The Different Types of Savings Accounts and How They Work

7 Min. Read

What Are the Different Types of Savings Accounts?

Saving is an important aspect of personal finance, giving you security and liquidity and earning some modest returns on your deposits. The stability and accessibility of a savings account make it a helpful tool for achieving your financial goals and managing unexpected expenses.

 

Here, we’re taking a deep dive into savings accounts, explaining what a savings account is and exploring the different types of accounts and how they work.

 

Ready to invest in yourself and your future? Learn how to create a savings plan.

 

What is a Savings Account?

A savings account is a type of bank account designed for saving money you don’t plan to spend right away. Like a checking account, you can access the money as needed. Unlike a checking account, a savings account allows you to earn compounding interest and grow your money.

 

A savings account is ideal for stashing cash for a specific purpose, like saving for a new car or vacation or building an emergency fund. Your money is securely stowed away and separate from your everyday spending accounts, but it remains accessible and earns interest.

 

How Do Savings Accounts Work?

Understanding how savings accounts work starts by looking at their core components. Common features of savings accounts include:

 

Deposits and Withdrawals

Just like a checking account, tapping into a savings account is simple. You can access your funds by visiting your bank or credit union, using online or mobile banking, or using an ATM.

 

Automatic Transfers

Linking your savings and checking accounts makes transfers between the two a breeze, especially when you schedule those transfers to recur automatically. You can make saving a more consistent habit by setting up automatic transfers that allow money to move from your checking account to your savings account regularly.

 

Interest Rate

The ability to earn interest is a standout feature of savings accounts. When you deposit funds into a savings account, the bank or credit union pays you interest on the balance. The annual percentage yield (APY) signifies how much you might earn from your deposits over a year. Interest rates are variable and can depend on the financial institution and type of account.

 

Compound Interest

When you earn interest on a savings account, you’ll earn interest on both the principal balance (the amount you initially deposited) and the interest accumulated from previous periods. This is called compound interest, and it can help your savings grow faster over time.

 

Fees

Some financial institutions charge a monthly fee to maintain a savings account. This fee may be waived if you meet certain conditions, like maintaining a specified balance. You may also encounter other fees with a savings account, like withdrawal fees for exceeding monthly limits or inactivity fees if you don’t use the account for a prolonged period.

 

Low-risk Growth

Unlike taking a chance on the stock market, a savings account offers you a low-risk way to earn money on your investment. With a savings account, you have a set interest rate that compounds daily and provides a monthly return on your deposits. In addition, savings account deposits are typically insured by the Federal Deposit Insurance Corporation (FDIC) or the National Credit Union Administration (NCUA), so you know your money is safe.

 

Types of Savings Accounts

You can choose from many types of savings vehicles, and each comes with unique advantages. Options for securing stowing your funds include:

 

Traditional Savings Account

Unlike investment accounts, a traditional savings account typically offers lower interest rates and has lower risk and greater liquidity. These accounts allow you to save for short-to-medium-term financial goals and build emergency funds.

 

High-Yield or High-Interest Savings Account

The terms “high-yield” and “high-interest” are often used interchangeably to refer to a savings account that offers an above-average interest rate compared to traditional savings accounts. These accounts typically provide better returns on your deposits, helping you maximize your interest earnings and grow your money faster than a traditional account.

Certificates of Deposit

These accounts offer a higher yield than traditional savings accounts because you agree to leave your money in the bank for a set term, during which it “matures.” The term can range from three months to five years or longer. At the end of that period, the bank returns your funds plus interest on the maturity date.

Money Market Accounts

A money market account is a type of account that blends some of the features of a checking and savings account. These accounts often pay higher interest than traditional savings accounts. They also allow you to withdraw money by check, debit card, or electronic transfer. However, you are generally limited by the number of transactions you can make.

Health Savings Account

This type of account is specifically designed to help you save for medical expenses. It allows you to set money aside pre-tax, but those funds can only be used for specified medical expenses.

