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Choosing the Best Savings Account
All savings accounts are not created equal, and close evaluation of various accounts offered by any bank reveals a vast array of choices. Over the years, the financial sector has developed savings and investment tools that address every need, but the savings account remains the best way to save money for access on a rainy day. Unlike a checking account, the funds in a savings account are not meant to be immediately accessible to pay bills or withdraw without careful consideration. When selecting the most beneficial account to reach savings goals, careful evaluation must be given to the attributes, drawbacks, and types of savings accounts available.
Account Attributes
Every savings account has similar attributes, and each of these must be compared closely to understand which savings account offers the best yield on the deposited funds.
• Interest Rate – Also called the yield, this is the amount of money paid to the depositor when the savings balance remains in the account over time. Compound interest is the most common type of yield, which means that the interest paid is then added into the savings account balance and earns interest in subsequent periods.
• Minimum Deposit – Amount of money that must be deposited initially to open the account. This amount will vary by the type of savings account because the minimum balance requirement may be driven the minimum balance required..
• Minimum Balance Required – The lowest balance that can be in the account during the statement period. This amount varies depending on the classification of the account. For high-yield savings accounts, the minimum balance can be as high as $25,000.
• Minimum Activity Frequency – How often a deposit must be made in order to keep the account active and avoid inactivity penalties.
• FDIC Insured – Funds insured by the FDIC are 100% guaranteed against loss due to bank failure. No one has ever lost money in an account with a balance below the maximum insured amount in an account that was insured by the Federal Deposit Insurance Corporation.
• Regulations – What federal rules apply to the account? What costs are associated with the regulations? Banks are required to provide a copy of the regulations that apply to the savings account at the time the account is opened.
• Overdraft link to checking account – Funds in the savings account are made available to the checking account at the same banking institution in the event a check is written for more than the balance of the checking account. Some banks offer this service free of charge while others will assess a per incident fee.
• Online access – Internet banking is safe and convenient, and most banks offer this option free of charge to depositors in good standing.
Drawbacks
Accounts that appear to pay twice as much interest can carry penalties that prevent easy access to the money in the savings account. Evaluate the account and look for the following terms when reading through the account profile.
• Penalty for early withdrawal – Savings accounts with rules for long-term investment will assess high fees when the money is withdrawn prior to the preset date. Some accounts have exceptions for certain life events.
• Fee assessed for dropping below minimum balance – One five-dollar fee assessed for dropping below the minimum balance can negate an entire year’s interest earned on the savings. High-yield accounts assess larger fees for a balance that dips too low.
• Transfer fees between banks – When the savings account exists in a different account from the checking account, some banks will charge fees for transferring money to other institutions.
• Fund transfer lag time – Moving money between banking institutions can require up to four business days of lead time. If funds are needed immediately, this lag time can present obstacles.
• Convenience-banking fees – Internet banking features can carry fees at certain banks. ATM fees may be assessed for access to the savings account when the bank is closed.
• Monthly withdrawal limit – Number of times that funds can be withdrawn in a calendar month. The intent behind a savings account is that money is regularly deposited to remain in the account. When the depositor accesses the account too often, the bank can assess fees.
Savings Account Types
Traditional Savings Account - The longest-standing type of savings account offered by “brick and mortar” banks everywhere. When the same depositor has a checking account, too, the savings account is often linked to the checking account for easy transfer of funds between the two accounts.
Online Savings Account - Many banks offer online savings accounts that pay higher-than-market interest rates and offer bonuses for opening the account. For the depositor who has sufficient funds that can be left in the account untouched for long periods, these accounts offer easy ways to deposit funds, but a traditional checking account at a “brick and mortar” bank is required to withdraw the funds. Four business days are required for the funds to be transferred. Many reputable banks offer online savings accounts.
Money Market Savings Account - A higher yield account that is offered by mutual fund companies. The yield is based on the performance of the mutual funds they offer. Deposited funds are not insured through the FDIC, so the depositor must be aware of the risk of this instrument.
CD or Certificate of Deposit - A pre-set deposit amount is placed in this account and must be left in the account for the agreed period. Available for periods of one to six months or one to five years, the CD is a very safe investment instrument that has been used for decades by the most conservative savers.
Business Savings Account - Similar to a personal savings account, the business savings account is opened by a business owner that has a business checking account. Minimum balance requirements are normally associated with business savings accounts.
Conclusion
Vast information sources are available for close evaluation of the many choices associated with savings accounts. Online calculators can demonstrate the difference between the accounts as deposit amounts are entered. Be aware of the fees and penalties associated with removing the money from the account too early. Any money that must be paid to the bank will impact the yield the account earns over time. Many depositors maintain multiple savings accounts to address monetary goals while being able to access enough money to address immediate needs in the case of emergencies.
