A savings account is a deposit account where you can keep cash that you don't plan to spend immediately. These accounts keep your money safe, accessible, and pay interest on your balance. There are several different types of savings accounts you can choose. Each account comes with different features, which is why it's so important to understand your options. Here are 3 types of savings accounts you could be using today to help grow your wealth:
Online savings accounts
You should never underestimate the power of the internet. There is online banking that still operates on the principles of lending, saving, and earning. However, the arrival of online-only banks (i.e., banks that exist solely on the internet) has created fierce competition for traditional banks. Online-only banks typically offer higher interest rates on savings and investment accounts. Additionally, these accounts come with low (or no) monthly fees, no minimum balance requirements, and leading-edge technology.
Here are the current top 5 online savings accounts (by interest rate):
- CIT Savings Builder — 2.45% APY
- Marcus Savings by Goldman Sachs — 2.25% APY
- Barclays Online Savings — 2.20% APY
- Synchrony Bank High-Yield Savings — 2.20% APY
- American Express National Bank — 2.10% APY
To illustrate, a savings account with 2.45% APY would earn $245 on a $10,000 balance over the span of 1 year. Even better, you can earn that cash while having your money safe and accessible, which are two critical factors when considering a savings account.
But remember, since these are online-only savings accounts, you can't walk into a branch and get assistance from a teller. This lack of in-person service means you will be responsible for managing your account but can always call customer service for help.
Money Market Accounts
Money market accounts have the same look and feel as traditional savings accounts. A money market account is a savings account that comes with higher interest rates compared to many other savings accounts and can include checks, a debit card, or both. The one downside to money market accounts is that they typically require more substantial deposits, but, just like an online savings account, you have the opportunity to earn a high rate of interest while having instant access to your funds.
Here are the current top 5 money market savings accounts (by interest rate):
- PurePoint Financial Online Savings — 2.35% APY
- Citizens Access Savings Account — 2.35% APY
- Sallie Mae Money Market Account — 2.20% APY
- Capital One 360 Money Market Account — 2.00% APY
- Discover Bank Money Market Account — 1.95% APY
As you can see, money market accounts offer similar rates as online savings accounts, but remember, money market accounts give you the flexibility to:
Depending on your needs, you may find the flexibility provided by a money market account is more suitable for you. Additionally, money market accounts can be found in traditional brick-and-mortar retail banks, which is a beneficial feature for those that require in-person service.
Certificates of Deposit (CDs)
A certificate of deposit (CD) is a type of savings account that pays a fixed interest rate and has a fixed date of withdrawal. CDs are very similar to online savings accounts and money market accounts, but they usually pay a higher interest rate. So, what's the catch? You have to commit to a fixed term such as 6-months, 12-months, 18-months, or even longer. You can withdraw funds before your CD has matured, but you will have to pay a penalty.
Here are the current top 5 certificates of deposit:
- Capital One 360: 1-year, 2.70% APY | 3-year, 2.85% APY | 5-year, 3.10% APY
- Marcus by Goldman Sachs: 1-year, 2.75% APY | 3-year, 2.75% APY | 5-year, 3.10% APY
- Barclays: 1-year, 2.65% APY | 3-year, 2.75% APY | 5-year, 3.10% APY
- Citizens Access: 1-year, 2.85% APY | 3-year, 3.05% APY | 5-year, 3.15% APY
- Synchrony Bank: 1-year, 2.75% APY | 3-year, 2.90% APY | 5-year, 3.10% APY
A 5-year CD with a 3.10% APY will earn over $1,600 on a $10,000 deposit. Keep the same deposit in an online savings account with an interest rate of 2.10%, and you will earn just under $1,100. In this scenario, you would earn about $500 more than what you would in a high-yield savings account. The numbers don't lie; if you can leave your cash alone for the term length, you should consider opening a CD.
Putting it into perspective
Traditional brick-and-mortar savings accounts pay meager interest rates (as low as 0.10% APY). For comparison, let's examine the difference between keeping your savings in an online savings account versus a traditional brick-and-mortar savings account:
Initial Deposit: $10,000
Monthly Interest Rate (Compounded): 2.10% (online savings) | 0.10% (traditional savings)
Number of Years: 10
With the online savings account you would earn a little more than $2,300 over 10 years with an initial deposit of $10,000. On the other hand, a traditional savings account would amount to $100 over 10 years! As you can see, you should be looking elsewhere to earn the maximum return on your hard-earned cash.