple types of retirement savings accounts. The most common are 401(k), IRA and Roth IRA. There is no limit on the amount or types of retirement accounts you can open, but individual retirement savings are capped at $22,500 for 2023.
401(k) plans are typically provided by an employer and make it easy to contribute a percentage of your income to retirement every year. This type of account gains value much faster than a standard savings account. The 401(k) savings rate recently hit an all-time high of 14% – meaning Americans are currently taking advantage of their tax-advantaged retirement accounts to save for the future.
You might think it’s hard to save for retirement if you’re self-employed or change jobs regularly, but there are plenty of options. IRA and Roth IRA accounts are tax-advantaged and can be accessed when you reach retirement age. In 2023, the IRA contribution limit is $6,500 per year, or $7,500 per year if you’re 50 or older by the end of the year.
Is it possible to cash out your retirement account early? Yes — but in most cases, there will be high fees. That’s why you should always have funds set aside in other accounts so that you don’t need to access your retirement savings in an emergency. You can start to make withdrawals from your retirement accounts without penalty at age 59 ½ even if you’re still working.
Cash Management Account
Best for: Someone who wants to keep cash available for investments.
A cash management account (CMA) is designed for people who want to gain interest on funds they plan to invest. This type of account is generally offered by an online bank or investment firm.
Like a checking account, you can access your CMA funds any time through checks or wire transfers. A CMA makes it easy to transfer money into your brokerage or retirement accounts through your investment firm.
How to Open a Savings Account
Opening a savings account doesn’t have to be complicated. Once you find the best savings account for your needs, you should contact the bank or credit union to learn more.
It’s important to work with an institution you trust. Savings accounts are meant for long-term saving, so you should feel good about the bank you’re working with. If you’re planning on opening an online savings account, be sure to look into the online bank’s reviews, financial strength ratings and certifications.
You will need a minimum initial deposit to open a savings account. With many banks, it’s as little as $1. Some banks also require you to maintain a minimum daily balance. Every savings account has different requirements, so talk to your bank representative about the account you’re interested in to make sure it’s right for you.
Savings Account vs Checking Account: What's the Difference?
If you’re debating the benefits of a checking vs. savings account, you should know that the best way to manage your money is to have both. As your wealth grows, you’ll want to have multiple savings and investment accounts to maximize your funds.
The key difference between a checking and savings account is that a checking account allows you to access your funds any time with no limits. A savings account offers higher interest rates than most checking accounts but may limit the number of withdrawals you can make for free.
How long should money be left to grow?
Wondering how big your rainy day savings account should be? That depends on what you’re saving for.
The best online savings account for you is one that helps you meet your financial goals. If you’re saving for retirement, for example, you should be comfortable putting your money aside until you’re old enough to retire.
If your savings goals are more short-term, like saving for a home or other big purchases, you should look for the best savings account rates for a highly liquid account.
All things considered, you’ll get the most out of your savings with multiple types of accounts. Set your long-term savings aside in a cash management account or retirement account, while allowing your rainy day fund to grow in a high-yield or traditional savings or money market account.
Compare and Contrast Different Savings Account Options
There’s more than one way to save. If you’re ready to open a savings account, research your options. Look for transparent APY rates and fees, high financial strength ratings from neutral third-party institutions like Moody’s or Standard & Poors, and good customer reviews. You may want to have a discussion with your financial advisor or a banking specialist at your local bank. Remember, you can always open another account in the future as your needs change or your savings grow.
With the right mix of savings accounts, you’ll put yourself on track to a better financial future.