You decide it is time to get serious about saving money so you head to the bank to open a savings account. Sounds simple, right? Unfortunately, when you get there you are presented with a variety of different types of accounts and you have no clue which one is the best option. Before you get tempted to turn around, go home, and save money the way your Grandma did (i.e. under the mattress, in the cookie jar, in a cut-out book, etc.) let’s take a few moments to understand the different types of savings accounts.
Basic Personal Savings Account
This is the account that we most often consider when we open a new savings account. It is perfect for the beginning saver since it generally requires a smaller amount to open an account. The minimum deposit will vary between financial institutions but it usually ranges from $25 to $200. The interest rate is generally lower on this type of account, but the restrictions for taking money out of the account are usually less severe. There will most likely be a fee if your balance falls below a certain amount but this amount is usually related to the minimum deposit requirement. For instance, if the minimum opening deposit is $200 then you will incur a fee if your balance falls below $200 at any time. This will vary between financial institutions so be certain to check the associated fees with your bank.
Special Personal Savings Account
Financial institutions like to have a special savings account for individuals wanting to place a larger sum of money into an account. They will usually name it something fancy so it sounds prestigious. My bank calls this account the Independence Savings Account. Sounds impressive doesn’t it? This type of account will have a larger opening deposit requirement which usually ranges from $7,000 to $12,500. The interest rate will be higher than a basic savings account (which is a good thing) and the restrictions for taking money out of the account may be more specific. There is often no monthly service fee associated with this type of account.
Money Market Account
This is a type of savings account that works a lot like a checking account as well. The minimum opening deposit is higher than a basic savings account but less than a special savings account, usually ranging between $500 to $2,500. The interest rate will be higher than the basic savings account and usually similar to the special savings account. There will most likely be a monthly service fee if your balance falls below a certain amount. The neat thing about this account is that you will receive a small quantity of checks that you can use to withdraw money. So, if your car breaks down and you suddenly find yourself owing the mechanic $2,000, you can write him a check from your money market account (assuming, of course, that you have the money in your account). This will save you the hassle of having to transfer money from a savings account to a checking account in order to pay the mechanic. There will be restrictions regarding the number of checks you can write each month.
Certificate of Deposit (CD)
CD’s tend to scare people but they really are nothing to be feared. They work much like a savings account in that you have to put a certain opening deposit amount into your account (or CD). The opening deposit will be higher than the basic savings account, generally ranging from $1,000 to $5,000 but you will be paid a higher interest rate. You will be required to keep your money in your account for a certain length of time, generally ranging from a few weeks to several months. If you take your money out prior to the specified time, you will have to pay a penalty.
Which one should you choose?
Now that you know how each of the accounts work, which one is best for you? Compare your circumstances to the situations below and you will discover the savings account that is right for you.
- You are just starting to seriously save money and you have only a small amount of money to open an account. Basic Personal Savings Account
- You have just received a large sum of money (let’s say $1,500) and you want to tuck it safely away. However, it is important for you to have access to your money in case you need it for some reason. Special Savings Account or a Money Market Account
- You have a large sum of money (let’s say $10,000) that you have received and it is to be used to pay your college tuition and related expenses. Since you know you will have bills that need to be paid using this money, you want to have easy access to it. Money Market Account
- You have a sum of money (let’s say $1,500) and you know the chances of needing it in the near future are very slim. You want to earn the largest amount of interest possible. Certificate of Deposit
Important Considerations
The rates, opening minimum deposit, fees, and restrictions will vary between financial institutions so be certain to check with your bank for details. While the above information is a great guideline, use the information provided by your bank to make your final decision.
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