We all know that we’re supposed to save a portion of our money but where are we supposed to put it? Conventional wisdom would suggest that a plain savings account is a good, safe option however, with the rates big banks offer on most account, you’d almost get as much from your piggy bank. So if you’re looking for a smart place to stash your cash and earn a little extra on top, here are three option for making the most of your savings.
Online savings account
If you like the simplicity of traditional savings accounts but hate the rates, you may want to look online for a better deal. While many large institutions only give a paltry .01% annual percentage yield on their savings account products, some online banks such as Ally offer savings accounts with 1% or better APYs. Granted you won’t have all of the same conveniences that bank branches offer but, with rates that are literally 100 times greater, you may find that putting at least a portion of your savings in an online account is good move. Just be sure that whatever bank you decide to go with is FDIC insured so that your money will be protected, and also be advised that online accounts do have some limitations in the number of transactions you can make per month.
Certificates of deposit (CDs)
Another great option for securing a better return is what’s known as a certificate of deposit or CD. These accounts are actually fairly similar to regular savings accounts but with one major difference: you can only take out your money at certain times without penalty. That’s because CDs have term lengths that determine how long you need to wait before you can withdraw your money. These can range from one month to as long as 10 years. In most cases a longer term length will yield you a greater return and, once again, going online might also allow you to get an even better rate.
As mentioned, if you do need to access your money before the term length is up, you can do so but at a price. According to Bankrate a typical early withdrawal penalty for a CD can start at three months’ interest on a short term length CD up to 12 months’ interest on a longer one. For that reason you’ll likely want to keep some other more accessible savings on hand so you don’t end up having to give some of your earnings back if you need fast access to your money.
Money market accounts
Not to be confused with money market funds, money market accounts might also seem suspiciously similar to average savings accounts. The big differences here are in how much money you need to open an account and how you access your money. First, opening a money market account may mean making a larger initial deposit. Additionally, depending on your bank, your account may require a higher daily minimum balance that you’ll need to maintain or face fees.
While that might sound like a savings account, money markets also maintain some attributes akin to checking accounts. For example many accounts allow you to write checks and maybe even use a debit card to access your funds while still earning relatively significant interest. However there are still limitations on how many transactions you can make per month and you’ll want to be careful about dipping below that aforementioned daily balance requirement. Otherwise this could be a good option for those wanting to accrue interest but also tap their reserve when needed.
Regular savings accounts can be great when you are just starting to put money away but there are better options for earning money on your funds. While there are certain inconveniences and disadvantages associated with online accounts, CDs, and money markets, there is also a lot to like. Ultimately the best plan may be to diversify your savings among the three products and beyond, allowing you the greatest amount of flexibility and hopefully some nice earnings.