When it’s time to spend your money, you know there’s more than one way to get the best deal. But are you as aware of the many options available to you for saving your money? The possibilities go way beyond a plain old bank savings account.
In fact, there are many types of savings accounts, and using more than one can help you maximize the amount you’re able to save each year. You should always have a traditional savings account, even if it seems like you’re not earning much interest on it. That cash buffer acts as an emergency fund in case of financial disaster, like the loss of your job or a major home or car repair.
Other types of savings accounts can help you with other savings needs. For example, you need to save for retirement, and an IRA (individual retirement account) can help with that. Maybe you know you’ll need some extra cash in 10 years to put toward non-tuition, college-related expenses, and a CD (certificate of deposit) might work for you.
Here’s a quick primer on some of the most popular types of savings accounts:
1. Basic/passbook savings accounts – This is the traditional bank account that most people think of as a savings account. There’s usually no minimum deposit to open the account and you’re not required to maintain a minimum balance on it. The interest rate is typically very low, but you’re able to withdraw money from the account without penalty whenever you want it.
2. Money market savings accounts – You can earn more money in interest with a money market account through your bank. However, banks usually require you to keep a higher minimum balance in a money market, and may limit how much you can withdraw in a month. Some money market accounts also permit you to write a certain number of checks against the account each month.
3. Certificate of deposit (CD) – With a CD, you place your money in the account for a set length of time, during which it earns interest, usually at a much higher rate than you could get with either passbook or money market accounts. Each bank will offer different rates and terms for its CDs. If you withdraw money from the CD before the end of the term (known as the maturity date) you’ll pay a penalty.
4. Individual Retirement Account (IRA) – While the first three types of accounts we’ve reviewed can be used to save for any purpose, an IRA is specifically designed to help you save for retirement – hence the name! Leading up to retirement, you put money into a traditional IRA every year. The money you contribute to the account is free from federal taxes at the time you deposit it. You won’t pay taxes on that money until you withdraw it after you retire – at which time you will, hopefully, have a lower tax rate.
A Roth IRA is another option, and differs in that your contribution is made after paying taxes on the money, and is then tax-free when you begin withdrawing funds during retirement.
If there’s a downside to saving money – for any reason or in any type of savings account – we haven’t heard about it! Using a combination of these types of accounts can help ensure you meet your savings needs for the near future and your long-term financial goals.