Savings accounts are crucial for any well-rounded financial plan, but deciding which one to use can be challenging. Since there are several different types of savings accounts, each with its benefits and potential drawbacks, it’s essential to choose one that best suits your individual needs.
This post will outline some of the most common savings account types, explaining how they work and outlining their pros and cons to determine which one is right for you. We’ll also give some basic advice on avoiding common mistakes when using savings accounts and how to safeguard your money once you open an account.
Traditional Savings Accounts
Many banks offer traditional savings accounts, which are great for beginners. According to experts at SoFi, “You can generally deposit between $0.01 and $250,000 without paying a fee, and FDIC insures your money for up to $250,000.”
Interest-Bearing Accounts
There are two main types of interest-bearing accounts: transaction accounts and savings accounts. Transaction accounts usually come with a debit card for easier transactions. This type of account allows you to make unlimited transactions in a month. However, suppose your balance is low at one point in time.
Then, it may not be possible to make any more transactions unless there is enough cash available in another account or an additional overdraft limit is available on your transaction account.
CD (Certificate of Deposit) Accounts
Certificate of deposit (CD) accounts are among the most common savings accounts. Also known as time deposits, federal or state agencies insure these savings accounts. For that guarantee, CDs typically have a set term—usually from three months to five years—and penalties for early withdrawal.
Money Market Accounts
These accounts often pay higher interest rates than regular savings accounts, but their major drawback is that you can’t easily withdraw money from them without paying a fee. They also usually have monthly limits on withdrawals.
So if you’re looking for a savings account to keep your emergency fund in or want someplace safe where you can stash your cash while you’re saving up for something big, like a house down payment, consider getting a money market account.
Health Savings Account
HSAs are a more flexible option if you have a high-deductible health plan (HDHP). The minimum annual deductible for HDHPs must be at least $1,350. The maximum out-of-pocket expense on an HSA was $6,650 in 2018. Any money in your HSA rolls over from year to year—if you don’t use it, you get it back when you need medical services. Check with your employer or financial institution about enrolling.
Education Savings Account (ESA)
This account works similarly to a 529 college savings plan. ESA money grows tax-free, but withdrawals are only tax-free if they go toward qualified education expenses.
The types within an individual category are also categorized by term length, interest rate, access, minimum balance requirements, and more.
Each type of savings account is designed for different purposes. The best one for you depends on your current financial situation, goals, and risk tolerance. When choosing a savings account, consider how much money you can afford to put away each month and how long you want to save it. But leave it to SoFI Invest (SoFi Bank) to pick the best option for you.
