Understanding the Different Types of Savings Accounts
Choosing the right savings account can significantly affect how your money grows and how easily you can access it. The account that’s best for emergency savings may not be ideal for long-term savings for retirement or college expenses.
Common savings account types include traditional savings accounts, high-yield savings accounts, certificates of deposit (CDs), money market accounts, cash management and specialty savings accounts. Each type offers different interest rates, fees and accessibility, which are important factors to consider when choosing a savings account.
Learn about the most common types of savings accounts, what they’re best suited for and the pros and cons of each option.
What are your savings account options?
There are several types of accounts from which to choose if you want a place to stash your cash. As you compare options, consider factors including interest rates, fees, minimum balance requirements and how accessible your funds are.
Different types of savings accounts include:
- Traditional savings accounts: The simplest savings account with low risk and easy access, but often low interest rates as well.
- High-yield savings accounts: High-yield savings accounts are nearly identical to traditional savings accounts but are usually offered by online banks and have higher interest rates.
- CDs: Like a savings account with a timer, you agree to leave your money in a CD for a set term to earn interest, and you’ll typically face withdrawal restrictions.
- Money market accounts: Money market accounts typically offer higher interest rates than traditional savings accounts and may also provide debit cards and check-writing privileges.
- Cash management accounts: Cash management accounts are available from non-bank financial institutions such as brokerage firms. They combine checking and savings features, and may allow integration with your investment accounts.
- Specialty savings accounts: Specialty savings accounts are designed for specific purposes, such as saving for education or retirement.
Traditional savings accounts
Traditional savings accounts are one of the most straightforward ways to save and earn interest. You can usually get a 0.01% to 0.10% annual percentage yield (APY) from banks or credit unions with traditional savings accounts. However, rates vary and can sometimes be higher, especially if you have other accounts with the institution.
You can expect low minimum deposit requirements, usually around $25. Some banks charge monthly fees for savings accounts but may waive them if you maintain a minimum balance, set up direct deposit or meet other requirements.
Pros
- Easy access to your funds
- Low minimum deposits
- Useful for setting financial goals
Cons
- Minimal interest earnings
- Monthly fees may apply
- Withdrawal limits and minimum balance requirements in some cases
High-yield savings accounts
A high-yield savings account is much like a traditional one but can offer a much higher APY. Rates can fluctuate based on market conditions; as of October 2024, premium rates are at around 4.5% to 5%. That said, APYs are declining as the Federal Reserve cuts rates. Most high-yield savings accounts are available from online banks and credit unions, which can offer higher rates by not having the expense of physical branches.
Often, high-yield savings accounts don’t have monthly fees. These accounts are a good fit if you want to maximize your interest earnings but are hesitant to lock up your funds in a CD or investments.
Pros
- Higher interest rates than traditional savings account
- Some banks have no-fee savings
- More flexible access than CDs
Cons
- Variable interest rates
- Limited or no branches if you choose an online bank
- Better long-term growth from other investments
Certificates of deposit (CDs)
CDs allow you to keep your money in the account for a set term — usually a few months to a few years — and earn a fixed interest rate. Most CDs have early withdrawal penalties that may forfeit some interest earnings if you take money out before the maturity date.
You may earn a higher APY with a CD than with a traditional savings account. As with a traditional savings account, APYs are based on rates set by the Federal Reserve. Rates on new CDs have dropped with recent interest rate cuts by the Fed, but your returns will remain stable through a CD’s term if you lock in a rate now. As of October 2024, you may be able to lock in a 3% to 5% rate on your CD, depending on which institution you work with and the length of your term.
Pros
- Predictable returns
- Usually higher interest rates than traditional savings accounts
- Wide selection of terms and account options
Cons
- Early withdrawal penalties
- Rates are locked in for the term and may be subject to inflation risk
- Lower returns compared with higher-risk stocks and mutual funds
Money market accounts
Money market accounts are a hybrid of checking and savings accounts, typically offering higher interest rates than traditional savings accounts. APYs may come close to high-yield savings accounts and CDs and are at about 4% as of October 2024.
