A Guide to Savings Account Types
Understanding how different savings accounts work could help you level up your saving game.
You’re looking to protect and grow your savings, but you’re not sure what account type or product is best for your plan? This guide is here to help you out.
You’re probably familiar with traditional savings accounts available through banks and credit unions; other options you’ve probably seen advertised are online savings accounts and even money market accounts.
Two other products that technically fall in the savings account category are certificates of deposit (CDs) and cash management accounts (CMAs). They are savings tools that have both similarities and differences to the other accounts mentioned.
With all the savings types available, it’s important for you to understand the pros and cons of each one and how they could integrate into your saving strategy.
Let’s dive in and see which ones may work best for you.
Savings accounts are designed to help you save money and earn interest on the money you keep in the account.
The name of the account isn’t as important as how the account fits your needs. And, of course, it’s always good to pay attention to the rate the account earns.
Some savings accounts have restrictions on the number of withdrawals you can make each month, so you’ll want to pay attention to the fine print.
What Are the Different Types of Savings Accounts?
There are many types of savings accounts available that could help grow your money over time. You may see different names depending on the bank you go to, but the accounts typically fall under the following categories: traditional, online, high-yield, and money markets. We’ll cover all of them.
We’ll also take a look at CDs and CMAs, and how they overlap and differ from the typical savings account definition.
Traditional Savings Accounts
Traditional savings accounts are the ones you’re probably most familiar with. They’re usually associated with the bank around the corner or the credit union in your town. Most likely your parents have one of these savings accounts tied to their checking account, making it easy to transfer money between the two.
Since traditional banks, by definition, have charters, the deposits there are insured by the Federal Deposit Insurance Corporation (FDIC). Similarly, Credit Union deposits are insured by the National Credit Union Association (NCUA). In both cases, this means your money is protected up to certain limits in the unlikely case that the institution goes under.1
Traditional savings accounts usually have rates (expressed as Annual Percentage Yield or APY) under 1.00%. If fact, the average rate on these accounts as of July 17, 2023, was about 0.40% APY.2
To put this in perspective, let’s say you save $100 per month over the course of the year in an account that earns 0.40% APY for the entire year. At the end of the year, you’d have saved about $1,202.3
Another note with these accounts is that they may have withdrawal limits restricting the number of times you’re able to take money out of the account or the amount of money you may remove at once.4
These accounts are typically best for people who want in-person access to their bank: the ability to speak to a teller or a personal banker and to get cash in-hand from their accounts.
Online Savings Accounts
Online savings accounts are relatively new and offered by digital banks. These banks may not have physical locations, which means accountholders access their money through their phones or computers rather than stopping by a branch in-person.
Online savings accounts became very popular during the pandemic5 and continue to grow in popularity as savings rates are favorable.
Digital banks usually save money from not having branches and the consumer tends to be rewarded through rates. When consumers open online accounts through chartered banks, they also benefit from having their savings FDIC insured.6
When considering online savings account options, watch out for neobanks and fintech companies. These organizations may look like regular or online banks, but they lack a bank charter. Deposits held in accounts at non-chartered institutions aren’t protected by FDIC or NCUA insurance, meaning you might not get your money back if the company goes under.
Online savings accounts tend to work best for people who are more digitally minded. These folks enjoy electronic access to funds but don’t require cash in-hand as often and aren’t super interested in visiting a teller or personal banker in person.
High-Yield Savings Accounts
High-yield savings accounts have a higher-than-average APY. These accounts may be available through traditional banks, but that is less common. Usually these accounts are offered online, through digital-only banks which means that most, not all, online savings accounts are also high-yield. But what distinguishes these accounts most is the rate, not the institution.
High-yield rates can be more than 11x the national average.7 Rates vary from bank to bank, but several digital banks offered rates of 5.00% APY or higher in July 2023.8
These accounts are great for those wanting to build their savings short term as well as long term. For example, if you’re saving for a big purchase, a high-yield account keeps your money liquid, and still earning, while you shop. Or, if you’ve maxed out your retirement investment account contributions for the year, you may choose to put additional funds in a high-yield savings account as an alternative.
