Whether you are able to save a large amount of money or just a little, a savings plan is an essential part of personal financial management. People save for many reasons. It may be as part of an overall investment program, to put something aside for emergencies or to accumulate funds for a major purchase. Because the size and purposes of savings vary from one person to another, there's no one best savings account. You should be familiar with different types of savings accounts and choose the best for your needs.
Basic Savings Accounts
If you have only a limited amount of money to save or might need quick access to funds in a savings account, a regular savings account offered by a bank or credit union may be your best choice. Most providers offer accounts with low minimum balance requirements (as little as $100) and allow a limited number of withdrawals per quarter without penalty.
Regular savings accounts are safe since the funds are insured by the Federal Deposit Insurance Corporation or the National Credit Union Authority. The big drawback to regular savings accounts is that the interest rates are lower than for other types of savings accounts.
Money MarketAccounts
Money market accounts are provided by banks and credit unions and also by investment firms. The money you deposit purchases shares in a money market fund and is used to invest in short-term bonds (with maturities that are usually six months or less) issued by corporations and governments. A money market account through a bank or credit union is insured like a regular savings account. Accounts with investment firms like Fidelity Investments or Vanguard Funds are not insured but historically have proven to be extremely safe.
Money market accounts have much higher minimum balance than regular savings---anywhere from several hundred dollars to as much as $25,000, but they pay higher interest rates. You do have access to savings in excess of the account minimum and can even write a limited number of checks each month. Money market accounts with investment firms, especially those with high minimums, tend to pay the best interest rates. Some of these money market accounts invest in government bonds and therefore the earnings are exempt from some taxes.
Certificates of Deposit
A certificate of deposit (CD) is a fixed rate time deposit with a bank or credit union and is insured like other bank accounts. CDs generally pay the best interest rates of any type of savings account. In exchange for this guaranteed rate you agree to leave the money on deposit for a specified period of time called the maturity. The maturity of a CD can be anywhere from a few months to several years; if you withdraw the money early you will incur a penalty (usually forfeiture of a sizeable portion of the interest). CDs can be purchased in amounts ranging from a few hundred dollars to "jumbo CDs" of $100,000 or more.
The longer the maturity the more a CD pays. Another factor that affects the rate you get is size. A large CD pays higher interest. It's a good idea to shop around before purchasing a CD because financial institutions compete for investors' dollars. Smaller banks in particular often offer premium rates in order to attract new customers. If you feel you must have some access to your money, consider a liquid CD. This is a special type of CD that allows limited early withdrawals and usually pays rates between those of regular CDs and money market accounts.
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