What to Consider When Comparing Savings Options

When it comes to setting aside money for future use, it’s hard to beat a savings account's appeal. According to recent data, Americans deposited approximately $1 trillion into savings and investment accounts in March 2023 and it's easy to see why. Savings accounts are simple to open, provide assurance that your money is safe and almost always pay interest on balances.

However, many consumers may not realize there are multiple interest-bearing deposit accounts to help reach their financial goals, such as money market accounts and certificate of deposits (CDs).

An Overview of Savings Options

Traditional Savings Account

As one of the most popular interest-bearing deposit accounts, many banks and credit unions offer traditional savings accounts. These accounts generally have low minimum balance requirements and earn interest, but the interest rate may be minimal. Despite having lower rates, traditional savings accounts provide flexible access to your money and consumers can open multiple accounts easily to help achieve different savings goals.

Benefits

• Earns interest: Savings accounts are typically interest-bearing, meaning you earn a financial return on your balance.
• Low minimum balance requirement: Generally, traditional savings accounts come with low minimum balance requirements, so you can open one with a small deposit and save at your own pace.
• Accounts for families: Banks and credit unions may offer savings accounts for children and teens. Minor and young adult savings accounts can be a great way to teach financial responsibility and support smart money habits into adulthood.
• Consumers may have multiple accounts: Thanks to the low initial deposit and minimum balance requirements, traditional savings accounts are outstanding for numerous savings goals, such as a car down payment or vacations.
• Pairs well with checking: A traditional savings account is an excellent companion to a checking account. One can help you work toward your savings goals, while the other can be used for spending. Additionally, some banks offer automatic transfer or round-up options that help build your savings quickly after each debit transaction.

Keep in Mind

• Limited withdrawals: Savings accounts may come with withdrawal limits. Many banks and credit unions limit account holders to six monthly withdrawals. If the withdrawal limit is exceeded, you may incur a fee.
• No checks: You typically won't get check-writing privileges with a savings account, but you may have an ATM card to access funds when needed.

Money Market Account

Money market accounts (MMAs) often come with the check-writing privileges and debit card access you'd get with a traditional checking account, plus the benefit of a relatively high-interest rate. Unlike many checking or savings accounts, money market accounts often have a tiered rate structure. For instance, you might see a money market account that provides a higher rate for a larger balance and lower rates for smaller balances.

Benefits

• Typically, higher interest rates: You'll likely see a higher-than-average interest rate with money market accounts, which means you earn more return on your investment than a traditional savings account.
• Low minimum balance requirement: Generally, traditional savings accounts come with low minimum balance requirements, so you can open one with a small deposit and save at your own pace.
• Check-writing and debit privileges: You'll typically receive checks and a debit card with a money market account, which means you can easily access your savings in a pinch.
• Overdraft protection: Like a traditional savings account, a money market account can be paired with a checking account for overdraft protection.

Keep in Mind

• One account is typical: Money market accounts are often considered bridge accounts, blurring the lines between a checking and savings account. In the same way, many consumers have just one checking account; multiple money market accounts are optional. Keep this in mind. However, if they're business owners, consumers may opt to open a personal and business money market account.
• Withdrawal limits: Money market accounts may be subject to withdrawal limits in savings accounts. Banks often permit up to six withdrawals a month.
• Rates can change: Like a traditional savings account, interest rates may fluctuate, meaning you could end up with a lower rate than what you initially received. Tiered interest rates are typical, meaning the more you deposit, the more you earn in interest.

Certificate of Deposit (CD) Account

With a CD account, you make an initial deposit and leave your money in the account for a specific term, often six months to five years. Credit unions and banks typically offer generous rates for CDs in exchange for holding your money for an agreed-upon term. This means that while you won't be able to access your money for a while, you could earn hundreds in interest, depending on your deposit amount and rate.

Benefits

• Generous rates: CDs generally offer higher rates than traditional savings accounts.
• Fixed rates: Your rate will be set for the duration of your CD's term, which helps you forecast a return on investment well in advance.
• Multiple terms: Short- and long-term CDs are available, so you can use CDs for multiple savings goals.

Keep in Mind

• Early withdrawal penalties: Banks and credit unions may charge penalties if you withdraw your money from a CD early.
• Automatic renewal: Depending on how it's structured, your CD may automatically renew at the end of its term. When this happens, you may receive a different interest rate than your initial term.
• Transfers not possible: You can make an initial deposit to a CD, but transferring additional funds typically isn't an option.

