6 Types of Savings Accounts

When planning for your financial future, you may look into paying off debts, starting a retirement account, buying a home, and investing. But another key part of the financial picture is saving money.

You may already know it's important to save money for an emergency, making large purchases, your children’s education, and a variety of other purposes, but where exactly do you start? There are different types of savings accounts out there, and you want to make sure that you’re signing up for the one that will give you the most bang for your buck and cater to your specific financial needs.

First, learning about the types of savings accounts that are available to you is important. Once you do that, you can decide which type of account is the best for your situation.

The definition of a savings account

A regular savings account is a free account your bank offers; it has the potential to earn a small amount of interest on the money you store in it. The bank may also give you a free checking account and access to mobile banking to go along with your savings account. The FDIC will insure your savings account for up to $250,000 just in case a bank goes under.

You will likely have to put in a minimum deposit as well as keep a minimum balance in your savings account every month in order to avoid monthly fees and maintenance fees. There is also a federal law called Regulation D, which typically stipulates that savings account owners cannot make more than six transfers or withdrawals per month from their savings account. This also applies to money market accounts, another type of savings accounts. This rule was temporarily relaxed due to financial implications from Covid-19, so you may want to ask your bank if you have questions about the current rules.

Other types of accounts

Though having a regular savings account is a good way to get started building an emergency fund, there are other types of savings accounts that could offer you more attractive terms and help you reach your goals quicker. Here are some options you may want to consider:

1. High-yield savings account

High-yield savings accounts provide higher interest rates on your savings than regular savings accounts. They may also not charge any fees. You can sign up for them in person or online, and they may have a minimum balance requirement.

Some of the top high-yield savings accounts offer 0.65% to 1% interest. A downside of high-yield savings accounts, however, is that the interest rate is variable, meaning it can change at any time. Even if you sign up for the highest interest rate account, the rate could drop whenever the financial institution chooses to change it.

In an interview on Dave Ramsey’s podcast, the financial expert was asked if he recommended a high-yield savings account to house an emergency fund. He said, “As long as it's liquid, I use high-yield money market savings accounts all the time.” Being liquid means that you can take your money out without being charged a penalty fee for an early withdrawal.

2. Money market account

A money market account is a savings account that offers higher interest than a traditional savings account and issues you check-writing privileges and perhaps a debit card with access to an ATM. You can establish a money market account in person at your local financial institution, online, or through a mutual fund company.

Unlike a regular savings account, the FDIC does not protect a money market account that you open with a mutual fund company, so you could potentially lose your funds. You’ll need to open your money market account with a bank in order to receive that protection.

Like a high-yield savings account, the interest rate for a money market account is variable. Typical interest ranges from .75% to .90%, and there is usually a minimum balance to open an account. You may be able to find a money market account offering a fixed introductory APY (annual percentage yield). When signing up for your account, you’ll need to make sure there isn't a penalty for taking your funds out too early.

3. Certificates of deposit

Another type of savings account is a certificate of deposit account. Also known as a CD, this short-term account will hold your money for a set period of time, but you usually can’t withdraw it early without paying a penalty. CD terms can last from a few months to several years, depending on the type of account you have. This type of savings account may benefit you if you don’t need access to your money right away and would rather let it sit and grow.

For this very reason, typical CD interest rates are higher than interest rates for money market accounts and regular savings accounts. You may be able to find a CD offering 1.5%, but you’ll need to have a minimum deposit in order to qualify. In fact, most CDs require you to deposit your money into the account in a single lump sum. Once you deposit your money, you cannot add or withdraw it until the CD term ends. Most CDs offer fixed interest, which means the rate won’t fluctuate.

4. Student savings account

If you’re a young adult in high school or college, you can sign up for a student savings account. This is a starter savings account that may not require a minimum balance or minimum deposit and might not charge you any monthly fees or maintenance fees either. You’ll earn minimal interest, but you’ll learn how to save money when there are low stakes involved. Then, once you effectively utilize your student savings account, you can graduate (figuratively and literally) onto a better savings account.

5. Health savings account

A health savings account, or an HSA, is an account you use to pay for your health care. You contribute tax-deductible money into the account, and you won’t pay tax when you withdraw from it, as long as you use the money to cover your health care costs. An HSA will earn interest, but unlike a traditional savings account, that interest will not be taxed.

You must have an HSA-qualified health care plan in order to get an HSA. Once you turn 65, you can take money out of an HSA to pay for nonmedical expenses and you will not be penalized. You will, however, pay income taxes on your funds.

6. College savings account

If you have children and you want to save up money for their education, you can open up a college savings account, also called a 529 plan. Additionally, you can use funds from your 529 plan to pay for K-12 education. There is no universal 529 plan; it will vary from state to state. You will put your 529 plan funds into an investment of your choice, which means that it could lose money.

Savings account tips

It’s incredibly important to have savings in the bank as part of your personal finance plan. According to financial guru Suze Orman on her blog, “How to Become a Better Saver,” you can save more by setting up automatic deposits into your account and opting for online savings accounts, which tend to offer higher interest than brick-and-mortar banks. Plus, Orman wrote, “When there are changes in the economy that cause general rates to rise, chances are very good that the online banks will quickly adjust their rates higher.”

By researching your options online and off, you can find the type of savings account that works the best for you and helps you achieve – and perhaps even exceed – your financial goals.