How To Choose A Savings Account

Most everyone can use a savings account. While your checking account should be a pit stop for your money, a savings account is a holding cell for your cash until you're ready to spend it on your goals. It's liquid, accessible, and a safe place to keep the money you might need in the next few years.

Types Of Savings Accounts

Here are some common account types to consider when looking for a place for your savings:

  • Basic: These tend to have few or no requirements for minimum daily balance. And they're available with just about any brick-and-mortar bank or credit union. But their annual percentage yields (APYs) usually aren't as high as they are with some of the other account types.
  • High-interest: This is also known as a high yield savings account. It offers an APY that's much higher than a basic savings account's rate. That lets customers grow their savings more quickly. These are usually more common with online banks, though some brick-and-mortar banks may offer them to customers who maintain a certain minimum balance.
  • Look Local

    If you want a financial institution, you can actually visit, consider a credit union or community bank.

    These “small institutions raise rates faster than the behemoths,” Schuette says. “They want to bring deposits in a little quicker.”

    Though their rates may be higher, credit unions and community banks often have a limited number of branches, says Patricia Seaman, a spokeswoman for the nonprofit National Endowment for Financial Education in Denver. That could be an issue if you travel frequently and want access to a branch or fee-free ATM while you’re on the road.

    Competitive Interest Rate

    Interest is one of the most important benefits of having a savings account, so make sure you’ll be receiving a competitive interest rate. It’s what makes storing your money with a bank better than stuffing it under your mattress.

    You want your money to work for you and earn interest as opposed to sitting in an account and collecting nothing but dust.

    Unfortunately, most savings accounts offered by big banks have extremely low interest rates like .01 percent APY, for example. At that rate, your money will earn just pennies per year in interest.

    The savings accounts that have the most competitive interest rates are often with online banks. Online banks are flexible, secure, easy to use, and offer many benefits of brick-and-mortar banks.

    Interest Rate And APY

    Savings accounts earn interest — their primary benefit over checking accounts — but even so, the interest earned could be very little. The national average is typically around .1% APY according to the FDIC. So, a $10,000 balance with an interest rate of .1% APY will only earn $10 each year. However, high-interest savings accounts will earn many times that and a $10,000 balance could earn $100 or more each year.