A high yield savings account is essential to responsibly manage your finances. The process might seem confusing or complicated, but before you resort to hiding your money under the mattress (bad idea, by the way!), learn more about how savings accounts work, the different types of savings accounts, and how to compare savings accounts to find the right one for you.
How to build savings with a savings account
Unlike the under-the-mattress method, a savings account is a safe and secure way to manage your savings. The Federal Deposit Insurance Corporation (FDIC) protects funds placed in banks and savings associations, typically up to $250,000 per depositor. FDIC insurance covers all deposit accounts, including savings accounts, money market deposit accounts, and high yield savings accounts.
Another benefit is that you can actually build savings by depositing your money in a savings account. Because banks are essentially using your money to lend to others, you'll receive a percentage of interest on your money. If you've deposited $5,000 and your account pays 3 percent interest, each year you'll make at least $150--and if you leave that interest in the savings account, interest will grow on the interest earned. Thus, as you grow your savings, the amount of money you'll make in interest will grow, as well.
Types of savings accounts
Your interest rate is determined by several factors, including the type of savings account you choose. Here are three basic options to consider:
- Traditional savings account: This is a simple savings account where you can deposit and withdraw money, but usually not with checks or ATMs. These accounts earn minimal interest, typically .5-1 percent per year.
- Money market account: Money market accounts are typically meant for larger balances that you need to access less often than money in a traditional savings account. On average these accounts offer higher interest than savings accounts--but a tradeoff may be a minimum balance requirement to open the account or a limitation on the number of transactions you can make for free in a given period.
- Online, high yield savings account: Online banks like ING Direct and HSBC Direct usually offer better rates than other types of savings accounts because they have less overhead than traditional brick-and mortar banks. Your money isn't immediately available for withdrawal, however, most banks take only two or three days to transfer the money into your checking account.
How to choose the right account
Answer the following questions to help you decide which type of savings account is best for you:
- How do you want to access your money? Do you want to be able to use checks or an ATM? Remember, sometimes it's too easy to spend your savings with an ATM, and you'd be safer with your money a little less accessible. Brick-and-mortar banks mean faster, easier access, whereas online bans will take a few days to process your transfer of money into your checking account.
- Is it important to get the highest interest rate? In most cases, the online banks will offer better rates. Get rates from several banks to compare, both online and traditional savings institutions.
- How much are you planning to save in the account? Going back to the money market account example, if you only have $1,000 deposited, you'll make zero interest in that money market account. Make sure you are depositing the minimum balance required for the account type in order to maximize your interest payments.
Finally, be sure you understand the fees associated with the bank and account type you select. Ask if there is a monthly fee for the account or additional fees for transactions.
Once you have decided on a savings account and a bank, you can start saving with the knowledge that your money is secured and your savings is growing. If you don't have an open savings account, weigh your options, do the research, and get started today!