A liquid emergency fund is a necessity for all American families, but liquidity usually comes at a cost. For savings accounts, that cost isn’t a fee or commission—it’s an opportunity cost. Savings accounts provide some of the worst rates of return on your money, and the more you search for yield, the less liquid your funds will be.
While a savings account won’t offer the return of stocks, you won’t have to absorb any risk. Neither will it offer the rate that bonds do, but you’ll have access to the principal. The combination of liquidity and lack of risk makes a savings account an ideal place for an emergency fund. And just because savings account interest rates are low, it doesn’t mean you shouldn’t shop around for the best yield. Understanding the different types of savings accounts will help you identify the most readily-available options.
If you need assistance with your finances, work with a professional financial advisor from Good Life Financial Advisors of Mt. Pleasant. We’re ready to help create a personalized plan for your specific needs.
Traditional Savings Accounts
The most basic of all accounts, the traditional savings account has no bells and whistles and usually offers a lousy rate of return. The upside? You’ll have access to your funds at any time and can make up to six different withdrawals or transfers per month. Most traditional savings accounts also come with a debit card for purchases and ATM visits.
Physical banks usually offer savings accounts in tandem with checking accounts because the interest rate is so low, often as little as 0.01%. If linking your savings and checking account at a single bank makes your life more convenient, this could be something to consider. Otherwise, look at online banks. With less overhead, online banks can offer high-yield savings accounts with interest rates as high as 0.65%. You’ll usually need to maintain a minimum balance to get the highest rate, but it’s a much better deal than what your traditional brick-and-mortar bank will be offering.
Money Market Accounts
Sometimes called Money Market Savings Accounts, these accounts are similar to traditional savings accounts in that you can make six transfers per month and you’ll get a debit card for convenience. Additionally, many money market accounts allow users to write checks for purchases. The best available interest rates are comparable to those of online savings accounts. However, there’s one significant drawback—tiered rates.
To get the best rate offered by a money market account, you’ll need to put a lot of cash into it. How much is a lot? To get the 0.6% interest rate offered by Navy Federal Credit Union, you’ll need to maintain a $250,000 minimum balance, which is a lot more than most people want to keep in a savings account.
Certificates of Deposit
Certificates of Deposit (CD) are FDIC-insured savings vehicles, but they work a little more like a bond—just without the coupon. A CD will require a lock-up period where your money will be inaccessible. Lock-up periods can be as short as 30 days or as long as 5 years, depending on your time horizon and desire for high yields. The more you put into a CD, the higher the interest rate you’ll earn. The same goes for longer lock-up periods—the longer you keep your money in the CD, the higher the interest rate you’ll be rewarded with.
CDs have an early withdrawal penalty, so you’ll need to keep your money in the account for the duration of the term. However, CDs offer the best interest rates, far beyond what you’ll find in traditional savings accounts or money market accounts. A five-year CD can often pay more than 1% with a minimum balance as low as $500. Want to work around the lock-up period? Creating a CD ladder with different accounts set to different terms can allow you to have access to a steady stream of savings while still earning the highest rates.
Cash Management Accounts
If you have uninvested cash sitting in a brokerage or retirement account, you can earn interest on those funds through a cash management account. Cash management accounts can be offered by brokerages or through third-party banks, but the concept is the same. Uninvested cash in your brokerage account can earn interest through a cash management account, often at a superior rate to a traditional savings account.
Many cash management accounts have limited restrictions on withdrawals and deposits, which draws comparisons to checking accounts. Some brokers allow account holders to write checks and make unlimited transfers without charging a fee or having a minimum balance requirement. Cash management accounts are only applicable with an accompanying brokerage account, so if you want to keep savings and investments separate, this may not be your preferred option.
Work With an Experienced Financial Advisor
We hope you have a better understanding of the different types of savings accounts. If you have any questions, reach out to a team member from Good Life Financial Advisors of Mount Pleasant today.
The opinions voiced are for general information only and are not intended to provide specific advice or recommendations for any individual.
An investment in the Fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although the Fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the Fund.
CDs are FDIC insured to specific limits and offer a fixed rate of return if held to maturity, whereas investing in securities is subject to market risk including loss of principal.