You have a bit of cash you’re looking to house, but aren’t sure if a traditional savings account is the right place to put it. Although it’s great to have a savings account there’s actually other options when it comes to investing money, such as a money market account or certificate of deposit (CDs). Knowing the difference between each type of savings account can help when it’s time to decide where to store your cash.
A traditional savings account is best used to extra cash in a place where you won’t spend it as frequently as you would with a checking. Money stored in the type of account, compared to others is typically more accessible for both deposits and withdrawals in the event of an emergency compared to other savings accounts. With a traditional savings there’s also flexibility with its function compared to money markets and CDs. For example, a lower initial deposit is generally required, account owners have the ability to withdraw from an ATM and can typically perform electronic transfers between accounts easily.
Money market accounts are most similar to a traditional savings account in terms of access to your funds, however they generally require a few things in order to do so. Money markets tend to require a higher minimum deposit, higher balance requirements and do limit the amount of withdrawals per month depending on the financial institution. This type of account is really meant to be a place to park your cash, take advantage of the higher rate and only touch it if absolutely necessary. Think of money markets as the step between a traditional savings account and a certificate of deposit.
Another way to house your money is with a CD. The key difference with this type of account is that it’s more restrictive when it comes to accessing your cash, but for a very good reason. CDs tend to offer a high Annual Percentage Yield (APY) which is the money you will make on your investment because it stays in the account for a certain period of time. For example, if you invest $1,000 in a CD with an APY of 1.9% for a three year term, your investment once the CD has hit maturity (once the time period is up) would be $1,058. When investing into a CD a higher initial deposit is usually required and the best way to get the full effect of this account is by rolling them over and having them for an extended period of time (i.e. once a child is born, setting up a CD until they are 18).
Investing money in the right type of savings account and aligning it with your goals is important. Before you choose a specific type of account to invest your money identify those goals, so that it makes the selection process much easier. There’s a type of savings account for every stage of life, it just depends on where you’re at.