A money market account may require a higher minimum deposit than a traditional savings account. You may have to pay a monthly maintenance fee if your account drops below the required minimum amount. Account holders generally get limited check-writing privileges and debit card access.
Pros
- Higher interest rates than traditional savings accounts
- Check-writing privileges
- Convenient for saving or making payments directly from the account
Cons
- Minimum balance requirements
- Transaction limits
- Monthly fees
Cash management accounts
Brokerage firms and other nonbank financial institutions offer cash management accounts and usually blend savings and checking account features. You can expect easy access to your money and a competitive interest rate, usually above what you can get from traditional savings account rates.
You may get ATM access and bill pay features with a cash management account. A cash management account can be a good choice if you want to manage your investments, savings and daily expenses all in one place.
Pros
- Combine savings and checking account features
- Offer competitive interest rates
- Manage investing and everyday banking in one place
Cons
- Account fees
- Minimum balance requirements
- Limited customer support at branches
Specialty savings accounts
Specialty savings accounts are intended to meet certain savings objectives, such as saving for health expenses, retirement or higher education. For example, health savings accounts (HSAs) can be used to save for medical costs, while 529 plans allow tax-advantaged savings for education. Custodial savings accounts: These can be opened by adults to benefit a minor.
Pros
- Personalized to particular savings goals
- May have tax benefits
- Low or no monthly fees, depending on the type of account
Cons
- Limited to specific uses
- Can have complex rules
- Returns may be better on other accounts
Choosing the right savings account for you
Choosing the right savings account depends on factors such as your financial goals, how much you’re willing to deposit and how much access you need to your funds. Consider these factors as you look for the right savings account for your needs:
- Your goals: A high-yield savings account could be the right choice for a short-term goal, such as an emergency savings fund or a vacation. On the other hand, a CD may be a better choice if you do not need to access your money in the short term, as it may offer better returns. For example, you may want to use a CD to save for a down payment on a home.
- Interest rates: Differences in interest rates can add up over time, and rising or falling rates can make certain accounts more attractive. A CD or high-yield savings account may offer better rates than a typical savings account. You should compare rates across banks to ensure you’re getting the best one, but be aware that rates will change over time.
- Fees and requirements: You may have to pay monthly maintenance fees on a savings account, but these are often waived if you set up direct deposit or maintain a minimum balance. Some banks assess fees for excessive withdrawals. You may find fee-free accounts with online banks, but you’ll typically forego branch access.
- Accessibility: Consider how often you’ll need to access your savings. For example, quick access is crucial for an emergency fund, so choose a traditional or high-yield savings account from which you can easily withdraw cash. Long-term savings goals, such as buying a car or funding a home-improvement project, might call for a CD, which offers higher interest earnings but ties up your money for a fixed period. It’s important to check withdrawal limits on any savings account, particularly if you need regular access to your cash. Also, consider whether you’re comfortable with an online-only account or if you need branch access.
Alternatives to savings accounts
You have other options if savings accounts don’t align with your financial goals. Consider these alternatives to more traditional types of savings accounts:
- Treasury bonds: You can buy Treasury bonds that pay a fixed rate of interest until maturity. Treasury bonds on TreasuryDirect offer 20- to 30-year terms in which interest is paid every six months until the bond matures. You can hold the bond until maturity or sell it before its maturity date.
- Investment accounts: If you’re willing to take a risk, brokerage accounts allow you to invest in stocks, bonds and mutual funds. You won’t get guaranteed returns from investments as you can with a savings account or CD, and you could lose some or all of your money. However, over time you may see higher earnings than you will with a savings account.
- Roth IRAs: A Roth IRA offers tax-free growth on retirement savings. You contribute after-tax income and can make penalty-free withdrawals on your contributions before retirement.