 

Retirement Accounts

Retirement accounts are specialized savings accounts designed to help you save and invest for retirement. These accounts offer tax advantages and are subject to specific regulations to encourage long-term savings. These accounts include: 401(k) Plan, Roth 401(k), Individual Retirement Account (IRA), Roth IRA, 403(b) Plan, and 457 Plan.

 

Learn more about the savings options at Marine Credit Union.

 

What Type of Savings Account is Right for Me?

What to Look for in a Savings Account

The “best” savings account depends on your individual preferences and financial goals. Factors to consider include interest rates, fees, minimum balance requirements, transaction limits, and convenience of access.

 

Key Savings Account Terms to Know

Understanding key terms related to savings accounts can help you make an informed decision when you’re considering opening a new account. Here are some important terms to know:

 

Interest Rate: The percentage of interest earned on your savings account balance over a specified period, typically expressed as an annual percentage yield (APY).

 

Annual Percentage Yield (APY): The total amount of interest you will earn on your savings account balance over one year, taking into account compounding interest.

 

Compound Interest: Interest calculated on both the initial principal account balance and the accumulated interest from previous periods.

 

Simple Interest: Interest calculated only on the principal balance of your savings account, without considering any previously earned interest.

 

Minimum Balance Requirement: The minimum amount of money required to be maintained in your savings account to avoid fees or earn interest.

 

Monthly Maintenance Fee: A fee charged by some banks and credit unions for maintaining your savings account, often waived if certain conditions are met.

 

Transaction Limits: Restrictions on the number of withdrawals or transfers you can make from your savings account per month, imposed by Regulation D.

 

Frequently Asked Questions: Savings Accounts

What is the best use for a savings account?

Savings accounts are commonly used for:

• Emergency funds. Providing a financial safety net for unexpected expenses or loss of income.
• Short- or long-term goals. Saving for expenses like vacations, home renovations, or major purchases.
• Opportunity funds. Setting aside funds for future investment opportunities or major life events.
• Peace of mind. Providing a sense of security and stability in uncertain times.

 

Can you have more than one savings account?

Yes, you can have more than one savings account. In fact, having multiple savings accounts can be a smart way to save for different financial goals without co-mingling your funds. For example, you might have one account to hold your emergency funds and another to save for a down payment on a house.

 

What’s the difference between a savings account and a checking account?

Checking accounts are designed for everyday spending. They allow you to write checks, pay bills, send electronic transfers, and make purchases using a debit card. These accounts are meant for daily transactions, and because of that, you earn very little (or no) interest.

 

In contrast, savings accounts are designed for saving money you don’t plan to spend right away. They allow you to earn interest, which helps your savings grow over time. Unlike a checking account, these accounts typically don’t come with checks or debit cards.

 

What is an Interest Rate? What is APY?

An interest rate is what you earn for depositing money into a savings account. APY (Annual Percentage Yield) is the total interest earned over a year with compounding interest. The higher the APY and the longer your funds remain deposited, the more money you earn.

 

How much money should you keep in a savings account?

How much money you keep in your savings account depends on your financial situation and goals. Budgeting strategies like the 50/30/20 rule can help you create a savings plan. This rule allocates 50% of your after-tax income to fixed expenses (like rent and utility bills), 30% to discretionary spending (like entertainment or dining out), and 20% to savings. If your goal is to create an emergency fund, one rule of thumb is to save for three to six months of expenses.

 

Wondering how much is too much to keep in savings? Consider that the FDIC insures eligible accounts up to $250,000. If you want to save more than that amount, you may want to research alternative investment accounts, like an IRA.

 

Plan for Your Future with Marine Credit Union

At Marine Credit Union, we’re here to help guide you through setting your personal savings goals. Get in touch with a Marine Credit Union representative today.

 

Get Started

 

Accessibility

No amount of money is too small to save. At Marine, you can get your savings underway with as little as a $5 initial deposit.

 

Control

Check your account balance and schedule transfers anytime, anywhere, with online banking or the Marine Mobile app.

 

Variety

Because all our members have different financial goals, we offer multiple types of savings accounts, each offering unique benefits.