Published in: Banks | June 21, 2019

Savings, Checking, CD, or Money Market: Which Should You Pick?

By:  Eric Volkman

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The financial industry is so big that we’re spoiled for choice, even at the smallest neighborhood bank. Here’s a guide to four traditional types of bank instruments -- savings accounts, checking accounts, CDs, and money market accounts.

Woman standing with finger on cheek contemplating a decision

It’s no exaggeration to say that there are thousands of ways to pack money away. Even your humble, friendly neighborhood bank has a generous selection of account types to choose from. There’s an awful lot of choice offered by banks these days, so how do you select the right financial instrument for your hard-earned cash? We’re here to help in this process with a bank account guide that covers four classic account and investment types available at most lenders. Read on to figure out which one -- or ones -- might be right for your needs.

Savings account essentials

Ideal for:

  • Those who need to stash money away for the long- or the short-term.
  • Individuals seeking to earn interest on their money at very low risk.

What is a savings account?

Also occasionally known as a “passbook account,” the humble savings account is the most classic of the classic bank financial instruments. As it says on the label, a savings account is intended to be the place where funds are saved, rather than spent. Because of this, it tends to pay higher interest than that other classic account type, checking (more on the checking account in a moment).

This is, of course, relative. In these days of still-thin interest rates, we’re not talking double-digit numbers; even the loftier APYs on high-yield savings accounts fall shy of 2%. Still, that’s more than you can earn from the best checking accounts.

Savings account withdrawal limits

But you don’t get those (slightly) higher rates for nothing. Savings accounts have limits to their activity, some of them federally mandated. The Federal Reserve’s Financial Crisis-era Regulation D stipulates that holders of savings and money market accounts (see below) can effect only six “convenient” withdrawals or outgoing transfers per month; in fact, some banks allow only three or four (although I should note that some common types of transactions, such as ATM withdrawals, do not fall under this restriction). Any further withdrawals/transfers generate penalties, which can vary widely by financial institution. They can range from modest fees, to account closure for repeated transgressions within a certain period.

Can I Write Checks On a Savings Account?

It’s rare that a bank allows its savings account holders to write checks for fund disbursement (this privilege is, of course, generally reserved for holders of checking accounts). You might also be on the hook if the account balance dips below a certain level, or if you don’t continually fund the account on a regular basis.

Are Savings Accounts FDIC-Insured?

All said, savings accounts are extremely secure, as -- like other bank accounts -- at nearly every financial institution they’re insured by up to $250,000 per account holder by the FDIC. So even if your chosen bank is on shaky financial ground (which happens, although far less frequently than in decades past) the federal government has your back 100%.

Ideal for:

  • Use as a “go-to” account for frequent spending.
  • Paying recurring expenses such as rent, utilities, cable TV, etc.

What Is a Checking Account?

As a savings account is an instrument for saving, a checking account is essentially one for spending. Compared to its relative, there are typically fewer restrictions on drawing money from a checking account. That’s what makes it the ideal vehicle for regular depositing and spending; it’s very “liquid” in financial parlance, meaning cash can be moved in and out of it quickly.

The use of checks in transactions has declined with the rise of more convenient solutions, such as credit cards and e-payment systems. Yet checks are still often the instrument of choice for purchasing higher-cost items, so checking accounts are a durably popular account option.

On top of that, checking accounts typically include a Visa or Mastercard debit card, and offer features such as automated bill pay services. Since there are numerous ways to disburse funds from a checking account, it’s perfect for regular spending needs.

Checking Accounts and Interest

There’s a price to pay for this access and flexibility, however. Interest is often non-existent, or there’s a token rate at best. Even at the top end of the APY ladder, checking accounts typically pay well under 1%, which isn’t competitive with savings account rates. You can probably make more by combing the sidewalk for pennies and nickels.

Checking Account Fees

Fees are also commonplace for checking accounts, as a means of bolstering bank income in a low interest rate environment. Some of these are commonplace for banking services in general, while others are more typical of checking accounts.

  • Monthly maintenance fee -- The good news is that this usually isn’t too burdensome, coming in anywhere from $15 to $35 per month, depending on the bank and the perks and features that come with the account.
  • Minimum balance fee -- Fortunately, banks will often waive this fee if certain conditions are met. For example, the TD Bank Convenience checking account incurs a monthly fee of $15, but this is waived if the account holder maintains an average daily balance of $100 within a given month. Another common fee waiver is the use of direct deposit at a certain dollar minimum and/or frequency.
  • Overdraft fees -- Overdrafting your checking account could result in a fee. It’s important to note that many banks offer overdraft protection when linking a savings account at the same bank.
  • ATM and other fees -- You may incur an ATM fee on machines out of the lender’s network, statement printing/mailing fees, and wire transfer fees. Anyone considering a new checking account should always familiarize himself or herself with these charges, in order to avoid unpleasant surprises down the road.

Are Checking Accounts FDIC-Insured?

Checking accounts are insured for up to $250,000 of FDIC insurance per depositor, per bank.

CD account essentials

Ideal for:

  • Savers with extra money they can afford to lock up for a certain period of time.
  • Yield hunters.

What Is a CD (Certificate of Deposit)?

Are you one of those lucky people that has a pile of extra cash? Want to earn a bit of scratch on it but don’t want to throw it into a risky investment? If so, a certificate of deposit (CD) might be the way to go. A CD -- or a share certificate, the credit union version -- is a type of financial instrument known as a time deposit, basically an account that has a certain expiration date.

