Saving money is an essential part of achieving financial stability and security. However, simply stashing cash under the mattress isn’t a viable long-term strategy. That’s where savings accounts come in. Savings accounts are a common and straightforward way for people to store their money while earning interest. While other types of accounts, such as checking accounts and money market accounts, exist, savings accounts are typically the preferred choice for those looking to save money. In this blog post, we’ll discuss the various options available to help you make informed decisions about where to store your money.
What is a Savings Account?
A savings account is a type of bank account that is designed to help you save money. This type of account typically earns interest on the funds you deposit, making it a good choice for people who want to grow their savings over time. Savings accounts are generally easy to open and have no or minimal fees, and you can usually access your funds whenever you need them.
Advantages of Savings Accounts
One of the biggest advantages of a savings account is that it is a safe and secure place to store your money. Savings accounts are typically insured by the Federal Deposit Insurance Corporation (FDIC), which means that if the bank fails, your deposits are protected up to $250,000 per depositor. Another advantage of a savings account is that it is a good way to earn interest on your savings. While interest rates may not be high, you can still earn some return on your savings without taking on a lot of risk.
How Savings Accounts Earn Interest
Savings accounts earn interest by investing the money deposited by account holders in a range of financial products, such as government bonds and other low-risk investments. The interest rate that the account holder earns on their savings is a percentage of the interest that the bank earns on its investments. In general, savings accounts offer a lower interest rate than other types of accounts, such as certificates of deposit (CDs) or money market accounts.
Average Interest Rates for Savings Accounts
According to Bankrate, the average interest rate for savings accounts as of September 2021 was 0.06%. This is a relatively low rate compared to other types of accounts, but it is still better than nothing. However, some banks and credit unions offer higher interest rates for their savings accounts, so it is important to shop around to find the best rate.
What is a Checking Account?
A checking account is a type of bank account that is designed to provide easy access to your money. This type of account is typically used for everyday expenses such as paying bills, making purchases, and withdrawing cash. Checking accounts generally do not earn interest on the funds deposited, but they offer other benefits such as the ability to write checks and use a debit card for purchases.
Advantages of Checking Accounts
One of the biggest advantages of a checking account is that it provides easy access to your money. Checking accounts typically come with a debit card that you can use to make purchases, withdraw cash, and transfer funds to other accounts. They also often come with online banking, which allows you to monitor your account and manage your finances from anywhere.
How Checking Accounts Earn Interest
Checking accounts generally do not earn interest on the funds deposited. Instead, the bank may charge fees for using the account, such as monthly maintenance fees or fees for overdrafts. However, some banks do offer interest-bearing checking accounts, which may earn a small amount of interest on the funds deposited.
Average Interest Rates for Checking Accounts
According to Bankrate, the average interest rate for interest-bearing checking accounts as of September 2021 was 0.04%. This is a very low rate compared to other types of accounts, and it is often not worth opening an interest-bearing checking account for the purpose of earning interest.
What is a Money Market Account?
A money market account is a type of bank account that is similar to a savings account, but typically offers a higher interest rate. This type of account is designed for people who want to earn a higher return on their savings without taking on a lot of risk.
Advantages of Money Market Accounts
One of the biggest advantages of a money market account is that it typically offers a higher interest rate than a savings account. Money market accounts also often come with check-writing privileges, which makes them a good choice for people who want to earn interest on their savings while still having easy access to their funds.
How Money Market Accounts Earn Interest
Money market accounts earn interest by investing the funds deposited by account holders in a range of financial products, such as short-term government bonds and other low-risk investments. The interest rate that the account holder earns on their savings is a percentage of the interest that the bank earns on its investments. Money market accounts typically offer a higher interest rate than savings accounts, but they may require a higher minimum balance or charge higher fees.
Average Interest Rates for Money Market Accounts
According to Bankrate, the average interest rate for money market accounts as of September 2021 was 0.11%. This is a higher rate than savings accounts and checking accounts, but it is still relatively low compared to other types of accounts.
