1. Savings account
A traditional savings account offers the opportunity to securely store cash with a bank or other financial institution. While storing the cash with the bank, you generally earn a modest interest rate on your money. Such accounts are federally insured up to $250,000, which means your money is always safe.
Of all savings products, traditional savings accounts offer the most liquidity. You can withdraw your money at any time without penalty. This makes savings accounts a good option when you need ready access to your cash. Such accounts are a better option than storing your money in a checking account, since they offer interest savings.
The bank may limit the number of savings withdrawals you can take each month. If you fail to maintain a specific balance in your account on a monthly basis, there may also be fees. Most banks don't provide checks for traditional savings accounts.
2. Money market account
A money market account is an interest-bearing savings account found at banks and credit unions. Such accounts have checking account features, yet pay higher interest rates than traditional savings accounts. They are federally insured.
With a money market account, you can easily access your money. Such an account offers the ability to take advantage of a limited amount of withdrawal transactions each month. These include writing a check, transferring money to another account and using a debit card for a purchase.
Money market accounts generally require a minimum monthly balance and feature fees. If you go beyond the monthly transaction limit, you may also be hit with a fee.
3. Certificate of deposit (CD)
A certificate of deposit (CD) is a low-risk savings product that requires investing a minimum amount of money for a predetermined time. In return for locking your money into the account for a set term—from a few months to several years—the bank pays you a higher interest rate than you would earn from a standard savings account.
Throughout the CD's term, interest is added to the account. These are a good savings option if you want to earn higher interest and don't require access to the money in the near future. CDs offer a stable interest rate for a specified period of time. If interest rates fall during the term, you continue to enjoy the higher interest rate locked in when you opened the account. When a CD's term ends, you generally have the option to let it renew automatically, or you can cash the CD. Certificates of deposit are insured by the FDIC. 1
There are usually no fees to open a CD. There is a minimum deposit requirement. The lowest minimum deposit is often $500. Generally, CD accounts with higher minimums pay higher interest rates.
4. Individual retirement account (IRA).
An Individual Retirement Account (IRA) is an ideal investment option for stashing cash for your retirement years. IRAs are essentially savings accounts into which you deposit stocks, bonds, mutual funds and other assets that earn dividends. IRAs are offered by a wide variety of financial institutions, including banks.
Ideally, the money you deposit into your IRA earns healthy dividends over the years and the account contains a resulting substantial amount of money when you retire. In personal IRAs, there are traditional and ROTH IRAs. Both offer tax advantages. You can contribute to either type of IRA if you received taxable income during the year and aren't older than 70 1/2 by the end of the year.
When it comes to saving money, the most important step is deciding to do it. Now that you understand the benefits and basics of the various types of savings accounts, you can make the right choice for your savings goals.