Banking institutions work hard to develop highly competitive financial products to earn your trust. That’s why there are so many different products – from certificates of deposit and checking accounts to a wide range of other savings vehicles – there’s a broad array of financial products. This comprehensive guide will help you understand all the vital information about savings accounts, their types, their benefits, and how to choose the right type for your budget. There’s a type of account for every need, and we will help you decide which one works to your advantage the most.
What is a Savings Account?
A savings account is a financial product with limited access that allows users to earn interest on the money deposited. It applies an interest rate to any lump sum deposit the user makes. The earned interest can be paid into a separate account or the same account at predetermined intervals.
Checking and Savings Account Differences
Your ordinary banking accounts also called everyday transactions or checking accounts, are financial products specifically designed to cover your daily financial needs. These products have unique features that allow each user to manage their money.
Through these accounts, users can easily access their money, pay their bills, make payments worldwide, receive deposits, and use all the available means in the account. While savings accounts have some of these features, they are structured differently.
These financial products limit your access by not allowing you to spend the sum of money you’ve previously deposited. The banking institution is paying you interest on the total balance deposited into the account. Banking institutions’ fees for this financial product depend on the type.
Savings Accounts & Fees
In most cases, banks don’t charge any savings fees even though there are specific terms for breaking the savings cycle and withdrawing the deposit on time. There could also be terms such as limits on how often and if you can withdraw your means and minimum deposit and balance requirements.
How do Savings work?
Savings mechanics work in a relatively straightforward manner. The user is required to deposit into the account. There are two ways to do this:
- By consistently depositing money
- By making a lump sum deposit that serves as a term investment
In both cases, the deposit becomes a balance, and an interest rate is applied. This rate can be used either on a daily or monthly basis. Different accounts have different savings, and depending on the type of account, the interest payments will either go into a separate account or the chosen account at intervals predetermined by the savings agreement. Most people choose an account that allows them to deposit the money they can use later. This money can be easily repurposed as a down payment. The user determines a specified amount to be deposited into their account monthly.
What is a Compound Interest?
The bank pays interest payments monthly, allowing the user to earn extra interest on the balance. Thanks to this feature, users can grow their savings much quicker. This type of savings feature is known as compound interest. It allows you to earn interest that pays directly into your account. Your interest is added to your balance, including the interest for the following period. That’s how you can earn more monthly without even depositing.
What are the Types of Savings Accounts?
Embarking on a savings adventure is quite a journey. It requires time, effort, and preparation, as many different types of savings products offer other features and options to users. Depending on your budget and financial needs, you must choose the kind of savings account that matches your needs. You must consider your financial goals before you consider which type is right for you.
The first step you should take is to understand the features of each type of savings to decide which financial product will help you achieve your goals. Most banking service users are considered casual savers, meaning they have no financial plans in particular at the moment. For this type of savings, an online savings account is quite enough.
6 Saver Account Types
On the other hand, some are on a clear path to increase their savings. To them, the only type of savings product is the one that allows them to grow what they already have through interest. To this type of saver, term deposits and bonus-saver accounts look more appealing. With that in mind, let’s delve deeper into different types of saver accounts.
- Introductory Bonus Savings – Exclusive to new users, this type of savings product allows you to earn a higher interest rate for a predetermined interval after you’ve opened it. The higher rate is only applied for the initial period of the bonus terms, after which the rate will change back to standard.
- Bonus Saver Accounts – For this type of savings product, the bank sets forth the terms of commitment. As long as a saver can meet these terms, they can continually earn interest at a higher rate. These special terms usually include limited access to monthly withdrawals and minimum deposits. If a saver fails to meet the terms, their balance will only be increased for the base rate. To apply for a higher interest rate, they need to make a deposit again.
- Online Savings – This savings product might be for you if you’re after convenience. It allows you to earn higher interest rates but limits your transaction options. Online savings are often offered by online-only banks even though this banking service has become a norm, as so many users value such a service.
- Retirement Savings – this type of account is perfect for elderly savers with pension benefits.
- Cash Management Account – If you plan to invest significantly in savings but want extra flexibility and control over your investments, this type of account is perfect for you.
- Term Deposits – these are accounts with fixed savings rates. To apply for this financial product, you need to make a minimum deposit that you won’t be able to access for the agreed period. The rates are higher than other accounts, but you risk paying penalty fees if you need your deposit before the terms expire.
Also, there are Student or College savings accounts, cryptocurrency savings accounts, and more.
4 Savings Vehicle Types
We want to address four types of savings vehicles simply because there are many categories. Put savings accounts fall into four categories: regular, high-interest, jumbo, and money market accounts.
1. Regular Savings
These accounts are the most base-level offerings in almost every bank. They are simple, easy to open, and have pretty much basic features while putting the fewest restrictions on the user. The most typical requirement includes a minimum balance of no to very low to open the account, which makes this type of account perfect for almost every user who can meet such a demand. The only downside is that the interest rates are relatively low. This might not be your best savings solution if you want to generate income.
