Types of Savings Accounts and How They Work
Saving money without putting it into some kind of risk-based investment is frequently associated with bank savings accounts.
However, a simple savings account is not the only tool available for secured savings. Multiple other versions exist, including options that are protected by the federal government.
Types of Savings Accounts
Savings accounts can generally be grouped in four encompassing categories and are available at both traditional banks, savings and loans, and at credit unions. These include as follows.
Basic bank accounts
Just about every bank provides savings accounts to customers. These are simple accounts that pay minimal interest but give consumers a safe place to put money that won’t get lost, even if the bank goes insolvent.
Such accounts are protected by federal insurance up to $250,000, making them a viable tool for cash that needs to be protected by easy to reach.
Unfortunately, today in 2013, most savings accounts pay below 1 percent interest per year. Most savings have a limit on transfers out per month, however.
High yield savings accounts
These tools are similar to regular savings accounts but they require a much large minimum balance.
If met, the saver gets paid a higher level of interest and still enjoys protection by federal insurance, again up to $250,000 per account.
The interest paid can be as much as 3 percent or more.
Money market accounts
Designed to work like checking accounts but still retain the benefits of savings, money market account provide a higher level of interest with a minimum balance of savings maintained.
However, these accounts don’t have limits on withdrawals, which makes the easier to work with for those who want to save large amounts but pull out money frequently.
Online savings accounts
Practically working the same as regular savings accounts in a brick-and-mortar bank, online savings account pay far more interest because online banks have far less in operating costs.
So they can then pass the savings on to customers with more interest gain.
These accounts are great for higher earning savings without needing to have a high balance. However, withdrawals can be more difficult, depending on how the online bank connects to ATMs and a regular bank for transfers.
Alternatively, consumers can place money into a certificate of deposit. This tool is like a savings account, but the funds can’t be withdrawn as easily without suffering a penalty (usually the loss of all interest gained for a year). The CD, in essence, works like a loan to a bank.
So for the inconvenience of locking up the money for a set period of time, banks often pay far higher interest rates of return to savers. CDs are also protected by federal insurance rules up to $250,000 per account.
The final option involved federal government savings bonds. They are only issued by the U.S. federal government, but they offer an easy way for an individual to saving money in a protected instrument up to 30 years. Savers can choose from inflation-adjusted bonds to regular savings bonds.
These bonds can be cashed after one year if needed, but can be held longer, earning far more interest than most regular bank accounts.
So, depending on what’s desired, a saver has a number of options available to him.