How to Choose the Right Savings Account
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Choosing the right savings account is like finding the perfect pair of shoes—it needs to fit your financial goals and provide long-term comfort. I don’t think many people take it seriously enough because it’s so easy to do now with so many banks having access to open accounts on the internet. So many people end up opening any account without really putting thought into it then later realize they made a huge mistake with their money.
The great thing is that it’s not rocket science, but with so many options out there, it’s easy to feel overwhelmed. This guide will walk you through the process so you can confidently select the best savings account for your needs.
Key Takeaways:
Savings accounts vary based on interest rates, fees, and features.
Determine your savings goals before choosing an account.
Look for FDIC or NCUA insurance to protect your money.
Compare interest rates, fees, and withdrawal restrictions.
Identify Your Savings Goal
Before diving into account options, get clear on why you’re saving:
Emergency fund: Accessible funds for unexpected expenses.
Opportunity Fund: Accessible funds for unexpected non-emergency expenses.
Short-term goals: A new car, vacation, or home renovation.
Long-term goals: A home down payment or future education expenses.
Knowing your purpose will help you determine the features you need.
Understand the Different Types of Savings Accounts
There are several types of savings accounts, each suited for different needs:
Traditional Savings Account
Best for: Savings where you don’t know when the money will be spent.
Features: Low minimum balance requirements and easy access.
Consideration: These accounts typically offer lower interest rates.
High-Yield Savings Account
Best for: Emergency funds and basic savings.
Features: Higher interest rates than traditional accounts.
Consideration: These accounts are usually online-only, with fewer physical branches.
Money Market Account (MMA)
Best for: Those who want savings account flexibility with check-writing privileges.
Features: Higher interest rates and limited check-writing options.
Consideration: Often requires a higher minimum balance.
Certificate of Deposit (CD)
Best for: Long-term savings where you won’t need immediate access.
Features: Fixed interest rates for a set term (e.g., 6 months to 5 years).
Consideration: Early withdrawals may incur penalties.
Compare Interest Rates
Interest rates can vary widely between institutions and account types. Online banks typically offer higher annual percentage yields (APYs) than traditional banks due to lower overhead costs.
Pro Tip: Compare APYs rather than interest rates alone. APY factors in compounding, giving you a clearer picture of potential earnings.
Check for Fees and Minimum Balance Requirements
Hidden fees can eat into your savings, so it’s important to review an account’s terms. These requirements not only vary by bank, but it varies by bank account type.
A quick story about my experience with changing bank accounts. I opened a PNC checking account back in my college years. Many years later, I was offered another type of checking account. The features seemed nice so I switched. I was under the impression that all checking accounts at the same bank offered slightly different features, but fore the most part had the same rules. That was not the case. I called the bank to change my bank account type and the new bank account came with monthly fees when the balance fell below a certain amount. At the time, my checking account would fall below a certain amount because I didn’t leave money sitting in a bank account that isn’t gaining the maximum amount of interest ( which checking accounts tend to have lower interest rates). I also lost my free savings account that came with it the old checking account. Needless to say, I switched back immediately.
Now I know that story was about checking accounts, but just understand that all accounts aren’t made equal. Here are some quick fees to look out for when choosing a savings account:
Monthly maintenance fees: Some banks charge fees unless you maintain a minimum balance.
Withdrawal limits: Federal regulations limit withdrawals from savings accounts to six per month. Exceeding this can lead to fees. Most bank have this limit although in April 2020 the federal reserve removed it due to covid and did not intend to reimpose it. Banks still have the right to add it back, so be sure that is not a limit with the savings account you choose.
ATM fees: Consider how you’ll access your money and whether ATM usage fees will apply.
Ensure Your Money Is Protected
Make sure the bank or credit union you choose is insured:
FDIC insurance: Protects your money up to $250,000 per depositor, per bank. This is a minimum requirement of mine. The bank I sit my money in, has to be FDIC insured.
NCUA insurance: Provides the same protection for credit union members.
Evaluate Account Features and Accessibility
Consider how you’ll manage your account and whether the bank offers features that fit your lifestyle.
Online and mobile banking: Ensure the app is user-friendly. This may be difficult because you need the account to have access to the online banking app. However, I’ve come across a couple banks that have simulations online for you to test the web version and app version of their accounts.
Automatic transfers: Great for consistent savings contributions.
Customer service: Check availability and responsiveness, especially for online-only banks. This is more than just calling to speak to someone to open an account. Many businesses tailor their welcome and acquisition services to have the best customer service so they can make a good first impression on their potential customers and new customers. Call and go through the prompts as if you are an existing customer and speak to a representative that way and see how responsive and friendly they are.
Don’t Forget Promotional Offers
Some banks offer cash bonuses or higher introductory APYs for new accounts. While these promotions can be tempting, be sure to read the fine print. Promotional rates often drop after a few months, so prioritize long-term benefits over short-term perks.
Consider Your Withdrawal Needs
Think about how often you’ll need to access your funds. If you’re building an emergency fund, you’ll want an account that allows quick, penalty-free withdrawals.
Tip: For money you don’t need immediately, consider laddering CDs to balance higher interest rates with periodic liquidity. However, if you’re just starting out, you may want to wait until you’re more experienced in your finance journey to incorporate CDs into your banking strategy.
Compare Multiple Institutions
Don’t settle for the first option you come across. You want to compare savings accounts not only from traditional banks, online banks, and credit unions but also the institutions within those categories. There are many online tools for rate comparisons that can help you find competitive options.
Review and Reassess Periodically
Financial goals and market rates change over time, and so does your needs. It’s a good idea to review your savings account annually to ensure it’s still meeting your needs. Unfortunately, if you’re like me and you’re loyal til the soil, you might not do this as often as you need to. However, a piece of encouragement that I have to give to you is, most savings accounts do not have incentives for long term customers. This means, you get the same benefits and the same mess being a customer for 20 years as the customer who signed up yesterday. Don’t be loyal to companies who aren’t loyal to you!
Final Thoughts
Choosing the right savings account is an essential step in building your financial foundation. Whether you’re saving for peace of mind, a dream vacation, or a future investment, taking the time to compare your options can lead to better returns and fewer headaches. Remember to prioritize accounts that align with your goals, offer competitive interest rates, and have minimal fees. With the right savings account in place, you’re one step closer to achieving your financial dreams.
