By: Steven Vulpis
Almost everyone has heard the term “Savings Account” before, but what is a savings account? Simply put, a savings account is a place to put your money so that it grows interest over time. In a savings account it is harder to access your money than it is to access in a regular checking account. So, why would you put money in an account that makes it difficult to take the money back out? The main reason is inflation. Inflation rate hovers at around 2% and constantly devalues your dollar. To combat this, open a savings account that accrues interest at a rate similar to the inflation rate will help keep your dollar as valuable as possible in the future.
There are many types of savings accounts but the three most common are deposit savings accounts, money market accounts, and certificates of deposit. The deposit savings accounts are the simplest of the group. These types of accounts can usually be started with a small minimum deposit. These accounts also have the highest liquidity of the three. This means that it is easier to turn the money in your savings account into cash in your pocket. However, it is not recommended to take money out of your savings account unless in case of an emergency. Unfortunately, due to the high level of liquidity in deposit savings accounts, these accounts also earn the least amount of interest.
Money market accounts are similar to deposit savings accounts in that they both require an initial deposit into the account. However, for money market accounts, this initial deposit is usually required to be much higher than a deposit savings account. It is also possible that the bank will fine you for not keeping a certain minimum amount of money inside your money savings account. The upside of these accounts compared to deposit savings account is the interest you earn. Money savings accounts usually have interest rates at or above 2%, which means you will be on par with or above the inflation rates.
The last type of savings account, Certificates of Deposit have extremely low liquidity but offer the highest interest rate of the three. Certificates of Deposit are purchased with a specific maturation period. The maturation period is chosen by you and can vary between all different time lengths. The interest rates for Certificates of Deposit are usually between 2.5% and 3%, meaning that your money is growing faster than inflation. If you were to withdraw your money from the certificate of deposit there is normally a large fee to do so, thus it is recommended to use a shorter maturation period if this certificate of deposit is your emergency fund. Finally, for certificates of deposit if you do not withdraw your money within a certain time period after the maturation period the bank will reinvest your money into another certificate of deposit for the same term. This allows the interest to compound which leads to more money in your account.