Welcome back to our guide to financial freedom, where we take you through the needed steps to achieve financial independence. So far, we’ve covered some of the most common financial terms, as well as how to deal with debt. Now that you’ve conquered your debt, it’s time to start saving. But what’s the best option for you? Below, we’ll dig into the most common types of savings accounts and their benefits.
Savings account
When you think about saving money, a savings account is probably what first comes to mind—an account that allows you to safely deposit and store money while earning a small amount of interest. Federally insured by the National Credit Union Administration (NCUA) at credit unions or the Federal Deposit Insurance Company (FDIC) at banks, savings accounts offer a secure place to store your money as you work towards short- or long-term financial goals. Money can be added to savings accounts easily and through various methods, including direct deposit and mobile apps. You can also easily access your money in case of emergency. Be aware, you may be limited to six “convenient” withdrawals or transfers per month from the account free of charge. Another downside is that the interest rate is lower than other accounts, like a money market or CD, and some accounts require a minimum balance.
High-yield savings account
Savings accounts are great, but one of the biggest drawbacks is the lower interest rate. If you’re looking for all the benefits of a savings account, plus a better rate, then a high-yield savings account may be the right choice for you—the interest rate on a high-yield account can be 10 to 20 times higher than a traditional savings account. As such, high-yield savings accounts are a great place for short-term financial goals, like saving for vacation or a down payment, or for your emergency fund.
Similarly to traditional savings accounts, high-yield savings accounts may come with a monthly withdrawal limit, and you may incur a fee if you exceed this limit. Additionally, you may have fewer options of withdrawal methods than traditional savings accounts, which can make accessing your funds a little more challenging.
Money market account
Another great option for saving money is a money market account (MMA). Money market accounts give you the benefit of a better interest rate along with check-writing and debit card privileges. This is particularly helpful in an emergency, as you can access funds more easily than with traditional savings accounts. However, a minimum initial deposit is required to open an MMA and balances must be maintained over a certain threshold while they’re active.
And again, you’re limited to six withdrawals from this account in a month. Like high-yield savings account, MMAs are best for people who are looking to earn more interest than they would with a traditional savings account, particularly with short-term savings goals in mind.
Certificates of deposit
The next option you might consider to save money is a certificate of deposit (CD). Issued by a credit union or bank, CDs allow you to set money aside for a specific time frame at a fixed interest rate, giving up access to funds until the account reaches maturity. Like the other accounts, CDs are backed by the NCUA or the FDIC depending on the issuing institution, which means your money is protected up to $250,000. CDs can be great for certain situations. If you have a stockpile of cash that you don’t need now but want in the future—maybe for a house or a car—a short-term investment like a CD is helpful. You don’t run the risk of losing money if you were to invest in something like the stock market. They can also keep your money safe from yourself if you have trouble with impulse purchases.
Remember, you won’t be able to easily access this money in an emergency and will likely pay a penalty for withdrawing those funds. The biggest risk with CDs is interest rate—as the financial markets fluctuate in response to economic and political factors, you want your CD’s rate of return to remain competitive. If rates rise, your current investments could be locked into a lower rate for an extended period. While you don’t risk losing your investment and earned interest, you could miss the opportunity to earn more money than with your current CD.
IRA
The last type of account we’ll cover is an individual retirement account (IRA) . While there are a few different types, the main goal is the same—to save for retirement. IRAs were developed by the IRS to make it easier for people to save for retirement. Each IRA type has different features and benefits, but all of them are long-term, tax-advantaged savings accounts for retirement planning that are available to individuals with earned income.
While the previous accounts we’ve covered are mostly for short-term financial goals, IRAs are specifically designed for the future. One of the biggest benefits of an IRA, aside from future financial security, is that you have the ability to invest your money across multiple options, like stocks or mutual funds. Additionally, money held in an IRA usually can’t be withdrawn before age 59½ without incurring a steep penalty, though there are some exceptions like qualified education expenses.
How to save
The last thing we want to cover is how you should be saving money. Just like there are many accounts, there are many ways to save. You can stick with the classic and drop your change into a piggy bank, or you can move to a modern version with savings apps like, Oportun (formerly Digit) or Qapital. However you decide to save, remember to factor savings into your budget. When you list your monthly expenses, like rent or utilities, include a set amount to go into savings alongside your other expenses, like your streaming subscriptions, groceries, and entertainment. If you haven’t made a budget before, consider the 50/30/20 rule—divide your after-tax income into three categories: needs (50% of your income), wants (30%), and savings (20%).
Key takeaways:
- Everyone should have a basic savings account.
- High-yield savings, CDs, and MMAs are best for achieving short-term financial goals, like vacations or saving for a down payment.
- IRAs are best for long-term retirement planning.
There are dozens of options to help you reach your savings goals, because there’s no one-size-fits-all solution to saving. It just depends on your savings goals. It’s also not uncommon to have several types of savings accounts—it’s best to have both a long-term retirement account and an emergency fund. But, saving is an important step towards financial independence so be sure to start as soon as possible. Do you have a current savings goal? Share what steps you’re taking to achieve it in the comments below!
