What Are the Types of Savings Accounts and How Do They Work?

Madison Baker  | 

One of the most common pieces of financial advice you may hear is to save money. As you grew up, stashing your allowance in your piggy bank was an adequate way to do so, but now that you’re older, it may be time to open a savings account.

Before you head to the bank, it’s important to understand what savings accounts are, the different types of accounts available, and how interest works. In addition, you should know what to look for when choosing a financial institution to open your account with.

Checking vs. Savings Accounts

Both checking and savings accounts are an agreement with your bank. You will deposit money in your account, which the bank can use to loan to other patrons, and they will keep your money safe until you choose to withdraw it. All savings accounts are insured by the Federal Deposit Insurance Corporation (FDIC) for up to $250,000, making it a secure choice even if the bank collapses. This enables the bank to make money from interest on loans, while you build up your finances.

Having only one of the two may leave you unable to meet your financial needs, as there are a few key differences between checking and savings accounts:

  • Intended purpose: Checking accounts are transactional; money in this account is meant to be spent. Money in a savings account, on the other hand, is meant to be saved.
  • Withdrawal limits: With a checking account, there is no limit to the amount or frequency of the withdrawals you can make. With a savings account, you can only withdraw funds six times in a month, per regulations set by the Federal Reserve.
  • Ease of access: Because they are transactional, accessing your funds in a checking account is relatively easy. Often, there will be a debit card or checkbook connected to the account so you can make withdrawals freely. Savings accounts typically do not have a card or checkbook connected to them, making it more difficult to withdraw funds. You will have to go to a bank or ATM, or transfer money to your checking account, to do so.
  • Interest: No matter how much money you have in a checking account, banks don’t usually pay interest on your funds. Savings accounts do accrue interest, and though it often isn’t much, it can help your funds grow over time.

Types of Savings Accounts

While you may not think you need a savings account, they can make it much easier to, well, save money, because that is what they are designed for. When used in conjunction with a checking account, you should be able to manage your money with greater confidence and security.

However, there are different types of savings accounts, and each has unique features. Consider some of the benefits and disadvantages to these variations to determine which one may best suit your needs.

Basic Savings

Virtually all banks offer, at the very least, a basic savings account. This is a traditional account you can easily set up at a bank or credit union. A basic account is simple and will often require you to maintain a minimum balance. If you open it with the same institution as your checking account, you can easily move funds between the two.

The biggest downside to a basic savings account is their miniscule interest rates. According to the FDIC, the average national interest rate for savings accounts in 2018 was only 0.09 percent. If you’re looking to grow the funds you’re saving, you may want to look at another kind of account.

Online Savings Account

At first, online savings accounts were only available through online-only banks. Now, many brick-and-mortar institutions also offer either an online account or a basic savings account that is accessible online. With a traditional online account, you do all banking on your own online, and possibly on the phone if you need additional help. To open one, you will likely need to link it with a traditional checking account.

Online savings accounts typically offer higher interest rates than a basic account — in fact, many online accounts have an interest rate of at least one percent, if not higher. These higher rates can make it easier to grow your savings, but it can be more difficult to withdraw or transfer funds when you need them unless you have a checking account with the same bank.

Money Market Account

Money market accounts (MMA) are similar to traditional savings accounts, but, like an online account, typically have higher interest rates. You can also access your funds more easily, as MMAs often come with a checkbook or debit card so you can make withdrawals; keep in mind that you are still subject to the withdrawal limits set by the Federal Reserve. Though MMAs tend to require a larger minimum balance than a basic or online savings account, they function in a similar way for many users.

Certificates of Deposit (CDs)

A certificate of deposit shares some characteristics with both savings accounts and bonds. Like a bond, you set aside funds for a certain length of time (which varies depending on your specific CD but can be as little as six months or as long as several years), but instead of receiving interest payments during the life of the CD, it is paid in a lump sum at its conclusion.

Because you cannot touch your funds without being penalized, the interest rates are usually much higher for a CD than a savings account. Additionally, the longer your money is put away, the higher your interest rate will be. CDs are a good option if you know you can go an extended period of time without touching the account.

Interest Checking

As stated above, most checking accounts do not accrue any interest, no matter how large the balance is. However, some — appropriately called interest checking accounts — do pay interest. These accounts combine the benefits of both checking and savings accounts, as you can earn interest while still having unrestricted access to your funds. Though there are some interest checking accounts with high rates, they typically have lower rates and require a larger minimum balance than a basic savings account.

Specialty Accounts

In addition to the variations on a basic savings account, there are speciality accounts tailored toward a specific function, goal, or beneficiary. Often, these types of accounts are tax-privileged, and may be exempt from income taxes on any interest they accrue:

  • Student savings accounts: Students may have trouble paying for the fees associated with a savings account or maintaining the minimum balance. Many brick-and-mortar banks will offer a student savings account — often a 529 college savings account — that waives those fees until you graduate from college and find a job. Keep in mind that this may transition to a regular savings account once you finish school.
  • Health Savings Accounts: A Health Savings Account (HSA) is a savings account intended to help you save for future medical expenses. You can contribute to it directly from your paycheck, though there is a maximum amount you can put in each year. There are also strict limitations to what you can and cannot use the funds in an HSA for.
  • Goal-oriented accounts: The beauty of a basic savings account is that you can build up funds for whatever you like. However, if you need more direction in your saving or want to save for a specific item (such as a new car or home), some banks allow you to open up a goal-orientated account or sub-account to help you stay on track toward that goal. These accounts usually have the same interest rates and fees as a traditional savings account.

How Does Interest Work on a Savings Account?

Before committing to one of the types of savings account discussed above, you should have an idea of how interest works on a savings account.

Simply put, interest is the cost you pay to borrow money. Conversely, you are paid interest by a borrower when you loan money. Putting money into a savings account at a bank is essentially loaning them money, and they pay interest to compensate you for it.

The interest rate is how much the bank will pay you, and it is typically determined by the current economic climate. Another important factor that affects the amount of interest you receive is how often it compounds — basically the interest you earn on interest. If your interest compounds more frequently, you will earn more money from your savings account.

Is a Savings Account Free?

Depending on which institution you open your account with, a savings account may or may not be free. At most banks, you have to put down a minimum deposit to even open the account. You may also have to pay a monthly service fee for as long as your account is open. However, many banks will waive those fees as long as you keep a certain balance or set up recurring, automatic deposits to the account.

Some banks are more likely to charge these fees than others. For example, large, national banks may impose monthly fees while a local credit union does not. Further, online banks are known for offering free savings accounts (though this is not always the case). Be sure to research all of your options and see what kind of offers you qualify for.

Even if it isn’t free, you might decide that it’s still worth opening a savings account. They are a secure and low-risk way to save, and even earn, money. By picking the type of savings account best suited to your financial needs, you are well on your way to future financial success.


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This post was updated January 16, 2019. It was originally published December 29, 2018.