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Remember the story of The Three Little Pigs? The third pig kept working and working with bricks to build a strong house, while the other two quickly built homes so they could play, and their homes were blown away by the big bad wolf.
That third pig also had a savings account and contributed to it regularly. That’s not in the story, but I’ll bet he had a hefty savings account.
Yes, a savings account is boring.
And it takes a lot of work and foresight to save any extra money you have in a savings account that doesn’t earn much interest - especially with rent payments coming in every month.
But over time it can turn into thousands of dollars set aside to pay for a number of big goals, including:
- An emergency fund in case you lose your job
- College fund
- House down payment
- Car purchase
Boring? Maybe. But that’s what life’s expenses are sometimes. And they’re not so boring when you can afford them — as the third little pig knows.
Why Have a Savings Account?
Even if you don’t have a short- or long-term goal in mind for your savings, a savings account can be a good place to park extra money and earn a little bit of interest. If you shop online for interest rates – as we’ll get to later — you’ll probably earn much better than the low rates many banks currently pay their customers
Savings accounts are safer than keeping your money in a piggy bank or under your mattress at home, where a big bad wolf could steal it. Savings accounts are insured for up to $250,000 by the Federal Deposit Insurance Corp., better known as the FDIC. That’s insurance you won’t get from keeping your cash at home, where you can easily grab it to go impulse shopping.
The money in savings account is liquid, meaning you can withdraw it at any time. This is one reason why they pay so low. Rates can be as low as 0.01%, though as of April 27 the national savings account rate was 0.07%, according to the FDIC. An interest-bearing checking account averaged 0.04%.
If your savings goals are years away, such as as college or retirement, then putting your money in vehicles like a college savings 529 plan or a 401(k) retirement plan will likely earn you more money.
What Type of Savings Accounts Exist?
There are many types of savings accounts and each works simply: Deposit your money in the bank and you’ll earn interest in return. The longer you let it have your money, the more interest you can earn.
These differ from checking accounts, which also have liquidity but often don’t earn interest. Checking accounts are usually used to pay bills, not to save for a car, vacation or other goal.
Savings accounts also differ from investment accounts. These can include cash, stocks, bonds and mutual funds, which don’t guarantee your rate of return.
Here are the three common types of savings accounts:
1. Deposit Savings Accounts
Also called transactional savings accounts, these are the accounts you’re most likely to encounter when opening up a savings account. They’re an easy way to store money in your bank or credit union while earning a little interest.
A small minimum deposit is usually needed to open an account. These accounts have high liquidity, which leads to some of the lowest interest rates paid for deposits. Money can be easily transferred to a checking account or used to make automatic bill payments.
Federal rules limit savings account transactions to six per month, though in-person and ATM withdrawals don’t count.
2. Money Market Accounts
These require a much higher initial deposit such as $2,500, and you could be charged fees if the balance drops below the minimum amount.
Interest rates are higher than what you would receive on a basic savings accounts. As of April 27, the national interest rate paid on money market accounts was 0.10%, compared to 0.07% for savings accounts.
Checks can be written against the balance of money market accounts, a feature that isn’t offered on deposit savings accounts. Up to six transactions are allowed each month, and checks are included.
The higher interest rates and liquidity make money market accounts a smart place to have an emergency fund if you can afford the initial deposit.
3. Certificates of Deposit
Called CDs for short, these savings accounts have the lowest liquidity but the highest interest rates. Terms range from one month (0.06% interest nationally) to 60 months (0.58% interest).
A CD is bought for a “duration” or “term,” and the longer the money is held, the higher the interest rate. Money can be withdrawn before the CD matures, but you’ll probably have to pay a high fee.
When the term ends, you can either withdraw the money or the bank can renew the CD for the same term.
One way to avoid early withdrawal fees and have a CD mature every year in case you need the money is to “ladder” CDs.
For example, instead of investing $5,000 in one CD for five years, invest $1,000 in five separate CDs that have a term one year longer than the last. The first $1,000 CD has a one-year term, the second is for two years, and so on.
When each CD matures, you either use the money if you need to or reinvest it into a new five-year CD.
How To Find The Best Savings Account Rates
Mobile banking accounts are more likely to pay higher interest rates than brick-and-mortar banks, credit unions, or physical banks.
Your money is just as liquid in an online account as it is at your neighborhood bank. You should be able to make an electronic transfer from the bank’s secure website or mobile app at any time to move money to your checking account or other financial institution. Phone transfers may also be possible, and some online banks allow cash withdrawals at ATMs without paying fees.
Before opening an online account, or any bank account, make sure you understand any fees. Luckily, fees for savings accounts are usually small and only require keeping a minimum balance. Transfer fees, if they exist for your account, can add up.
Get a High-Interest Savings Account
We suggest using a high-interest savings account to get the most out of your money. Most traditional banks only offer ~0.09% interest (APY) on your savings accounts and you could be getting much higher yield.
After doing extensive research, here are the high-yield savings accounts we recommend:
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