Often considered a safe haven for funds, bank savings accounts offer advantages such as liquidity, access to funds and a slightly higher yield than what may be found in a standard checking account. Additionally, all bank savings accounts are insured up to $100,000 by the FDIC, meaning that if the bank is robbed or is destroyed by a storm or fire, your are money (up to $100,000) is guaranteed.
Savings Account Advantages
Finding a savings account with a decent yield will help you to earn additional interest on the account. A “yield” refers to the interest you earn based on the account’s rate. Rates are tied to the market and may fluctuate daily.
Typically banks advertise the savings account with the term “APY” next to the rate, for example, 1.5% APY. APY stands for “annual percentage yield” which is the amount your deposit creates over the course of a year. The higher the APY, the more interest you can earn.
Account Type
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In addition to providing a place to harbor money and generate interest, bank savings accounts can also be used to back up other accounts. For example, instead of turning to an overdraft protection program offered by many banks (often associated with a fee), customers can link the savings to the checking account in case it is ever overdrawn. Instead of the check bouncing, the money is automatically pulled from savings to checking to cover the expense.
Banks typically offer the standard or regular savings account, however you have more choices:
Basic or Standard Savings Account
Sometimes referred to as a “passbook account,” the basic or regular savings account usually has no or a low minimum balance requirement. Some banks restrict the number of withdrawals the customer can make before charging a fee, however others provide unlimited access. Rules vary from bank to bank.
The standard savings account typically offers a low APY, but usually something higher than what is being associated with standard checking. Additionally, the standard savings account rates typically change with the market.
Money Market Account
This type of savings account offers a higher APY than the standard savings account, but with a few more rules. One rule is that most money markets require a minimum balance in order to earn interest. Like standard savings, customers have access to their money market account but that access is limited, so planning monthly withdrawals in advance is important with this type of account.
The interest rates fluctuate with market changes, however money market accounts typically pay more than standard savings.
Often, financial institutions will run promotional money market offers where a higher rate is given for a higher deposit. Some promotional money market accounts are offered for a limited time, whereas other financial institutions like to provide a higher-end money market for high depositors.
Certificates of Deposit (CDs)
Although credit unions typically refer to CDs as certificates of deposit, they are both considered to be “time deposits.” The financial institution associates a rate with a certain deposit. The customer earns interest on the deposit, provided that the money remains in the CD for the pre-determined amount of time. If the customer withdrawals the money early, he or she must pay a penalty fee.
Sometimes banks or credit unions will offer a “step up” CD where the customer can elect to increase the rate one time during the CD’s duration. These are typically promotional CDs and offered for a limited time.