Part of setting yourself up for financial success is investing in a savings account. A savings account refers to any sort of bank account where you store money and potentially accrue interest over time.
Typically, you leave your money in a savings account for as long as possible until you either reach your savings goal or need to cover emergency costs. There are several types of savings accounts to choose from, each with their own set of pros and cons.
Traditional Savings Account
If you are unsure where to begin saving, you can start with a traditional account. Traditional savings accounts are available from most banks.
Traditional savings accounts typically provide the lowest interest rates, but there are no other risks or downsides to consider. You won’t generate much extra income, but it allows you to make at least a small profit while you decide what to do with your savings.
Many banks offer additional incentives if you are already a member and open a savings account. Typically, you must deposit a certain amount of money and keep it in the account before you earn any additional benefits.
High-Yield Savings Account
High-yield savings accounts are primarily available from online banks, but there are some physical locations offering these accounts.
High-yield accounts share similarities with traditional savings accounts, but they allow you to earn greater interest rates on your savings. Being solely an online bank allows these savings accounts to offer several perks.
Because there are no physical costs to maintain a location, online accounts generally offer more interest. They also do not have as steep of initial deposits, with some only requiring $100 to open an account.
Certificates of Deposit
Certificates of deposit provide some of the highest interest rates. However, when you deposit your money, it must generally remain in the account for a set period of time.
You can typically choose how long your money is stored when you get a certificate. The times greatly vary, with most financial institutions requiring at least three months, with a maximum of five years.
There are methods to withdraw your money early, but you may need to pay a fee to access your savings. Both online banks and physical locations typically offer certificates of deposit.
Specialty Savings Accounts
A specialty savings account is a broad term that refers to several types of accounts, including the following:
- Custodial accounts
- Health savings accounts (HSA)
- IRA accounts
A health savings account allows you to put aside money specifically for medical emergencies, typically used after you retire.
A custodial account is typically for younger family members. Your investment earns interest, with the funds released to your child when he or she turns 18.
An IRA is an investment account that allows you to put money into each year, with your savings released when you are ready to retire.