Money in the Bank - Saving Basics

Savings Accounts

The easier it is to access your money, the lower the rate of return from interest. A savings account in a bank pays less interest because you have easy access to your money. That means that you can withdraw your money at any time, which in turn means that the bank cannot invest it in a higher rate long-term investment. Some banks will offer interest rates on money in your checking account.

Saving Money in a Bank

Banks frequently use different methods to calculate interest. To compare how much money you’ll earn from various accounts in a year, ask for each account’s "annual percentage yield" (APY). Banks typically quote both interest rates and APYs, but only APYs are calculated the same way everywhere.

Also ask if the bank offers overdraft protection. Most banks will now automatically link your checking and savings account so that if you draw more from your checking than you have in that account, they will transfer the needed money from your savings account for a small fee. This saves you paying high overdraft charges for your bank and for the merchant whose payment would have bounced.

CD - Certificate of Deposit

A certificate of deposit has a set term for a set interest rate and usually
requires a minimum deposit of $1,000 or more. Some require a $10,000 deposit. The shortest term will be 3 months, but you usually want to deposit the money for at least one year unless there is a special short-term promotion where you can receive more interest. There is a penalty for early withdrawal, so only commit to a time period that you know you can stick with.

Each CD is insured up to $100,000 by the FDIC. If you are investing more than that in CDs, put it in separate CDs. You could set them up for different time frames also.

The interest rate of a CD usually stays the same for the term of the CD. If interest rates go down the bank still has to pay you the higher rate. If interest rates go up, you are stuck getting the lower interest rate unless you take your money out and pay the early withdrawal penalty.

Money Market Account

A bank money market deposit account pays a higher interest rate than a savings account and you do not have to commit the money for a specified term like a CD. You usually have to put a minimum of $2,500 in the account to open it. These accounts allow you to write checks against them, but they usually have restrictions on how many checks. So be sure you understand any restrictions and fees.

Money market accounts are offered by banks and they are insured. However, do not get them confused with money market funds, which are offered by mutual fund companies and are not federally insured. To read more about money market funds and mutual funds, click here.