  • Term length -- The “life” of a CD is called the term length. Terms generally last from several months to five years or more.
  • Maturity date -- The expiration date of the CD is known as the maturity date. This is when your money is returned to you if not being rolled over into another CD with a new term.

Things to Know About CD Rates

  • CD Rates are almost always higher than savings account rates and checking account rates -- At times, the difference can be significant. This is a major reason for their popularity. Another plus is that, unlike traditional bank accounts, they rarely carry monthly fees.
  • The higher return is a reward for socking away your money until maturity -- Generally, the longer the term length, the higher the APY. Again, though, we’re in an era of low CD rates, so some max out at an APY of around 3% for terms of three to five years.

3 Things to Know About CD Ladders

A popular strategy that produces income on a regular basis is called the CD ladder. This consists of spreading an overall CD investment among a set of CDs with consecutive annual maturities (e.g. one-year, two-year, three-year, etc.). After the one-year CD matures, the proceeds are rolled into a new five-year CD. Before long, the CD ladder starts producing reliable income on a yearly basis.

Here are three things to bear in mind regarding CD ladders:

1. If done correctly, they can earn an account holder steady income at fixed intervals.
2. They require continued rollover of maturing CDs, and thus full commitment with principal funds.
3. The CD ladder is a fine way to play rising interest rates, due to the constant rollover.

Can You Withdraw Money from a CD?

The big caveat with CDs is the lock-up commitment. Banks take this seriously, and there can be tough penalties for violating it -- early withdrawal charges are notoriously steep. Mirroring the time period/APY dynamic, the longer the maturity period, the heavier the penalty.

A CD with a six-month maturity might generate a penalty of three months’ interest, while taking money out prematurely from a five-year CD could cost the violator a full year of interest. Additionally, some early withdrawal penalties include any bonuses earned when opening the CD (such bonuses aren’t as common as inducements for opening, say, checking accounts, but they exist).

Other Types of CD’s

Finally, over the years CD variations have sprung up on the market, including:

  • Liquid CDs -- These CD’s offer some scope for accessing your money before maturity, with the trade-off that APYs are lower than standard CDs.
  • Bump-up and Step Up CDs -- These CDs increase their rates over time. With the former, a holder can request a rate increase once during the term length if overall market interest rates climb. A step-up CD’s APY automatically increases at certain specified intervals. For deep-pocketed savers, jumbo CDs tend to have slightly higher APYs, and a minimum deposit commitment of $100,000.

Are CDs FDIC-Insured?

CDs of all types are covered under the FDIC’s $250,000 per account holder guarantee.

Money market account essentials

Ideal for:

  • People that want a higher yield than the typical savings account, but with more flexibility.
  • Those with enough funds to satisfy opening and minimum balance requirements.

What Is a Money Market Account?

A relatively recent arrival to the bank scene is the money market account. This is not to be confused with the money market fund, a type of vehicle that allows investors to tap directly into the namesake financial instruments.

The money market account is a form of savings account that has many features in common with classic savings products, although there are some important distinctions.

Money Market Accounts vs. Savings Accounts

The big factor that sets the two apart is what the bank does with the funds from the respective accounts. In a savings account, the bank can only use your cash to provide loans to its clients. The funds from a money market account, meanwhile, can be deployed for investment into low-risk securities.

  • Rates -- As with many prudent investors, banks are eager to diversify their assets. As a result, money market accounts earn slightly more interest than their savings account cousins. These days, it isn’t hard to find a money market account that comes close to, or even exceeds, a 2% APY.
  • Withdrawals -- Those considering opening a money market account need to be aware that it can be as restrictive as a savings account in terms of utilizing funds. Money market accounts fall under the Fed’s Regulation D, so they’re similarly restricted to six withdrawals and/or transfers per month.
  • Checks -- Yet they have distinct advantages over savings accounts. Many offer the ability to write checks (although this can be limited), which is almost always a no-no with a savings account. Examples of accounts that offer check-writing options are Ally’s Money Market Account, and Discover’s Money Market.
  • Debit cards -- Some money market accounts provide debit cards whereas savings accounts do so less frequently.
  • Minimum balances -- One notable difference between savings and money market accounts is that the latter tends to require a higher minimum balance to waive fees. Additionally, money market accounts often mandate a higher opening balance. For instance the Discover Money Market account requires both an opening and minimum average daily balance of $2,500. That number falls precipitously to $0 for both line items in Discover’s Online Savings Account.
  • FDIC insurance -- Money market and savings accounts do have one crucial feature in common, though -- the level of protection from the federal government. Like its close relative, the money market account is insured up to $250,000 by the FDIC for each account holder.

Which should you pick?

All of us have different needs when it comes to finance. Some people have, or want, to save, while others are more geared towards spending. This is where on the scale each of the mentioned account types lies:

  • Savings account: Appropriate as a place to store and keep money. If you’re looking for flexible withdrawals on a consistent basis (more than six per month), then a checking account is better.
  • Checking account: This is a spending account, very useful for everyday, recurring, and occasional expenses. Basically it’s suitable as a central account for a person or family. Major caveat: it typically earns little to no interest.
  • CD: The CD is arguably the most appropriate account type for savers, as they’re penalized (often severely) for early withdrawal of their funds -- it’s a pure invest-and-wait situation. This commitment is rewarded, though, by interest rates that are usually higher than the other three account types.
  • Money market account: Another financial instrument geared towards savers, the money market account offers slightly higher interest rates than the traditional savings account. Similar withdrawal/transfer restrictions apply, however, so account holders shouldn’t actively move their money around more than strictly necessary.

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