Savings Accounts
Savings accounts at a bank or credit union have traditionally been one of the simplest and most convenient ways to save. These accounts typically have the lowest minimum deposit requirements and the fewest withdrawal restrictions. But they often pay the lowest interest rates of any savings alternatives. Because they tend to have lower overhead, online banks may offer higher interest rates than more traditional brick-and-mortar banks.
Most savings accounts pay compound interest, which means that your earnings are added to the balance to create a larger base on which future interest is paid. The more frequently it compounds, the faster your earnings will accumulate—though with small balances, the increases won't be very dramatic. You generally begin to earn interest as soon as the money goes into your account, and that interest continues to accrue until you withdraw.
The bank or credit union will tell you the basic interest rate and the annual percentage yield (APY). The APY is larger than the basic, or nominal, rate since it takes into account the impact of compounding. Financial institutions often advertise the APY since it more accurately reflects the amount of interest the account will actually accrue.
Savings accounts are subject to the provisions of the Federal Reserve System’s Regulation D, which includes guidance regarding frequency of transfers and withdrawals. With a basic savings account, you can make as many deposits as you like, whenever you like. However, requirements regarding withdrawals and transfers may vary, with some banks now allowing unlimited withdrawals and transfers and others setting monthly limits of as few as six withdrawals per month and sometimes charging fees for transactions that exceed these limits.
Additionally, minimum opening balances may apply to savings accounts, and some banks charge fees if your balance falls below that minimum.
Some banks offer low-cost savings accounts or more flexible alternatives for children, college students, seniors and others whose income falls below certain limits. The way these accounts work varies from bank to bank.
Money Market Deposit Accounts
Money market deposit accounts are similar to savings accounts but might pay higher interest rates. They tend to have higher initial deposit and balance requirements than savings accounts, and different interest rates may apply to different account balances.
Money market deposit accounts let you write a limited number of checks each month, in essence combining features of savings and checking accounts. You can also make additional withdrawals by visiting a bank branch office in person or, when the money market account is linked to a debit card, through an ATM, and you can deposit that money into your checking account without penalty.
Be aware that money market deposit accounts differ from money market mutual funds—even though their names sound alike. A money market mutual fund is a type of security (rather than a bank product) that is not federally insured. Learn more about mutual funds.
Certificates of Deposit (CDs)
CDs are financial products that hold your deposit for a fixed term—usually a preset period from six months to five years—and pay you interest until maturity. At the end of the term, you can cash in your CD for the principal plus the interest you've earned or roll your account balance over to a new CD.
CDs are less liquid than savings accounts. You can't add to or withdraw from them during the term. If you cash in your CD before it matures, you'll usually pay a penalty, typically forfeiting some of the interest you've earned.
You can buy fixed-rate CDs or variable rate CDs, sometimes known as market rate CDs, which have interest rates that may rise and fall with changing market rates or be readjusted on a specific schedule.
A common CD investment strategy involves creating a CD ladder in which you divide the total sum of money you’re okay with locking away in CDs equally across multiple CDs with varying maturity dates, which can provide you with additional flexibility.
Other offerings include long-term CDs, which pay high interest rates but may be callable, meaning the bank can redeem them early (say should interest rates fall), and brokered CDs, which are more complex and carry more risk. Although most brokered CDs are bank products, some may be securities, which won't be federally insured.
