Four kinds of savings and other important savings account information
Learn more about savings accounts and how they work. We share four different kinds of savings to help you decide which one may help with your financial goals.
Important savings account information
What is a savings account?
A savings account is a simple way to save money. Savings accounts are liquid, which means that the money is available for quick withdraw. This makes them ideal for financial needs such as: holiday spending, major purchases, vacations, weddings and emergency funds.
How does a savings account work?
You typically open a savings account at a bank or a credit union, and deposit money in it. Your account will then produce interest on your balance. Keep in mind that while you'll earn interest on the money in your savings account, it won't be as substantial as with other investment options.
You can access your money in this account with an ATM card, by making withdrawals at a bank branch or by transferring money from your savings account to a checking account. Savings accounts typically do not offer debit cards or checks. Your bank or credit union can confirm if there are restrictions on number of withdrawals, minimum balances and interest rates offered.
Are savings accounts insured?
Accounts are insured up to $250,000 per ownership category per bank (not per savings account opened). The Federal Deposit Insurance Corporation (FDIC) offers insurance in many different account type/ownership categories. Based on the structure, you may be able to receive more than $250,000 i.e., adding beneficiaries.
- Banks – The Federal Deposit Insurance Corporation insures deposits at more than 7,000 banks and savings associations across the nation. The FDIC identifies, monitors and addresses risks to these institutions.
- Credit unions – The National Credit Union Administration regulates, charters and supervises federal credit unions.
Types of savings
Emergency fund or “I can’t touch fund”
Emergency funds are important because they can help you address unexpected things that might cost you money. Examples include a job loss, medical emergencies and home or car repairs. If you don’t have an emergency fund, you may choose to incur credit card debt to address these challenges. An emergency fund is designed to help avoid using credit when these emergencies occur.
A high-yield savings account could be used for an emergency fund. It offers an increased interest rate, but often has higher minimum balances and may charge fees, too.
Another savings account to consider for an emergency fund is a money market savings account. This account type may offer higher rates — even promotional introductory rates. Some have minimum balances, like $500 or $1,000, that the saver must maintain to avoid fees, compared to lower or no minimum balance requirements with traditional savings accounts.
Theoretically, emergency funds are used infrequently, so the trade-offs might be worth it if you decide to use one of the higher interest accounts.
The "I can touch" fund
This is for things you know are going to happen, but just not every month. Gifts, travel, real estate taxes, homeowners insurance premiums or hair appointments, for example. Figure out what's coming up and put some money away to pay for these expenses. Then when they do come up, you don't have to bust your monthly budget to pay for them — the money is already there, waiting.
A traditional savings account can be good for this type of savings. Most savings accounts offer online access, making it easier to transfer money and check your balance. In addition, some may not require a minimum opening deposit and will let you make direct deposits, which can help if you want to set up an auto-transfer option. Finally, while the interest rate may be lower than other savings account types, you may have quicker or easier access to funds.
"I know what I want, I just need to pay for it" fund
This kind of savings is for a specific goal or purchase that may happen in a few years. Some examples may be a dream car, a once in a lifetime travel destination or a wedding. These are not really part of your living expenses. They are something you would like to have. So, this savings is designed to help you get them.
A certificate of deposit (CD) may be a good way to save money for this type of goal. Minimum balances vary, and renewal options let you put your money in a CD and forget it; you can't access the funds without penalty until the term is over. CD terms generally range from about six months to five years; typically, the longer the term, the better the interest rate. One thing to note: When mature, CDs automatically renew unless you direct the bank otherwise.
Long-term savings
When you're saving for things like a down payment or retirement, you'll want to think about saving in a different way. For longer time frames, you might consider investing your money rather than putting it in a traditional savings account.
Now that you have read about saving accounts and saving types, you may be interested in learning more about other financial topics like basics of investing, mutual funds or different retirement accounts.
