What Type of the Savings Accounts Are the Best?
Savings accounts are an essential part of anyone’s financial toolkit, but choosing the right account can be difficult. They’re a great way to build savings and work towards financial goals.
Unfortunately, with so many features to consider, it’s hard to separate what’s important from what’s not.
Instead of just choosing the closest bank, consider these factors when choosing what savings account to open.
Quick answer: Look for a savings account with a great interest rate and low fees -- most likely from an online bank.
How Savings Accounts Help Your Money Grow
Next to a checking account, a savings account is the most common bank account available.
They’re perfect for storing money that you might need on short notice while still earning some interest. They’re also the best way to store money you cannot afford to lose, thanks to the FDIC.
The FDIC insures every savings account in the United States for up to $250,000.
Even if the bank that your savings account is at closes, you’ll get your money back (up to the covered amount).
The FDIC is backed by the full faith and credit of the U.S. government. That means you can don’t have to worry about the FDIC running out of money. Every dollar you put in a savings account is completely safe.
Deposit earn interest over time
On top of the safety that savings accounts provide, you’ll earn interest on the money in the account.
The interest you’ll earn is expressed as a percentage of the money you have in the account.
For example, an account offering 1.00% APY will give you $10 each year for every $1,000 you have in the account.
Interest is paid monthly, and most banks calculate it based on your average daily balance for the month. That means you won’t lose out on all of the interest if you need to make a withdrawal.
Banks are able to pay interest because they use savings deposits to offer loans to other customers.
By law, a bank needs to keep a certain amount of money, based on the total deposits it has accepted, on hand. That way you don’t need to worry about not being able to withdraw your money when you ask.
The bank will use the rest of the money to give mortgages, credit cards, and car loans to customers.
The bank’s customers pay more interest than the bank pays on savings accounts, letting the bank make money. Still, thanks to the FDIC your money is never at risk, even when the bank uses it to make loans.
Key Features of a Top Savings Account
On the surface, savings accounts seem simple, but there are a number of things you need to pay attention to when choosing a savings account.
Interest Rates
The interest rate is one of the most important aspects of a savings account. It can be the difference between losing to inflation and keeping pace with it. It can also accelerate your progress towards long-term savings goals.
Compounding, or the ability to earn interest on interest, is what makes interest so powerful.
Imagine you’re trying to save $15,000 for a down payment on a home. Your plan is to put $100 a month into a savings account each month until you reach your goal.
If you’re earning no interest, it will take you 150 months, or 12.5 years to reach your goal. If you’re earning 5% interest, it will take you less ten years.
You’ll have contributed $12,000 and earned more than $3,000 in interest after 10 years. More than 20% of the money for your down payment will have come from interest.
Many online banks offer savings interest rates of around 1.00% APY. Some credit unions may also offer higher rates on limited amounts if you meet balance and transaction requirements.
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Fees and Minimums
Fees and minimums are the other major aspect of savings accounts that you need to watch out for.
The entire idea of a savings account is for it to be a safe place for your money. You can hardly call a savings account safe if your bank will take the money from you with fees.
Unfortunately, many banks are now charging fees for even the most basic accounts.
Bank of America, for example, has a $5 monthly fee on its basic savings account.
Chase has the same fee for its Chase Savings account. Since the interest rate at both banks is so low, those fees can easily outpace the interest you can earn.
There are usually ways to avoid fees on savings accounts. Bank of America will waive its savings account fee if you maintain a $300 minimum balance.
You can also avoid the fee if you have a checking account with Bank of America. Similarly, Chase will remove the fee with a minimum balance of $300, or a monthly repeating transfer of $25 from a Chase checking account.
Banks use fees to encourage their customers to act in specific ways.
Usually, to encourage customers to use that bank as their main (or only) bank.
Recurring Transfers
The ability to set up recurring transfers is a very useful feature for a bank account to have.
Recurring transfers can be used to send money to an investment account, move it to a vacation account, or otherwise automate your financial life.
If you’re saving up for multiple financial goals at once, recurring transfers make it easy to do without having to spend hours entering transfer requests.
Setting up a recurring transfer should be a free feature at banks that offer it. Savings accounts are designed to make your financial life easier, and recurring transfers take that a step further.
Other Features
Though we’ve already covered the most important features of savings accounts, there are some other features that can enhance an account.
The ability to open and nickname sub-accounts
Some banks let you separate your savings account into multiple pools of cash. You can then add a nickname like “vacation fund” or “down payment” to those sub-accounts. That makes it easy to track multiple goals at once.
Debit card access
Savings accounts might also offer debit cards so that you can withdraw your cash more easily. If yours does, be sure to keep track of what ATM network the bank is part of so that you can avoid fees.
Mobile banking
A high quality mobile banking app can also make or break the savings account experience. Being able to transfer money or check your balance in a pinch is a useful tool. Once you get used to it, it’s difficult to not have those options.
Automatic savings programs
Other features, like Bank of America’s Keep the Change program, can help you save in other ways. Knowing all of the miscellaneous features a savings account offers can help you decide on the right account for you.
Where to Find the Best Savings Accounts
The best savings accounts tend to come from online banks and credit unions.
The reasons for this are simple: low fees and high interest. Credit unions have the added benefit of offering more personalized service.
Online banks don’t have to charge fees to stay afloat due to their low overhead costs.
By avoiding the need to rent buildings and hire tellers for physical locations, online banks can centralize their operations. This greatly reduces the cost of running the bank.
Online banks also understand that it can be difficult not to have a physical location to visit when you need to withdraw or deposit cash. That’s why most online banks refund ATM fees, within reason.
Online banks are also able to offer high-interest rates because of their lower costs. As a bonus, online banks tend to have great mobile and online apps, since they’re the main interface customers will use.
Credit unions can also offer low fees and high-interest rates, but for a different reason than online banks.
Credit unions are, in fact, owned by the people who open accounts with them.
That means that they will always be run to try to maximize the benefit of account holders. However, some credit unions have eligibility requirements that must be met before you can become a member.
Though there are many things to take note of when opening a savings account, pay close attention to the interest rate and the fees. To find the best account, look beyond the nearest physical bank. Consider your local credit union or an online bank.