Money Market Accounts
Money Market Deposit Accounts (MMDAs) have been around since the 1970’s, and they’re like a combination of a checking and savings account—you can write checks from the account and potentially earn interest on the balance.
By opening an MMDA, account holders are investing their balances into a pool of securities.9 The funds are FDIC or NCUA insured and earn interest based on the performance of that pool of securities.10
The average rate for money market accounts in July 2023 was around 0.63% APY, higher than traditional savings accounts, but lower than online ones.11 As with other savings account types, banks may restrict the number of withdrawals you are able to make each month and may have minimum deposit requirements in place to open a money market account.
It’s important to pay attention to the type of money market account you’re opening – a Money Market Deposit Account (MMDA) or a Money Market Mutual Fund Account. Only MMDAs are FDIC insured, and these are the ones that banks and credit unions tend to offer.12 The others are offered through investment or brokerage firms and don’t carry FDIC insurance.13
If check writing is important to you, money markets may be a good option. Money markets through brokerages may work well for those who want the added convenience of moving money between investments and savings, all within the same institution.
Certificates of Deposit (CDs)
Certificates of deposit (CDs) are a type of savings product typically offered through banks and credit unions. Unlike other savings options, CDs effectively lock your money away for a specified period, known as a term. CDs tend to have terms ranging from 3 months to 5 years, and the longer your term, the higher your rate tends to be.
Most likely, if you withdraw money during the term, you’ll pay a penalty. There are CD types that offer more flexibility, but usually that flexibility comes with a reduced rate benefit. Additionally, most banks have a required minimum deposit for CDs, meaning you need to have some savings on hand in order to open one.
CDs tend to be ideal for people who don’t need their savings to be liquid, at least for a period of time, and are looking for a way to potentially maximize the return on their funds in a relatively safe way.
Cash Management Accounts
Now that we’ve talked about common savings accounts and products at banks and credit unions, let’s talk about another savings-like account: cash management accounts (CMAs).
CMAs are a unique mash-up of savings, checking, and investment accounts. These accounts are usually offered through nonbank financial institutions and may include a checkbook, debit card, or both.14 They tend to serve as a central location for managing investment funds.15
Even though CMAs are offered by non-bank institutions, some are still able to provide FDIC insurance for deposit funds. They’re able to do this by working with multiple partner banks. Since CMA deposits may be larger, the non-bank institutions create a network for “extended FDIC protection,” meaning deposits may be covered above the usual FDIC $250,000 limit per depositor, per ownership category.16
Let’s use a quick example to illustrate extended FDIC insurance. Say you open a CMA with Company X and deposit $1,000,000. To cover your full balance with FDIC insurance, Company X may split your $1,000,000 into deposits at five different partner banks, with each account totaling $200,000.17
Some CMAs have a high minimum balance requirement, meaning they may not be an option for everyone.18
CMAs often work best for people who want both flexibility and protection with large cash sums. They want their money accessible and don’t want to open multiple accounts through different institutions in order to have a larger FDIC insurance benefit.
Choosing the Right Savings Account
Now that you’ve learned about the different types of savings accounts, you may be asking yourself how to choose the right savings account for you. There are a few main components to look for, including:
Fees (minimum balance, excess transfer, etc.)
Minimum balance requirements
Tiered rates depending on deposit amount
Some banks may charge fees just for having an account. Others may have fees hidden in the small print for certain transaction types. There are also some banks that may require a minimum balance to avoid fees or to even earn interest. And if the institution isn’t a chartered bank, they may not be able to secure your funds with FDIC insurance.
Be sure to keep an eye out for these requirements when comparing your savings options.
Building your savings is a smart financial move that could help make your long-term goals a reality, and opening a savings account may make it easier for you to achieve those goals.
As you start to explore the different types of savings accounts, evaluate how you want to use the account and shop around for the one that will best meet those needs… and of course give you the highest return!