If you’re starting to think about buying a home, starting a family, or just want to save up some funds in case of emergency, you may be considering a savings account. How do you pick the right one for your needs? Here are some types of savings accounts, and what you need to know before choosing the right one for you.
Traditional Savings Account
If you’re unsure of your savings goals or just want to get your foot in the door, your current bank or credit union likely has a savings account that will fit your needs. There are some small differences between your checking account and savings account, one being that you’ll earn a small amount of interest on the money invested in your savings account, but likely less than some of the other options on this list. Savings accounts, unlike checking accounts, usually have a limit on the number of withdrawals you can make each year, which is fine for those saving up long-term to reach a financial goal.
Some things to look out for with traditional savings accounts are additional fees. Those fees may equal out to about what you’re earning in interest, making that savings growth moot. If you’re looking for more of an investment than a place to squirrel away money for budgeting purposes, an account with higher interest rates may be better for you.
High-Yield Savings Accounts
These types of accounts are exactly what they sound like – the interest rates are higher, so you can save up more money over an amount of time than with a traditional savings account. High-yield accounts are more likely to be online banks, as they save money by not having physical “branches” you can visit.
Similar to traditional savings accounts, high-yield savings accounts will have a limit to how much you can withdraw each year. You’ll also be solely banking online, so if you prefer walking into a branch and working through your savings plan face-to-face. You will also likely not have access to these funds through a debit card as with a traditional account. If you do not need the comfort of immediate access because you’re saving up over time for a large purchase, such as a home, this is a great option.
Retirement Savings Accounts
If you’re looking to save up solely to retire, a retirement savings account is a great option. Usually they come in two forms – 401(k)s and IRAs.
Typically, a 401(k) is provided by your employer and allows you to deduct a small amount of money from each paycheck, matched by your employer up to a certain amount, to put aside for retirement. Individual Retirement Accounts (IRAs) are often opened by the individual to supplement any other financial needs after retirement. If you’re going to be making additional contributions to your IRA each year, be sure to find the best budgeting tool that helps you meet your goal now while still saving for the future.
The drawback to retirement savings accounts is you will pay a high penalty to withdraw money early. If you’re concerned you may need to withdraw early because of an emergency situation, it may be beneficial to consider using another savings account on top of your 401(k) or IRA, so your present needs and future goals can both be met.