If you’re looking to save funds in order to pursue your goals, where should you put that money? The good news is that you have multiple options, many of which pay interest. They allow you to increase your savings even as you protect them—not an option with the old money-under-the-mattress strategy.
To select the account that will best serve your needs, you’ll need to determine your timeframe and your goals. You’ll need to know a bit about interest rates as well.
How interest rates and APY work
Interest-bearing accounts accumulate compound interest—which is a boon for your bottom line. Simply put, the amount of interest the account earns depends on the interest rate, and also how often the interest is compounded, or added to the account. The more often interest is compounded, the more often money gets added to your original stash, and the more your money grows. Federal regulation requires banks to use the annual percentage yield (APY) as a standard to represent how much you can earn based on the interest rate and how often interest is compounded.
So when you’re comparing savings options, keep in mind that each offers different APYs. Then factor in the flexibility, fees, and benefits of each account. Here’s what to consider.
1
High Yield Savings Account
• Pros: A higher interest rate than most savings accounts, with FDIC insurance.
• Cons: No check writing, and limited withdrawals and transfers.
2
Money Market Account (MMA)
• Pros: A higher interest rate than many savings accounts, with the flexibility of check writing, plus FDIC insurance.
• Cons: May limit the number of checks, withdrawals or transfers in a given period.
3
Certificate of Deposit (CD)
• Pros: Higher rates of interest than most other FDIC-insured accounts, and the interest rate is fixed for the term of the CD.
• Cons: You should stay invested for the length of the CD—meaning you have less flexibility than with other accounts. If you take your money out before the term is up, you’ll pay a fee. Terms generally range from six months to five years, with longer-term CDs usually offering higher interest rates.
So think about your goals, what account might work best, and get started saving. Whichever savings vehicle you select, be sure it’s at an accredited bank or credit union, where your deposits are insured up to $250,000 by the FDIC (for banks) or the National Credit Union Administration (for credit unions).
Marcia Lerner lives in Brooklyn, NY, and writes on finance, health care and children's literature. Her articles and reviews have appeared in the New York Times and Proto magazine as well as many financial websites and magazines.
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- https://www.investopedia.com/terms/a/apy.asp
- https://www.bankrate.com/glossary/a/apy-annual-percentage-yield/
- https://www.bankrate.com/banking/what-are-the-different-types-of-bank-accounts
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