Saturday, October 17, 2009

Savings Accounts


In addition to the regular savings account that we're all familiar with, other types of savings accounts include money markets and certificates of deposit, all of which are insured by the FDIC up to $100,000 (assuming your bank is member of the FDIC) and earn interest. Savings accounts are offered by credit unions as well as traditional banks and online banks.

How do you know which type of savings account is best for you? Here are some basic characteristics of each:

Regular savings

  • Allows frequent transactions and transfers
  • May require a minimum balance to avoid fees

High-yield savings
  • Allows frequent transactions and transfers, though is geared toward deposits rather than withdrawals
  • May require a minimum balance to avoid fees
  • Pays higher interest than a regular savings account
  • Often exclusively online
  • Often requires a fairly high minimum initial deposit
  • Potential 4-5 day lag in transferring funds
  • May offer debit card, but typically not check-writing services

Money market
  • Normally requires a fairly high minimum balance to avoid fees
  • May offer check-writing or debit card services
  • Pays higher interest than a regular savings account
  • Allows a limited number of withdrawals per month
  • Potential 7-day lag in accessing funds

Certificate of deposit (CD)
  • Does not allow for withdrawals without an early withdrawal penalty
  • Pays the principal and interest at the end of the term
  • Is a relatively low-risk investment
  • Typically offers a higher rate of interest than a regular savings account


A money market account is a type of deposit account, but which often includes the ability to write checks and use a debit card and
typically earn a higher rate of interest than regular savings accounts. This type of account allows only 6 withdrawals (by check, debit or transfer) per month, only 3 of which can be by check; the limit may or may not include ATM withdrawals, depending on the bank.


Calculating Interest
Almost all savings accounts these days pay compound interest, which simply means that whatever interest you earn in one period is included in the principal for the next period, so that your interest is earning interest too. It's a good thing.

Here's a quick example. Say you put $1,000 in a high-yield savings account paying 5% interest compounded yearly for 3 years and you never deposit or withdraw anything in that 3 years. Here's what happens with compound interest:

Initial deposit: $1,000
End of Year 1: $1,000 x 1.05 = $1,050
End of Year 2: $1,050 x 1.05 = $1,102.50
End of Year 3: $1,102.50 x 1.05 = $1,157.63

Now, that's assuming interest is compounded annually, meaning that interest is calculated once a year. Other common interest periods are quarterly, monthly, and daily. The more often your interest is compounded, the more you'll earn. See for yourself. Try the calculator at MoneyChimp.com.


Resources
Want help finding banks near you that offer the best bang for your buck? MoneyAisle.com has an "online auction" service where banks make automated bids for your business, based on your initial deposit amount. Search for either high-yield savings accounts or CDs.
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