Types of Savings Accounts: Where to Stow Your Cash

The decision to build your savings is a big step toward a better financial future.

The savings you create could help you reach any number of life goals, including saving up for a down payment on your first home or building a financial runway to start your dream business. These two goals could not be more different. Although many goals require that you save money, the best account to save that money within will vary dramatically.

As you take this step toward your financial goals, the type of account you choose to save your money in will depend on your unique preferences for safety, returns, and liquidity. With that in mind, we will take a closer look at your best saving options.

How Does a Savings Account Help?

Before you can start using one of many types of savings accounts, it’s important to understand what a savings account is.

Savings accounts are vehicles for reaching short term saving goals. They are bank accounts designed to help you set extra money aside while maintaining a balance of accessibility: it takes an extra step or two to access it, which makes it easier to avoid unnecessary, spur of the moment spending. At the same time, the money is accessible in the event that you need it. 

Banks offer features like automatic transfers back and forth between a savings account and a checking account to help you in this process of putting money away and accessing it when necessary. 

Banks also pay interest on the money you deposit into the account. Interest is money that the bank pays you in exchange for holding your money — something that is not offered with checking accounts. 

What Should You Use a Savings Account for?

Savings accounts act as a place where you can store money safely and retrieve it easily, a concept known in financial circles as high liquidity. These characteristics make a savings account ideal for short-term financial needs and goals such as:

• Emergency fund. The rule of thumb is to put away at least three to six months’ worth of living expenses. While that amount may seem challenging, contributing small amounts each week can help you reach that goal, and a savings account is a good place to stockpile it. In fact, according to a U.S. News survey conducted in 2019, about 40 percent of respondents use their savings account as an emergency fund, about four times as much as for any other purpose.
• Large purchases such as a car or vacation. These remain popular uses for savings accounts, just as they were in the 1960s and ’70s, when banks routinely offered “vacation club” voucher booklets to help savers keep on target with their goals.

1. Traditional Savings Account

Good for: People who need to save money for the short or long term and aren’t as concerned about getting the best interest rate, expressed as the annual percentage yield (APY).

Traditional savings accounts are what you may immediately think of when you consider where to save. These are the savings accounts you typically find at traditional banks or credit unions.

2. High-Yield Savings Account

Good for: People who want to earn a more competitive rate on savings while minimizing fees.

High-yield savings accounts are savings accounts that offer a higher APY, compared to regular savings accounts.

3. Money Market Accounts

Good for: People who want to earn interest on savings while having more options for accessing their money.

Money market accounts (MMAs) combine features of regular savings account with features of a checking account. You can find these accounts at both brick-and-mortar banks and online banks.

4. Certificate of Deposit Account

Good for: People who want to earn competitive rates and won’t need to access their savings right away.

Certificates of deposit (CDs) are time deposits, meaning you agree to leave your money in the account for a set period. During that time, your money earns interest and, when the CD matures, you can withdraw your savings or roll it into a new CD.

You can find CDs at traditional banks and online banks. Between the two, online banks tend to offer better interest rates. CD terms typically range from as short as 30 days or as long as 60 months, with longer terms usually boasting higher rates—although not always, especially in a lower interest rate environment.

5. Cash Management Account

Good for: People who want to keep cash available to invest in their brokerage or retirement account.

Cash management accounts aren’t savings accounts per se. Instead, these accounts let you hold cash you may plan to invest in a taxable brokerage account or a retirement account.

Online brokerages and robo-advisor platforms may offer cash management accounts to their investors. The money held in the account can earn interest, often at a higher rate than what you’d get at a bank.

6. Specialty Savings Account

Good for: People who want accounts tailored to specific savings goals.

Specialty savings accounts are designed to help you reach specific savings goals, rather than being a catch-all for the money you don’t plan to spend. And, in some cases, they can be intended for a specific type of person, rather than a goal.