What is a Certificate of Deposit?
A certificate of deposit, or CD, is a type of bank account that allows you to earn a fixed interest rate for a set period of time. CDs typically offer a higher interest rate than savings accounts or checking accounts, but they require you to lock up your funds for a specified period of time.
Advantages of Certificates of Deposit
One of the biggest advantages of a CD is that it offers a higher interest rate than a savings account or checking account. CDs also offer a fixed rate of return, which means that you know exactly how much interest you will earn over the term of the CD.
How Certificates of Deposit Earn Interest
Certificates of deposit earn interest by investing the funds deposited by account holders in a range of financial products, such as government bonds and other low-risk investments. The interest rate that the account holder earns on their savings is a percentage of the interest that the bank earns on its investments. CDs typically offer a higher interest rate than savings accounts and checking accounts, but they require you to lock up your funds for a specified period of time.
Average Interest Rates for Certificates of Deposit
According to Bankrate, the average interest rate for a one-year CD as of September 2021 was 0.16%. The interest rate for CDs generally increases with the length of the term, with longer-term CDs offering higher interest rates.
Comparison of Interest Rates
When comparing the interest rates of different types of accounts, it is important to understand the differences between them and how they earn interest. As mentioned earlier, savings accounts typically offer lower interest rates than other types of accounts, but they are also the safest and most accessible option for storing your savings. Savings accounts are FDIC-insured, which means that your funds are protected up to $250,000 per depositor, per insured bank. This protection ensures that your money is safe even if the bank fails.
Checking accounts, on the other hand, typically offer little to no interest. Checking accounts are designed for daily transactions such as paying bills, writing checks, and using a debit card. While you may be able to earn a small amount of interest on a checking account, it is not a significant source of income.
Money market accounts offer a higher interest rate than savings accounts and checking accounts. These accounts are designed for people who want to earn a higher return on their savings without taking on a lot of risk. Money market accounts earn interest by investing the funds deposited by account holders in a range of financial products, such as short-term government bonds and other low-risk investments. However, money market accounts may require a higher minimum balance or charge higher fees than savings accounts.
Certificates of deposit offer a higher interest rate than savings accounts and checking accounts, but they require you to lock up your funds for a set period of time. CDs are designed for people who have a specific savings goal and are willing to leave their funds untouched for a set period of time. CDs typically offer a fixed rate of return, which means that you know exactly how much interest you will earn over the term of the CD. However, if you withdraw your funds before the CD matures, you may incur penalties and lose some of the interest you have earned.
When choosing an account, it is important to consider your financial goals, your level of risk tolerance, and the fees and minimum balance requirements associated with the account. If you need easy access to your funds, a savings account or money market account may be the best option. If you have a specific savings goal and are willing to lock up your funds for a set period of time, a CD may be a good choice. Ultimately, the right account for you will depend on your individual financial situation and goals.
Conclusion
In conclusion, choosing the right type of account to store your savings is an important decision that can have a big impact on your financial future. In general, savings accounts offer lower interest rates than other types of accounts such as money market accounts and certificates of deposit. However, this may not always be the case and the interest rates may vary depending on the specific account and the bank offering it.
Money market accounts and certificates of deposit typically offer higher interest rates than savings accounts, but they may also come with higher fees or minimum balance requirements. In contrast, savings accounts are often more accessible and have lower fees and minimum balance requirements, but may offer lower interest rates.
While the interest rates offered by savings accounts may not be high, they offer a safe and secure way to earn a return on your savings without taking on a lot of risk. When choosing an account, it is important to consider your financial goals, your level of risk tolerance, and the fees and minimum balance requirements associated with the account. By doing your research and comparing your options, you can find the right account to help you achieve your financial goals.
Next: While a savings account is an excellent option for storing money and earning interest, it’s also important to have an emergency fund to cover unexpected expenses. Read how you can build an emergency fund in just 52 weeks.