Savings accounts help you to save for future goals, keep a cushion of money underneath you for a rainy day, and even earn interest. It’s a good idea for everyone to have a savings account. However, the type of savings account that’s right for you will be different than the one that’s right for your neighbor or your coworker. Savings accounts all depend on your personal situation.
Let’s explore the various types of savings accounts you can open so that you know which kind of account is best for you and your financial circumstances.
What Is a Savings Account?
The definition of a savings account may seem self-explanatory, but it’s not as simple as it first appears. Folks who are opening their first savings account often don’t realize that there’s more to it than just saving. You’re also typically earning interest on the money you put in your savings account. The rate at which you acquire interest will depend on the bank or other financial institution where you choose to open your account.
A basic savings account is a great option for someone who would like to keep a little money stashed away for a rainy day. You probably don’t want to put all of your assets in one savings account, but it’s a great choice for people who want to have extra cash at the ready for short-term expenses. For example, a savings account is a great place for:
- Putting away money throughout the year for holiday gifts
- Planning a vacation
- Saving up for a down payment on a house
There are plenty of reasons one would want to save for a short-term expense. Your savings account is also a good place to put any excess money you have sitting in your checking account. If you put that cash in your savings account, it will accrue interest that will go right back in your pocket. Keep in mind that the interest rates for your savings account are not going to make you a ton of money, but the little bit you get back is still worth it. If you start putting a significant amount of money in your savings, you will gain more back in interest. This will be considered taxable income.
Now that we’ve established what constitutes a basic savings account, we can discuss a few variations of the savings account that could be better for certain folks’ financial situations: an individual development account (IDA), a linked savings account, and a holiday club account.
Individual Development Account
An individual development account is best for folks who are low-income and looking to accrue assets and eventual economic stability. The goal of an IDA is to take someone who is in a difficult financial situation and help them become self-sustaining in the long term. IDAs are also great for folks looking to pay off student loans, buy a home, or start a small business.
A really cool aspect of IDAs is that the financial institution or bank you open such an account with will often match your savings. Similar to the way that employers will often match their employees’ contributions to their 401(k)s, the money that one saves in their IDA can be matched by their financial institution or bank. Typically, the matches will come to about a 2:1 Or 1:1 ratio, but this all depends on the institution you choose to open your IDA with. Read the details of their agreement closely to make sure that you are okay with the matching system that they adhere to.
Linked Savings Account
A linked savings account is connected to another account; usually a checking or negotiable order of withdrawal account. This makes it easy for customers to transfer money from their checking account to their savings account. The simple transfer process is great for those who want to build up savings over time.
If you have an LSA, you can keep the majority of your money in your savings account. This could lead to higher interest yields. There are also financial institutions and banks who will make it very tempting to open an LSA by offering discounts on other services.
Holiday Club Account
A holiday club account is a term used for savings accounts that people use to deposit funds throughout the year. These funds are for the specific purpose of holiday shopping, and folks will typically use it by putting small deposits of $5 or $10 into the account each week for the entire year.
Holiday club accounts, also known as Christmas club accounts, were quite popular back in the day. They worked well to help people save for those big end-of-year expenses, as the small deposits slowly grew into a decent chunk of change. These types of accounts were especially popular in the 1970s, but they have since fallen out of style. This is likely due to low interest rates not giving people much back on their deposits. There were also a lot of restrictions placed on these types of accounts. Many banks and other institutions would not let their customers withdraw funds from their holiday club accounts unless a fee was paid.
Still, many people believe that it’s wise to have a holiday club account today. You don’t even have to save for the holidays with it! The way the account is used throughout the year is the most important part. Many folks have an easier time saving when they have a set routine for how much they’ll contribute to their account each week.
Many banks encourage their members to open a more modern version of a holiday club account, using it to save up for a vacation, a gift for yourself, or whatever else you want!
High-Yield Savings Account
A high-yield savings account is an account that will help you grow your money much faster. Because the internet has made online banking so easy, financial institutions have been able to make their savings account interest rates much more appealing. The competition between banks and other organizations has hit a new level. Now, high-yield savings accounts can offer as much as 25x what an average savings account would pay you in returns.
So, what’s the catch? Well, having a high-yield savings account may require you to have your checking account and high-yield savings account in separate institutions. This is due to the fact that these accounts are highly specialized. They’re not going to offer full banking services; they’re just going to manage the money you want to grow for savings. Essentially, you won’t have an easy time finding a high-yield savings account that bundles itself with a checking account and a debit card. It’s also typical for these institutions to accept online transfers only.
Financial experts suggest that folks who open a high-yield savings account should only use it as a part of their general financial portfolio. It shouldn’t be your only savings plan; the best way to use it as a complement to your other investments and financial plans. It’s wise to open a high-yield account to save up for a big purchase that you’ll want to make in the next 3-5 years.
Choosing the Right Savings Account for You
Now that you know about the various types of savings accounts, you can decide which one is the best option for you and your financial circumstances. When you’re deciding which types of checking accounts you want to open, think carefully about your goals. Are you saving up for a short-term purchase or a long-term goal? How important are interest rates to your investment strategy? What does your financial portfolio require in order for you to be in the place of economic security you’re striving for?
It’s also essential to consult with your chosen bank or other financial institution as you use this account. If there’s something you don’t understand about the way they pay interest rates, the restrictions they put on your withdrawals and transfers, or anything else, they are there to help you. One of the most important parts of investing and growing your money is staying up to date on how your bank is handling your funds. If you discover that part of your bank’s contract doesn’t work for you, don’t fret. There are plenty of savings accounts in banks out there that can offer you the right plan for your needs.
Whether you want to save up for a rainy day, an exciting purchase for yourself, or holiday gifts, there’s a savings account that can help you get the job done.