2. High-Interest Savings
If you’re looking for the most efficient way to maximize your investment income, this might be the correct type of savings for you. It can be a great alternative as it offers you a chance to earn higher interest rates on your money. The interest rates are much higher than regular savings, although there’s a catch. To qualify for higher rates, users must keep a larger minimum balance. You’ll have to pay the penalty fees if your balance exceeds the minimum. These fees tend to be large, so pay attention to the terms and ensure you weigh your options before deciding.
3. Jumbo Savings
This type of savings vehicle is specifically designed for users with huge incomes and bank balances. The threshold for jumbo accounts differs from bank to bank, but the most common minimum amount the user needs to qualify for such an account is 100,000$. If you fall into the category of high-value users, you will be pleased to know that jumbo accounts include high interest rates.
4. Money Market Accounts
These aren’t typical savings accounts, although they share a similar purpose. These hybrid savings vehicles combine savings and checking accounts in one place. The rates of interest are higher than with most checking accounts. Money market accounts allow users to earn higher interest rates while accessing limited check-writing activity. This account is suitable for those users who want to earn some cash and still be able to use the check-writing capability.
Key Features of Basic Savings Account
Saving is an essential part of your financial stability. Choosing the correct account for your short and long-term savings is the best way to ensure your financial safety and security in times of need. Since there are so many savings vehicles, it can become quite challenging to pick the right one for your needs. Things tend to look much better if you consider the features, as these features help you distinguish one type of savings product from another. Considering these factors, you can select the exact type that matches your needs the most. Every basic savings account should have the following elements listed below.
Must-Have Features List
- An interest rate that is applied to your balance on a predetermined basis
- No additional transaction charges, monthly service fees, or penalties
- Minimal monthly balance requirement
- No mandatory deposit
- There is no limited access to the number of withdrawals
- Accessibility both in a branch and online
How to Choose Your Savings Vehicle Type?
Choosing the correct type of savings vehicle can become quite a challenge, as there are many things to consider. Pay attention to the following factors to make an educated decision when choosing the best account for your savings needs.
Fees, Charges & Penalties
The first thing you should pay attention to is the charges. Each bank has charges for each type of savings vehicle it offers. If you can find an account that offers all the best features without charging any fees, that’s the one for you. While paying these fees doesn’t have to be necessarily bad, most banks offer accounts with costs that tend to outweigh the benefits. Since you’re on a money-saving mission, this isn’t an option. If the fees, charges, and penalties don’t look good in your bank, perhaps you should try an account with less attractive features but no additional charges. You should also worry about interest rates.
Interest Rates
When comparing savings options, most people consider interest rates the most significant determining factor. The trick is to go with the banking institution offering the highest interest rate. However, we urge you to consider the additional charges mentioned above. Banks also tend to change their rates from time to time. The best thing to do is choose a savings account with a shorter period.
Easy to Manage
Since convenience matters greatly, choose a savings option that allows you to manage your savings plan the way you want. That means the bank you choose should have an online service, the ability to do your banking in person, a good network of ATMs, and fee rebates.
Other Benefits
Some banks offer loyalty programs and rewards to their regular users. You can probably get a good deal if your bank pays rewards and bonuses for having multiple accounts. Consider more attractive interest rates and other financial products such as investments, loans, and other products that might help you achieve your financial goals.
4 Pro Tips for Choosing the Right Savings Account
Now that we’ve properly introduced you to different types of savings vehicles, we’ll share some valuable tips on narrowing down your search and choosing an account that matches your financial capabilities and needs.
1. Think of a savings goal
Before you go on a savings campaign, you first need to think about a couple of things:
- The goal of your savings
- The sum you want to achieve
Different accounts can help achieve other goals. You’ll need an instant access account if it’s only an emergency fund. If it’s a house deposit you’re into, you’ll need a fixed-rate account. The goal of your savings determines the type of savings vehicle. If you have more than one goal, going with multiple options might be the best way.
2. Compare rates and be realistic
There are certain accounts with tempting and attractive bonus rates, but these bonuses tend to wear off after some time. You can choose from such options if you don’t mind switching between banks and accounts. Just remember to change the account once the initial bonus period is over. If you don’t have time for this, stick to an account with a more stable rate – research comparison websites to find a savings vehicle tailored to your needs.
3. Fixed-term deposits or regular savings accounts
Before you commit, you need to think carefully about what you want. Are you ready to say goodbye to your money for longer, or are you more into a standing order to your savings? Many structured financial products have attractive high-interest rates, but since savings are an investment, you should consider your options. A fixed term means limited access and a potential withdrawal fee.
4. Don’t forget about your taxes
One more thing to think about is your income tax. If you don’t pay it, go with a savings option where you can get your interest paid gross, or your tax will be deducted automatically. If you pay your income taxes, discuss additional bonuses you can get as a taxpayer.