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We all know that consistently saving money is an essential habit for long-term financial health. However, where to place that savings each month can be a difficult decision. There are several types of savings accounts. In this article, we will break down the key characteristics of each type.
Requirement Number One
Remember, the primary consideration that should be taken when considering an investment vehicle for your savings is safety. Personal savings is not risk capital. In other words, preservation of capital is requirement number one when considering various investments for your savings.
Bank Savings Account
This is the most common type of savings account. Typically, you can open a personal savings account for free at your local bank. There is generally a very low minimum account opening requirement. This is also the most liquid type of investment a person can make. Funds are completely available for withdrawal at any time. Furthermore, with ATM’s, people can now withdrawal funds from their savings accounts 24 hours a day, 7 days a week. The primary drawback of a bank savings account is that it offers the lowest interest rate of any investment vehicle.
Money Market Account
Local banks generally offer money market savings account on top of the standard savings account. A money market account will invest your deposits in U.S government debt, which is considered to be a 100% safe investment. The primary advantage of a money market account over a standard savings account is the interest rate. Typically, a money market account will offer more than twice as much annual interest than a standard savings account. The primary drawback, however, is liquidity. Money can be withdrawn from a money market, but it can take a few days.
Certificate of Deposit
This can be the best vehicle for those who know they will not need access to their funds for a specified period of time. A person can put money into a CD for an agreed upon time period, which generally ranges from 3 months to several years, and in exchange they will receive a very nice interest rate that is higher than both a standard savings account and a money market account. The primary disadvantage of a CD is that funds cannot be withdrawn before the previously agreed upon maturity date without paying penalties. Thus, this type of investment vehicle is best for investors who know they will not need the cash for a certain period of time.
All three of these savings accounts can help a person reach their savings goals, and oftentimes investors take advantage of all three at the same time. The primary difference in savings vehicles is their liquidity and interest rates. If you are saving for an emergency fund, savings accounts are typically the best option since it is easiest to access your funds. If you are saving for retirement or investment oppurtunities, liquidity is not as important and the higher interest rates from a CD or money market account will be more beneficial to you.
Bi Line: Tom Cleveland is a writer and market analyst for Forex Traders, and online resource for currency news or forex broker reviews .
