This tutorial will answer the following questions:
Saving accounts are a crucial part of everyone’s financial picture. If you are looking for a safe place to keep your money, savings accounts are often a good option.
What Is A Savings Account?
This refers to an account maintained by a customer with a bank or other depository institution, with the aim of accumulating funds over a specific period of time. Money deposited in a savings account can only be withdrawn by the account owner or any duly authorized agent. Some savings accounts require funds to be deposited for a minimum length of time, whereas others allow unlimited access to funds. Earnings from a savings account may be in the form of interest or dividends.
Types of Savings Accounts
Bank Savings Accounts
A bank savings account is a safe, short-term investment. The accounts are insured by the federal government through the Federal Deposit Insurance Corporation (FDIC).
Advantages Of A Bank Savings Account
Easy Access To Cash
Bank savings accounts enable you to access your cash easily. Your money is very liquid, which means that you can make a withdrawal quickly and easily from a bank savings account.
Bank Savings Accounts Grow Your Money
When money is deposited in a bank savings account, it earns interest. Interest refers to money the bank pays you due to the fact that they use your money to give loans to other people. Your bank savings account pays a rate of return on the total amount of money in the account. If you had no immediate use for the money anyway, at least you will earn something little from it. Bank savings accounts pay more on your money as compared to checking accounts.
Bank Savings Accounts Are Safe
Bank savings accounts provide a relatively safe place to keep you money. Money kept in a savings account is safer since it is insured. Let’s say, for example, you had $2,000 and you were not planning to use it for another 4 months. There are several things you could do with the money. You could stuff it under your mattress, you could carry it around, or you could put it in a savings account. The wisest thing to do is to put your money in a bank savings account. If you put the money under your mattress, your house could be robbed or burn down. If you carry the cash around, you are likely to lose or misuse it. However, if your money is in a bank savings account, it is your banking institution’s responsibility to keep that money safe. Even if the bank is robbed or burns, your money will not be lost.
Money Market Accounts
A money market account is a high interest savings account or a premium account. This kind of account can be easily opened at either credit unions or banks. With these accounts, the bank usually pays a higher rate of interest than for a savings account. A money market account, just like other bank accounts, enjoys insurance of up to $100,000 from the FDIC.
Whereas a money market account may be a good low risk investment, it is important to note that it has certain restrictions. Your money won’t be as liquid as when in a regular savings account. In addition, a money market account normally requires a fixed minimum deposit and a minimum balance. Though you withdrawals are allowed with money market accounts, there is a limit on the amount you can withdraw in a month.
Certificate of Deposit (CD)
Certificate of Deposit - CDs are debt instruments issued by financial institutions such as banks. With this account, the bank retains your money for a specific period of time ranging from a few weeks to five years. The bank pays a set rate of interest on money deposited in this account. However, unlike a conventional savings account, you are not allowed to withdraw your money any time you wish. If you do so, you will incur early withdrawal fees. The advantage of CDs is that you can calculate your expected earnings at the beginning of the investment. In addition, CDs are FDIC insured.
Money Market Funds
Money market funds are somewhat similar to bank savings accounts. A money market fund refers to a mutual fund that invests only in cash or cash equivalent securities, which are also known as money market instruments. Such investments are very liquid, short term investments with high credit quality. They generally include commercial papers, treasury bills, bankers’ acceptances, and repurchase agreements.
Money market funds are offered by mutual fund companies. Money market funds usually give a better return than bank savings accounts. In addition, since these funds are not deposited with a bank, they do not enjoy FDIC insurance. According to the Securities and Exchange Commission (SEC), the average maturity period of money market fund securities should be 90 days.
Advantages Of Money Market Funds
Money market fund securities are some of the most safe and stable investments. These securities offer a fixed rate of return with short maturities. By purchasing debt securities offered by large corporations, the government and banks, money market funds offer a reasonable return, while carrying a low default risk.
Low Initial Investment
Money market securities usually have a large minimum purchase requirement, thus making them unaffordable for most individual investors. On the other hand, money market funds have significantly lower requirements. Therefore, money market funds enable you to access money market investments at low investment amounts.
Money market fund shares are not subject to market timing limitations and can be sold and bought at any time. In addition, most of these funds offer check writing privileges. While most mutual funds take three days to settle, money market funds provide a same-day settlement.