Alright, gather round. This is going to be important.
Now that you’re more familiar with what types of savings accounts there are, you’re probably wondering which one to get. Let’s get started.
What were the 3 types of savings accounts again?
Right, as a reminder, they are:
- Regular old savings account
- High-yield savings account
- Money market savings account
Got that? Great, let’s dive in.
No account
First off, you might need no savings account at all.
Uhh…isn’t this article supposed to be about which savings account to have? How can not having a savings account make sense?
Well, think about it this way: If you’re just starting out and just learning how to manage your money, a regular old checking account is all you really need. A savings account on top of that might be too much to handle for some folks. In the beginning, it’s more important to understand how money and banking works on a basic level than to jump right into more complicated accounts.
Once you’ve got a handle on the basics though and regularly have at least a little more money than you need in your checking account, then you can look into a savings account. Until then, just use the checking account, focus on the basics, and keep it simple.
Regular old savings account
Once you feel comfortable managing money and using your bank, you might be able to start putting away some money. Enter the regular old savings account! It’s basic and a great way to learn how savings accounts work in general. Plus, you get some interest out of the deal and that’s not bad at all.
And with a basic savings account, it really is a small amount of interest right?
It is indeed. Remember, though, it’s all about getting your money to make money for you, even if it’s just a little bit at a time.
Basic savings accounts are also great for specific savings goals. Let’s say you want to save up for a couch and your goal is $500. You can try to keep track of that money while keeping it in your checking account mixed in with the rest of your money, but that’s an accident waiting to happen. Let’s say you forget how much you’ve set aside for the couch and accidentally spend some of it. Now you have to figure out how much money you had set aside for the couch, how much you accidentally spent, etc. What a headache!
Ah, so having the separate savings account keeps the couch money away from your everyday money, so you don’t accidentally spend it.
Exactly. You can create a special savings account, just for saving for that couch! But, I hear you say, what if you also want to save for a birthday present? Make an account for that too! Nobody said you could only have one savings account. Now, obviously this can get confusing if you open too many accounts, but definitely don’t be afraid to open a couple, especially if you have a few savings goals you want to keep track of.
High-yield / money market savings accounts
If, by now, you’ve successfully managed your checking account and you have a couple (or a few!) savings accounts to track savings goals and to make you a little extra money, you might be wondering how to get your money working harder for you. It would be nice if you could make more interest on your money. This is where high-yield and money market savings accounts shine.
I’m combining these two types of accounts because they only really differ in how you qualify for them and the restrictions banks put on them. Broadly speaking money market savings accounts tend to have more difficult requirements to qualify and will limit you more heavily on how many withdrawals you can make. Otherwise, they both make more interest than basic savings accounts with money market savings accounts often offering the higher interest.
As to how to use these types of savings accounts, it’s basically the same idea as the basic savings account. You have more money than you typically need at the end of the month and need a place to put it so it does some work and makes some money for you. That, and, you have specific savings goals you’re working towards, like a rainy-day fund for emergencies.
Got it. So, when should I look into getting one of these accounts?
Basically as soon as you qualify for them. Seriously, if you have enough cash on-hand to qualify for these higher-yield accounts, get one. Put all the money you don’t need frequent access to into one of these accounts and start making that higher interest pronto.
Woah okay. What’s the rush?
Remember, money takes time to make you money, so you need to give it all the time you can. Interest builds on interest and then, over time, more interest builds on that and so on. So, the more time you give your money, the more work it will do for you.
Rainy-day funds and making all your money work for you
Right, right. Now, you keep mentioning the restrictions on taking money out of these accounts. How do I know what money qualifies as “money I won’t need frequent access to”? What money makes sense to “lock up” like this?
I mean, no one can 100% predict the future and when they’ll need what money where. One type of fund that does fit well into the limitations of higher-yield savings accounts are “rainy day funds” i.e., money you set aside in case of emergency.
The whole purpose of these funds are to be sources of money when the #2 has thoroughly hit the fan and at no other time. So, unless you’re prone to having frequent emergencies, a rainy day fund is a great fit for these more restrictive accounts. You don’t need frequent access to the money, you can usually meet the minimum balance requirements since rainy day funds tend to be larger in value to cover living expenses during an emergency, and you’ll probably leave that money in the account for quite a while, letting the interest grow and grow. Even your rainy-day fund will be working for you! So, all-in-all, it shouldn’t be money you mind “locking up”.
Okay, playing devil’s advocate here. I put my rainy-day fund in a money market savings account and, wouldn’t you know it, I need the money I didn’t think I needed. What now?
Sure, I understand why these accounts might make you nervous. There are limits on how many withdrawals you can make, so you can’t expect to have unlimited access to the money once it’s in there. That’s part of the deal for getting the extra interest.
If you think you’ll need unlimited access to your money, and the restrictions on these accounts make you nervous, just keep it in your checking account instead. Don’t worry about it! This whole personal finance thing is all about doing what you can, nothing more. Don’t feel guilty if you don’t think you can live with locking up your money in one of these more restrictive accounts. Take your time and do your best for what’s right for you. That’s all you need to do. Later, if you’re in a more secure financial situation, look into them then.
Now, to close things out here, what if the worst case happens: you put your rainy-day fund in a higher-yield savings account and, darn it, you need to use the whole thing to fix up your car. You’ll definitely fall below the minimum balance to keep the account open, so won’t the bank close it on you? Yup! They might. You can always talk to them and they may waive fees or even delay the closure until you can get back on your feet.
But, you know what? In the end, who cares if they close the account? It’s not the end of the world. You need your money now, you get your money now. Besides, you can always reopen the account later and you will NOT hurt their feelings one bit. So do what you need to do and don’t worry about the bank or the account! The only thing you need to worry about is how to make your money work hard for you, when you can.
What’s next?
If you’ve got all this figured out, you might be wondering what’s next in your savings journey. The next level of savings is a certificate of deposit (CD), and it’s where you’ll likely end up parking a good amount of money. More on that in the next one.
Thanks for reading.
Common Cents 