It's not that I wasn't aware that there were different types of savings accounts for the almost three decades of my life—it's just that New York City living kept my savings to a minimum, and what I did have I wanted to keep liquid. But what I've learned (via my intelligent older brother) is that having a regular savings account at my local bank reaps very little interest and that I'd be wise to diversify my savings. (I mean, you diversify your 401(k) portfolio, so why not this?)
And there's so much more than just the savings accounts you probably started when you were a kid (although we're not saying that they should always be overlooked). How you save and the types of accounts you use depend on what you are saving for—and how often you want (or have) to tap into your cash flow, for that matter. Keep reading to get the full rundown of the top five types of savings accounts and the pros and cons of each. Then, take your pick.
Basic Savings Account
This is the type of savings account your parents likely started for you at the bank when you were a kid. The annual interest on a basic savings account will only give you around a 0.06% return—but what you get is the security and the fact that it's easy to liquidate. Plus, when you have an account at a brick-and-mortar bank, it becomes easier to take out cash or transfer between your accounts.
Pros: Security; easy withdrawals; savings are liquid
Cons: Often requires a minimum balance; low interest rate
Online Savings Account
If you're willing to forego having a brick-and-mortar bank, an online savings account typically has the highest interest rate (yes, seriously). They can offer this because they don't have to pay rent on buildings and the like. However, if you're looking for convenience, this may not be the option for you. Transfers to your local checking account can take up to three days at some of these institutions.
Pros: A high interest rate, low to no monthly fees; no minimum balance
Cons: Must be technologically savvy; transfers aren't automatic
Certificates of Deposit
Certificates of deposit or CDs—not the contraptions you used to listen to music on—are a variation on a savings account. Basically, the main difference is that you can't touch the money in that account for a fixed period of time ranging from a month to five years. If you do, you will have to pay a penalty, so it should only be for money that you're not planning to withdraw. In case of an emergency, it's wise to have a slush fund in the form of a basic savings account that you can tap into in case you lose your job (or something similar). However, the perk is that this type of savings account earns you much higher interest than you would reap from a basic savings account.
Pros: Higher interest rate
Cons: Not liquid; must pay fees if you withdraw early
Money Market Account
A money market account, also known as an MMA, is another type of savings account through a bank. This type often requires a higher balance or deposit than a regular basic savings account as well as a minimum balance (it's usually around $1000 or more). The good news is that it is sort of a hybrid between a savings and a checking account—with most you can write checks, withdraw cash, and use a debit card to access your money.
Pros: Higher interest; debit card, check, and cash withdrawals
Cons: Fees if you don't maintain a set balance; higher balance needed to open; limits on check writing
Automatic Savings Plan
If you have a hard time allocating savings every month, setting up an automatic savings plan through your bank can be a great idea. You can allocate a portion of your checking account to automatically go into a separate savings account each month. You know that saying "Pay yourself first"? Well, that's exactly what this allows you to do. While the interest rate may not be as high as other options, you can always transfer it into different types of savings accounts after the fact.
Pros: Allows you to save for long-term goals and savings
Cons: Lower interest rate in relation to other accounts
Now that you've read about the types of savings accounts (as well as their pros and cons), it's time for you to develop a game plan for your money. Remember, savings don't just happen, and it's always good to have some cash stored for a rainy day—or that vacation you've been dreaming of.