Other Accounts to Explore

Health Savings Account

Employers may offer employees health savings accounts (HSAs), though it's possible to open an HSA on your own. You'll need a high-deductible healthcare plan to qualify for an HSA. HSA money can be used to pay for qualifying medical expenses, and these accounts offer tax benefits.

Benefits

• Tax perks: HSA contributions are generally tax-deductible, withdrawals for qualified expenses aren't taxed and your investments in an HSA can grow tax-free.
• Offset medical costs: You can use your HSA funds as an alternative to your everyday savings to help cover your healthcare expenses.
• Invest for the future: Money invested in an HSA carries over year to year and can be used as a companion to your retirement savings.

Keep in Mind

• Annual limits: HSAs are subject to annual limitations the IRS sets. For 2023, individuals can contribute $3,850, and those with family healthcare plans can contribute $7,750.
• Qualification requirement: You'll need a qualifying high-deductible health plan to be eligible for an HSA.
• Withdrawals may be taxed: If you withdraw funds to pay for non-healthcare expenses, you'll likely pay taxes and penalties.

High-Yield Savings Account

Common with online-only banks, high-yield savings accounts work similarly to traditional ones. You typically earn a higher rate on your deposits and can withdraw and deposit money as needed, within limits your bank or credit union sets.

Benefits

• High rates: Like CDs and money market accounts, you'll generally get a generous annual percentage rate with a high-yield savings account.
• Accessibility: Unlike CDs, your money isn't tied up with a high-yield savings account for a set period. You can access it whenever you please, up to any limits your financial institution has set.

Keep in Mind

• Limited withdrawals: Like traditional savings accounts, high-yield savings accounts often come with a limit of six monthly withdrawals.
• No checks: Your high-yield savings account probably won't have check-writing privileges, though an ATM card may be available.
• Limited deposit options: Online banks often offer high-yield savings accounts, but you may need more physical branches and ATM networks to get easy deposit options. While you may not expect to need branch access, many consumers find it beneficial to open a savings account where they already have an established relationship.

What to Consider When Comparing Accounts

Considering your situation and comparing options before opening a new savings account is wise. Here are some essential things to think about.

What Purpose is the Savings Account Filling?

You can use savings accounts to set aside money for single goals or multiple goals, so you'll want to consider your account's purpose before opening one. For example, a barbell or ladder strategy could make sense if you're saving for multiple goals.

With a barbell strategy, you deposit money into multiple accounts with the goal of saving for near- and long-term goals. A ladder strategy works similarly, but account holders focus on medium-term savings goals. These strategies are common with CD accounts but can also be applied to others.

How Much Interest Does it Earn?

Rates vary by bank and credit union, as well as account type. Consider how much interest potential accounts earn before opening a new one.

What Are the Minimum Deposit/Balance Requirements?

Certain accounts may have a higher initial deposit or minimum balance requirements than others. For instance, you might see a higher minimum balance requirement with a money market account than you'd see with a traditional savings account. Requirements also vary by institution.

What Are the Fees?

Some savings accounts may have monthly maintenance fees, low balance fees or other fees. Be sure to read the fine print to determine what fees may apply before opening a new account.

Are There Any Tax Benefits?

Certain accounts, like HSAs, offer tax perks. If getting a break on your taxes is important, consider the tax benefits of new accounts before moving forward.

How Liquid is the Account?

You want to be sure you can access your money when needed. For instance, some savings vehicles, like traditional savings and money market accounts, offer more liquidity than CDs.

Can I Withdraw Money Without Penalty?

You may incur an early withdrawal penalty with a CD if you take out money before the account matures. In addition, other accounts may come with fees if your balance drops below a set minimum.

Does the Account Offer Online Banking or Automatic Transfers?

Many banks and credit unions offer convenient online and mobile banking access. Beyond just checking in on your balances, digital banking can be beneficial for linking your savings to a checking account. Doing this simplifies funding and could be useful if you overdraft your checking account.

An additional perk of connecting accounts is automatic transfers. With automatic transfers, your bank may automatically round up to the nearest dollar or transfer $1 into your savings account every time you make a qualifying transaction.

Is the Account Insured?

It's critical to make sure your deposits are safe. Before opening your account, ensure the bank or credit union is a member of the FDIC (banks) or NCUA (credit unions). This assurance means your deposits are guaranteed up to the allowable limits if they were to cease operations.

Which Savings Account is Right for You?

If you'd like to open a new savings account, you have several savings options. Those looking for an everyday account may appreciate a traditional, money market or high-yield savings account, while those with longer-term goals might consider a CD. The biggest perk of savings accounts is having multiple accounts at a time and using each to support your unique savings goals.

Learn more about Seacoast Bank's range of savings account offerings today.