You have six options for types of savings accounts. To find the best option for you, weigh the interest rates with accessibility to your money.
Savings accounts allow you to hold funds safely while earning some interest. You have many options for types of savings accounts. While a high-yield savings account offers some of the highest interest rates, traditional savings accounts make your funds more accessible and easy to use. And while a money market might offer good interest rates, you’ll have transaction limits and withdrawal thresholds per month. So before you open a new savings account, learn more about its features, pros and cons, and who it is best for.
Types of Savings Accounts
Check out these different types of savings accounts to learn more about your options. Each bank or institution will have different rules and thresholds, so review the fine print carefully before opening a new account. This guide will help you get started.
1. Traditional Savings
If all you need are the essentials, a traditional savings account might offer everything you need. These accounts are designed to hold your funds. While you can earn interest on all money in these accounts, typical interest rates hover around 0.01%.
Traditional savings accounts are available at banks and credit unions. Most accounts allow unlimited withdrawals and have few restrictions. Each bank decides how to handle this, so read the fine print before opening an account.
Who is it suitable for? Anyone who needs fast access to their money and cares little about earning interest on the money.
Pros
- Easy accessibility
- Few restrictions
- Unlimited withdrawals (or nearly unlimited)
- FDIC insured up to $250,000
Cons
- Money held in the account earns minimal interest
- Some accounts charge a monthly maintenance fee if you don’t meet account thresholds
2. High-yield Savings
Consider a high-yield savings account when you’re focused on earning passive income on your money held in a savings account. The interest on these accounts has been solid because the Federal Reserve has raised interest rates over the last few years to curb inflation.
Both banks and credit unions offer high-yield savings accounts. However, these accounts have more strict rules about the money you can transfer or withdraw from them. That makes them ideal for individuals who don’t need ready access to their funds.
Who is it good for? Individuals looking to maximize their returns on their savings and who don’t need to withdraw money frequently should consider a high-yield savings account.
Pros
- Higher interest rates, with current rates earning up to 5%
- Many accounts don’t charge monthly fees
- $250,000 in FDIC insurance
Cons
- Since these accounts are often offered only by online banks, you won’t get access to physical branches
- Restrictions on the number and amount of withdrawals or you’ll face penalties
3. Cash Management
You’ll commonly find these accounts associated with investment or brokerage accounts. They are not a bank account. Cash management accounts earn more interest than traditional savings accounts but less than high-yield ones. These accounts complement brokerage accounts nicely as they can hold funds when you’re between investments to help you keep earning money.
Who is it suitable for? These savings accounts are for investors who want to know that their money will still earn interest between investments.
Pros
- Earn interest on money when you’re between investments
- Turns brokerage accounts into more of a savings account
- Most provide the same $250,000 of FDIC insurance as a traditional savings account
Cons
- Interest rates are lower than some other forms of savings accounts
- Watch out for accounts that are not FDIC-insured
4. Certificate of Deposit (CD)
CD accounts offer competitive earnings. But in exchange, you can’t touch these accounts for a set number of months you agree to when you open the account. You'll pay a penalty if you need access to the funds during the term.
CD accounts offer a fixed interest rate. When you open an account, you can calculate how much money you’ll earn by holding your funds. Traditional banks, online banks, and credit unions all offer CD accounts. You can find accounts that last anywhere from three months to five years.
Who is it good for? Those who can live without money for the term agree to look for a safe, secure way to grow their money. They also serve those who want to know the specific interest rate they will earn and lock in that rate.
Pros
- Rates are locked in, providing reliable returns on your savings
- Higher interest rates compared to most savings account types
- No monthly fees
- FDIC insurance up to $250,000
- Options for terms varying from a few months to many years
Cons
- You can’t touch your money during the term without facing penalties
- Rates could increase during your term but you’ll be locked at a lower rate
5. Specialty Accounts
Many banks offer specialty savings account types. These include accounts for children, custodial savings, and student savings accounts. Another form of savings account is a 529 account, which allows you to enjoy tax advantages while saving for education costs.
Some banks offer special accounts to help you start saving toward holiday gifts or a home. That way, the savings don’t intermingle with other funds, and you’ll know exactly what they are used for.
