Everyone’s financial situation is different, which means their savings goals are different, too.
Check out three great interest bearing accounts, all of which earn interest but have different advantages in terms of their ability to help you with your financial goals.
3 accounts to help you save
Putting your savings in an account can mean a lot of different things: from ongoing contributions to “save it and forget it.” Below, we look at accounts that offer different deposit options. For example, a high-yield online checking account lets you continually add money. A CD normally only allows one deposit that then earns interest.
Each account provides a unique way to make the most of your savings.
1. High-yield online checking account
Great savings vehicle for: Short-term financial goals (e.g., building an emergency fund)
Once, traditional savings accounts were the main way you earned interest on your saving deposits. Not anymore. High-yield online checking accounts have now joined the party.
Sometimes, checking accounts don’t offer interest, but a high-yield online checking account offers higher returns on your savings. And since there aren’t any transaction limitations on checking accounts, funds are easy to withdraw if needed.
How does a high-yield online checking account work? This type of account works similarly to a regular checking account. You open an account with a financial services provider, deposit money, and make transactions.
The big difference is that the money you deposit (normally through direct deposit, not cash) earns higher interest — meaning you get a higher annual percentage yield (aka the account’s interest + compounding interest) than a regular checking account. For example, Simple has a high-yield checking account where you can earn up to 1.55% APY (as of April 2020) as compared to the regular checking account which earns 0.01% APY. Check here to see current rates at Simple.
Although there are options for opening a high-yield checking account at a physical bank, you’ll normally get a better interest rate if you open online. You can also find options that don’t hit you with high ATM withdrawal or monthly fees.
How much can you put into a high-yield online checking account? Depends on the financial services provider, but minimum deposits can range anywhere from $0 to $2,500. Sometimes, the provider will require that you keep your deposit at a certain amount, so be sure to read the fine print.
What are the advantages of a high-yield online checking account? You can find some high-yield online checking accounts with a higher annual percentage yield (APY) than many traditional savings accounts. You can manage your money, pay bills, and more, all while earning interest.
But how can you make sure you don’t “accidentally” spend savings? With some high-yield online checking accounts, your savings live alongside the checking account with your spending money, so it can grow safe and sound. It’s still easy to access these savings if necessary, making the account a great place to store your savings for things like your emergency fund.
2. Money market deposit account
Great savings vehicle for: Midterm financial goals (e.g., saving for a new washing machine)
If you have a large chunk of cash already saved up AND are more flexible in how often you need to access these savings, a money market deposit account (MMDA) just might be the ticket.
It’s normally less flexible in terms of accessibility than a high-yield online checking account, but it’s more flexible than a traditional savings account (you can also normally earn higher interest rates).
How does a money market deposit account work? An MMDA is a type of high-yield savings account that you can open through most banks, credit unions, and financial service providers. These accounts normally offer higher rates than traditional savings accounts and are somewhat similar to a checking account.
You don’t have unlimited access to your savings with an MMDA, but you can traditionally write a certain number of checks each month or even use a debit card to get money out (e.g., up to six times per month). Your account also grows safely if your provider is insured by the FDIC (up to the legal limit).
How much can you put into a money market deposit account? MMDAs normally require a higher minimum opening deposit (e.g., $2,500), which can be a drawback if you don’t have that much money to deposit. And if you go below the minimum balance, you might be hit with fees.
What are the advantages of a money market deposit account? As mentioned, money market deposit accounts normally offer higher rates than traditional savings accounts. You also don’t have to deposit your money in an MMDA for a specific length of time, as you do with a CD (more on that below). Instead, you can deposit at any time. It’s a great option if you want to grow your money at a higher rate and want the flexibility of using a check or debit card to access your hard-earned savings periodically.
3. Certificate of deposit (CD)
Great savings vehicle for: Future financial goals or for expenditures that you already have the cash saved up for (e.g., buying a house)
Cue the music from the Backstreet Boys’ 1999 album “Millennium.” Wait . . . sorry, not that kind of CD.
The CD we’re talking about here is a type of savings vehicle. Also called a certificate of deposit, a CD allows you to put an amount of money into savings, where it will generally earn more interest than a traditional savings account. The catch here is that you aren’t normally allowed to use the money until the period agreed on with the financial services provider is up (unless you have a no-penalty CD, but more on that in a minute).
How does a CD work? A CD is a sum of money you keep in a bank, credit union, or with a financial services provider for a set period (also called the CDs term). That sum then generates interest. In summary: You agree to keep your money in the account for a while, and you come out with more than your initial deposit at the end.
How much can you put into a CD? You’re usually required to deposit a minimum opening balance (your “principal” balance) traditionally between $200 and $10,000.
What are the advantages of a CD? A great thing about certificates of deposit is that they’re flexible in terms of their length. For example, you can place your money in a short-term CD with a 12-month timeline, or in a long-term CD with a 5-year timeline. This is especially helpful so that you can time the access to your money for your planned expenditures and goals.
Another advantage is the interest rate. The interest rate generally stays the same (i.e., it’s fixed) for the length of the CD’s term, so you know exactly how much interest you’ll have earned after the term is up. You also have the option of choosing a no-penalty CD. Unlike a traditional CD, a no-penalty CD means that you can get your savings out without paying a fee. Your money can still grow, but you have the peace of mind of knowing that you can access your money if absolutely necessary.
Which type of interest bearing account is right for you?
The right type of interest bearing account ultimately depends on what you want to do with your money. Think about those short-term and future financial goals.
If you’re building an emergency fund, a high-yield online checking account lets you grow your savings and still easily access the money, if necessary. For your neighbor who wants to start that alpaca farm, a CD might be a great option if they already have a stash of cash and want to earn a guaranteed return on their savings.
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