Different Types of Savings Accounts
When you’re trying to build your net worth and increase your savings, it is important to understand where to put your money so that you can get the maximum benefits and maximum return. You also want to put your money into financial instruments that are not overly risky and won’t keep you up nights.
Interest
One of the most powerful benefits of using Savings Accounts is that you can earn interest on the balance that you keep in the account. What this means is that the bank will actually pay you a small percentage for letting them borrow your money. These interest rates will fluctuate like all other rates but you likely will not experience any wild swings over a short period of time.
Four Different Types of Savings Accounts
Traditional Bank Savings Accounts – These are perhaps the most safe and least risky of all Savings Accounts. You do however want to make sure that you are placing your money with a large, stable and reputable bank. These accounts are backed by the government (the FDIC to be exact) and are a good place to start.
Money Market Accounts – Also called “sweeps”, these accounts will usually pay you a higher interest rate than a bank savings plan. In Money Market accounts, the minimum balances are usually higher and you should not confuse these with Money Market Funds which have a much higher risk profile.
Certificates of Deposit (or CDs) – These are savings accounts where the bank agrees to hold your money for an agreed upon timeframe – usually between 1 and 6 months or 1 to 5 years. The big difference with CDs though is that you cannot take your money out. If you do, you will be hit with a large withdrawal feel.
Money Market Funds – Though these are not technically bank accounts, they are very similar. These accounts are most often issued by Mutual Fund Companies and offer a better return than Money Market Accounts (or any other savings account for that matter). The money you put into these accounts is also not put into a bank, they are invested in short term investments such as bonds. These accounts are regulated by the Securities and Exchange Commission and though the risk is a bit higher than bank savings accounts, you stand to make more from your money.
Whatever type of savings account you choose, it is important to find one that gives you the best return for your risk tolerance. The last thing you want is your money in a mattress somewhere providing you with no return at all.
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