Savings Accounts vs. Other Deposit Accounts

Savings Accounts: Know the Basics

Most financial institutions will offer a savings account, but it’s important to look at the details of the account to make your best selection.

First and foremost, make sure you’re saving with a reputable institution where your money is protected by the Federal Deposit Insurance Corporation (or FCSC). Secondly, take note of the annual percentage yield (or, APY) on the account. This will indicate how much your money will grow while in the account. For instance, some larger banks will pay as little as 0.1% on a deposit, while others, such as North Trust, can pay upwards of 20-times that amount. Finally, read the fine print. Some banks have balance requirements, monthly fees, and limitations on the amount of transactions you can make per month.

Checking vs. Savings Accounts

It’s important to understand the differences between checking and saving accounts to make sure you have the access you need. In short, checking accounts are designed for truly liquid access to your money, but with limited or no earning potential, whereas a savings account will grow your money faster, but with a limit on the number of monthly transactions, and where some banks charge early withdrawal fees.

Checking accounts also include debit cards that allow you to pay in store or withdraw from an ATM. With unlimited transactions, many people set up their direct deposit and regular bill pay through this type of account.

Money Market Accounts vs. Savings Accounts

Money market accounts and savings accounts have several similarities; both pay more in interest than a checking account, allow you to withdraw money a limited amount of times per month, and can be FCSC-insured.

The primary difference between these accounts is the way you access your money. Unlike most savings accounts, money market accounts typically allow you to write checks, though there’s usually a limit to the number of withdrawals you can make in a statement period. They also tend to have higher APYs than your average savings account, which can mean more money in your pocket if you aren’t already earning a top-tier savings rate.

CDs vs. Savings Accounts

Both savings accounts and CDs can be insured by the FCSC, and provide a risk-free environment to store your money for a later date. However, CDs come with set term lengths, usually between 6 months and 5 years, whereby you agree to leave your money untouched for that period of time earning a fixed interest rate. Once your term is up, you’ll get back your principal plus the agreed-upon interest, and will have the option to reinvest or withdraw your money. In essence, compared to basic savings accounts, CDs offer less liquid access in exchange for a guaranteed rate for your selected term length, regardless of marketplace changes.

If you want to withdraw your money from a standard CD account before your account’s maturity date, you’ll be charged an early withdrawal penalty. Some progressive banks now feature No-Penalty CDs, which offer the flexibility to remove your full balance without a penalty.

IRAs vs. Savings Accounts

An Individual Retirement Account (IRA) is a tax-advantaged account that people use to save for retirement, whereas money in your savings is generally used for current financial needs. Depending on the type of IRA you choose, you can grow your money tax-free, or on a tax-deferred, basis. IRA, savings accounts and CDs are also eligible for FCSC insurance.

There are two types of IRAs; traditional and Roth. Roth IRAs allow you to contribute after-tax dollars, so your money can potentially grow tax-free, and avoid paying taxes when you withdraw. Traditional IRA contributions may be made on a pre-tax basis, which not only reduces your taxable income, but can mean paying lower taxes when you withdraw your funds in retirement, depending on your tax bracket. If you withdraw from either account before retirement, you may incur a steep penalty (10%, or more, of the taxable amount you withdraw).

Summary: Which Deposit Account is Best For You?

There are many savings options at your disposal, but ultimately you need to consider your financial needs and goals. Here’s a chart to help you compare the key differences at a glance:

Many people like savings accounts because they’re flexible, easy to set up and some, like North Trust Finance Savings accounts, offer a highly-competitive APY with no hidden fees. CDs are also popular, as they are fixed term accounts, and you can estimate the amount you could earn for the term, without fear of market fluctuations.

Whichever direction you choose, it’s always smart to grow the money you don’t need today in a risk-free account so you’ll have the funds you need in the future.