Who is it suitable for? Parents or guardians are looking to prepare youth for financial prosperity. Other accounts allow you to set aside funds for specific purposes, such as a home purchase or holiday gifts.
Pros
- Focus on savings goals by earmarking your funds while earning interest
- Low or no maintenance fees based on the institution that oversees the account
Cons
- You might face strict account rules for tax-advantaged accounts
- Often lower interest rates compared to other savings account types
- Many accounts have strict rules for who can open these accounts
6. Money Market
A money market account (MMA) offers variable interest rates like a high-yield savings account. But the perk of an MMA is that you can get a debit card and checkbook to spend money directly from the account, making the money more accessible.
However, you risk getting minimal interest on your account since those rates can change from one month to the next.
Who is it suitable for? Money market accounts best serve individuals looking for high interest rates and accessibility to their funds.
Pros
- Higher interest rates compared to traditional savings accounts
- Easy access to your money
- $250,000 in FDIC insurance
Cons
- You might face fees for withdrawing too much in one month or failing to maintain account minimums
How to Choose the Right Type of Savings Account For You
Just because your friend talks about how much interest they earn on their high-yield savings account doesn’t mean you should open a similar account. You should take the time to evaluate the best account for you based on your financial goals and spending habits. Use these tips to find the best account for you.
- Review your goals: Are you saving toward a specific purchase, such as a home or college for your child? If so, look for an account that helps you meet your goals within the time frame you’re working toward.
- Type of money you’ll hold there: Is your savings account going to hold your emergency fund? Funds you’ll use toward a goal? Money you just aren’t sure what to do with currently? If you don’t have a specific use case for the funds or they are the emergency fund you hope to never need, you can open a more strict account that doesn’t allow for withdrawals or has account minimums since you likely won’t touch the funds.
- Amount of funds you’ll start with: Many accounts have an initial deposit minimum and a minimum account balance that you must maintain to avoid fees. Research these minimums before opening an account.
- Account management preferences: To earn the highest interest rates, look to an online bank. Evaluate whether you’re comfortable with that or whether a traditional bank is better.
- Option to invest: If you want to invest the funds at some point, open a cash management account, which will seamlessly transfer to your brokerage account.
- Check-writing/debit card: Do you intend to write checks from the account or withdraw funds using a debit card? If so, the best option is a money market account with check-writing privileges and a debit card.
- Locked interest rates: If you want to know the interest rate you’ll earn on the account long-term, a CD is the best option since it is the only savings account type that lets you lock your rates. Other types offer variable interest.
Top Savings Accounts
Alternatives to Savings Accounts
You don’t have to place your money in a savings account. Learn these alternative options.
- Investment account: You can earn greater returns on your money by investing it in the right investments. The challenge is that it’s hard to know what investments to choose, and there is some risk of losing your money due to changes in the market.
- Health savings account: You can only use the money toward health care-related expenses, but you won’t pay taxes on the funds or the earnings you make on the funds so long as you use them toward health care expenses. This is a smart move, especially if you foresee medical expenses in the future.
- Individual retirement account: An IRA allows you to set aside funds toward retirement. You can invest in a traditional IRA and get tax advantages in the current tax year or opt for a Roth IRA to enjoy tax advantages during retirement.
Earn Interest and Protect Your Hard-earned Money
Savings accounts offer FDIC insurance and the peace of mind that you’ll earn interest on the money without concerns about losing it due to poor investment choices. Select the best account type based on your goals and start building your savings account now.
Frequently Asked Questions
What is the best type of savings account?
The best type of savings account will vary based on your need for access to funds. A high-yield savings mixes the benefits of higher interest rates with moderate fund accessibility.
What types of savings accounts should I have?
You can choose from various savings accounts and mix and match them to maximize their benefits and minimize their disadvantages. For example, it can be wise to use a money market account for your emergency fund and open a CD account for all the above to enjoy short-term and long-term benefits.
About Rebekah Brately
Rebekah Brately is an investment writer passionate about helping people learn more about how to grow their wealth. She has more than 12 years of writing experience, focused on technology, travel, family and finance. Her work has been published in Benzinga, Hearst Bay Area, FreightWaves and Dallas Observer publications.