Savings Account Types 101

When it comes to opening a savings account, there are so many options available that it is difficult to know where to begin researching. With a brief guide to some of the retail banking industry's most popular savings account offerings available, making the best decision just got a little easier.
| Saturday, April 16, 2011

Part I: Basic Savings Accounts

Passbook Savings Accounts

Often called passbook accounts, these are the most traditional and oldest savings accounts available. To open a passbook savings account the depositor must go to the bank, open the account - typically there is no opening deposit required - and they leave with a small booklet for recording deposits and the occasional withdrawal. While some banks still utilize the hard copy passbook, many now simply mail a monthly statement to account holders. There usually is no minimum balance required, no term set, no deposit frequency set, and no or very little (less than 1%) interest is paid on balances. Also, there are no penalties levied for withdrawals, no advance notice is required to make a withdrawal, no checks are allowed written on the account, and FDIC insurance covers deposits up to $100,000, This truly is the simplest form of saving account available in America today.

Savings Accounts That Pay

When a depositor opens a savings account and puts money into it, the bank then uses that money to fund various loans to other customers. Because of this banks pay account holders interest on their deposits for the use of their money. There are many rates banks pay to different account holders based on how much money is in the account and how long it stays there. As such, there are a variety of high-yield savings accounts available to customers.

Money Market Savings Accounts

Money market savings accounts, or MMAs, start off much like a traditional passbook savings account. They are designed for individuals to deposit money into to save and for account holders to have ready access to their funds should they need them. However, that is where the similarities stop. When an individual opens an MMA there is generally a large opening deposit required; usually $1,000 or more. Also, a minimum balance is generally required; that means that in order to get their interest money, the account holder must keep at least the minimum balance amount (usually $1,000 or more) in the account at all times. Should the balance drop the account holder will forfeit part of their interest for the time they were below the balance amount. The check-writing privilege is allowed somewhat in MMAs; most banks allow account holders to write up to three checks each month, compared to traditional passbook savings accounts where no checks can be written. Then there is the interest payment factor; that is another privilege. Because of the larger opening deposits required and the minimum balance requirement banks reward depositors by paying higher interest rates. For instance, a MMA account may pay upwards of 1.3% per year; compare that with traditional passbook savings and that is quite an increase. Also insured by the FDIC for up to $100,000, MMAs are the perfect choice for individuals who are planning to open with a large deposit and plan to keep that deposit in the account as a minimum balance, want to be able to write checks out of their savings account, and want to make a little money off of their idle cash.

Online Savings Accounts

With today’s advanced banking technology, depositors can open a savings account entirely online, without ever having to step inside a brick and mortar bank. Account holders like the ease and convenience of opening an online savings account, while others are concerned about security and the safety of their information online. It is important to know that established banks are professional institutions who have access to the best technology and security methods on the market, and they take customer security and privacy very seriously. Customers who are considering opening an online savings account are encouraged to contact the bank and speak with an expert who can answer questions about those concerns. There are many benefits to opening an online savings account. The first one is liquidity; because customers can open the account using an online transfer the funds are available much faster than opening an account in a physical bank with a check that must be held to clear before the funds are available. The second is flexibility; because all deposits, not just the opening one, can be made via online transfers 24 hours a day, 7 days a week, it is easier to make deposits and to stick to a saving schedule. The same FDIC rules apply to online savings account funds, so the security of knowing that funds are insured should something happen is always there; on another note, however, very few of these accounts allow checks to be written off of the funds. Perhaps the best benefit of all is that because online savings accounts have lower operational costs and overhead, banks can pass those savings onto depositors in the form of higher interest rates. For instance, some banks are offering an initial rate of 2.25%, good for the first three months or so, and 1.51% for the first year. Of course these figures are averages, and each bank is different; if online convenience and flexibility are important, start looking into the rates of banks that offer online savings accounts.

Part II: High-Yield Savings Accounts

High-yield savings accounts do just what they say; these accounts earn depositors significantly higher interest rates—in the neighborhood of 3% or more—but require substantially higher deposits and other restrictive rules.

It is true that some traditional banks offer high-yield savings accounts, it is also true that they usually require huge opening deposits--$10,000 or more—require high minimum balance levels to be kept—possibly $5,000 or more—and penalize depositors for writing checks, withdrawing too often, letting a balance dip below that minimum line, and/or not making regular deposits. Then there are fees; brick and mortar banks must charge fees for these types of accounts to help cover their overhead costs for housing such programs. For instance, many banks charge transaction fees, account maintenance fees, and service fees for opening the account, keeping it open, and making deposits. After a very short while these fees, in addition to the rigorous rules of the account, add up to very costly very quickly.

This is where the internet bank again emerges. Many online banks offer high-yield savings accounts online. While many may still require a substantial opening deposit, others do not; also, some do require the minimum balance, while others do not. Online banks differ widely in the high-yield savings accounts they offer, so it is important to compare many banks before choosing one. One of the reasons online banks are able to pay such high interest rates and have more lenient rules is because they do not have the same overhead and maintenance costs that traditional brick and mortar banks do. Also because of this fact many of these banks do not charge the plethora of additional fees associated with such an account at a traditional, physical bank. Another item to consider when thinking about opening a high-yield savings account is that, more than likely, the bank chosen will not be the same bank the account holder has his or her other financial accounts at. For instance, an individual may have a checking account at Bank A and the high-yield savings account at Bank B. This separation can make depositing money a bit more complicated, but if the account allows direct deposit (very likely) or transfers from other institutions (less likely), this minor detail can usually be worked out fairly painlessly.

When choosing a high-yield savings account, either online or in a physical bank, it is important to understand the fine print. For instance:

  • How easy is it to gain access to the money in the account?
  • Look at the rate: How is it compounded (monthly, yearly)? When does the bank pay it?
  • Will the account’s interest rate change? For instance, is the bank paying a high introductory price for the first three months, but then will the rate adjust to a lower rate for the remainder of the account’s existence?
  • Must a minimum balance be kept? What happens if it drops below that line?
  • Are checks allowed to be written off the account? If so, how many in what amount of time?
  • What other types of fees—if any—are associated with the account? For example, is there penalties for withdrawing funds?

Being aware of the account’s finer points will help to make the most out of the idle cash in the account. Also, find out where an account holder can go for help. Is there staff readily available? Do they seem knowledgeable and eager to help with problems? Can customers talk to managers or other mid- to high-level management if they experience problems? Again, it is critical that account holders understand the ins-and-outs of such an account; talking with a bank representative can make sure there are no gray areas this understanding.

While there are countless types of savings accounts available to potential customers, the four major categories are covered in this article. By understanding the basic types of accounts individuals can feel informed and confident about delving in deeper to an account’s finer points in order to make the best choice for themselves. Once a decision is made as to the type of account desired, individuals can then begin to hunt out and compare interest rates, account benefits, and costs of having an account (if there are any). All of this research does seem tedious, but it is important and well worth the time and energy spent. Fully understanding an account’s benefits and disadvantages is truly the key to making the most of money.

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