Published in: Banks | Jan. 4, 2019
Types of Savings Accounts and How to Choose
By: Dan Caplinger
Banking institutions are competing hard to earn your business, and they'll offer a wide variety of products to get you in the door. From checking accounts and certificates of deposit to various types of savings vehicles, you'll find a broad array of options from which to choose.
Even if your goal is to find a savings account to help you put aside money for a rainy day, you'll have to pick from several different choices. Below, we'll look more closely at the various types of savings accounts and how you can decide which one is best for your needs.
The various types of savings accounts
Banks often refer to different types of savings vehicles with proprietary account names that makes them harder to compare. In simplest terms, however, savings accounts typically break down into about half a dozen different categories.
Regular savings accounts are the base level offering that nearly every bank will have. These accounts are usually the easiest to open, because they come with the fewest restrictions. Regular savings accounts typically have either no minimum balance requirement at all or have very low minimums that make it easy for just about any customers to meet them. The drawback of regular savings accounts is that they often pay relatively low amounts of interest, making them less beneficial for savers looking to generate income from their account balances.
High-interest savings accounts offer an alternative for those who are looking to maximize the amount of investment income they earn. As their name suggests, interest rates on high-interest savings accounts tend to be higher than what regular savings accounts pay. That comes with a catch, though, as most banks will require you to keep a larger minimum balance in the account in order to qualify for the higher rate. In addition, banks often impose fees if your balance falls below the stated minimum, and the amount of the fee can be large enough that it actually outweighs the favorable impact of the higher interest rate.
Jumbo accounts are savings accounts that are specifically designed for those with extremely large bank balances. Different banks define the threshold for jumbo accounts differently, but $100,000 is a common minimum amount to qualify for jumbo account status. The reward for these high-value customers is an interest rate that typically exceeds even what high-interest savings accounts pay.
Money market accounts aren't really savings accounts, but they fill a similar purpose and so they often get talked about in the same category as savings accounts. Money market accounts are hybrids between checking and savings accounts, featuring higher interest rates than most checking accounts pay but also allowing a limited amount of check-writing activity from the account. At some banks, it's hard to distinguish between savings and money market accounts, and if you don't intend to take advantage of the check-writing capability that money market accounts offer, then you can simply compare them on the basis of which one pays higher interest rates or has the more attractive minimum balance requirements.
Finally, you'll often see references to online savings accounts as if they were a special type of account. Online savings accounts refer to savings accounts that online-only banking institutions offer as part of their product lineups. You can find online savings accounts in any of the categories above, with various internet-based financial institutions giving customers access to regular savings, high-interest savings, jumbo, and money market accounts. All of these accounts include the online features that so many customers value right now.
How to pick the best savings account
If you're in the market for a savings account, there are a lot of things to consider in choosing the best one for you. The following are the most important.
First and foremost, make sure you know what fees and other charges your bank will charge for each type of savings account. Usually, your best option will be whichever account gives you the most benefits without charging any fees. If you have to pay charges to qualify for a certain type of savings account, you'll often find that the account's costs outweigh the benefits, and you'd be better off downgrading to a free account with slightly less attractive features.
Interest rates are another good way to compare savings accounts. All other things being equal, whichever banking institution is willing to offer you the highest interest rate on your money deserves your business the most. However, one thing to keep in mind is that banks have the right to change their interest rates at any time, and so the bank that happens to be paying the most in interest right now could well be back in the middle of the pack just a week or two from now.
Nowadays, banking is about convenience as much as it is about generating interest income, and so it's important to have a banking relationship that lets you do business the way you want. If you like banking in person, then you'll want to choose a savings account from a bank that has branch locations near you. Similarly, if you want access to cash through ATM withdrawals, finding a bank with a network of ATMs or with fee rebates if you have to use another institution's ATM can save you a lot of money in unnecessary fees.
Finally, choosing an institution with which you want to have a more extensive relationship can be a good reason to pick a certain savings account. For instance, some banks pay bonuses for opening multiple accounts, either through cash payments or by offering more attractive interest rates. If opening a savings account also opens the door to better terms on loans, investments, or other products, then it can be the ideal first step in reaching your overall financial goals.
Get the best savings account for you
Saving is important, and using a bank savings account for your short-term savings means that you'll always have the money available when you need it. With so many different types of savings accounts available, it can seem daunting to figure out which one will fit your needs the best. However, by taking into account the various factors that distinguish one type of savings account from another, you'll be better able to select the exact features you want and come away with the savings account that will do you the most good in the long run.
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