Most banks and credit unions enable you to place your money in a checking account, a savings account, a CD, or an MMA. I discuss the pros and cons of each of these below.
What is a checking account?
Best for: Those who want a safe place to keep their money with few restrictions on accessing it.
Not for: Those who want to earn a lot of interest on their money.
You should open a checking account for money you plan to use for everyday spending. Unlike savings accounts, CDs, and money market accounts, there are no restrictions on when or how often you can withdraw money from a checking account, as long as you don’t withdraw more money than you have. They’re ideal for paying bills and you can easily turn your checking account funds back into cash as needed with the included debit card. You can also purchase checks for your checking account if you prefer to pay this way.
While some online checking accounts offer interest, these accounts are rare, and even the best interest-bearing checking accounts usually have annual percentage yields (APYs) lower than most savings account APYs. If you’re hoping to grow your money, you’re better off using one of the other bank accounts listed below.
Some checking accounts charge a monthly maintenance fee, but they might waive this if you meet certain requirements, like having a certain number of deposits per month or maintaining a minimum balance. Other fees you might run into with checking accounts are ATM fees for using ATMs outside of your bank or credit union’s network or overdraft fees if you try to withdraw more money from your checking account than it contains.
What is a savings account?
Best for: Those who want a low-risk way to grow their money.
Not for: Those who plan to withdraw money frequently from their account.
A savings account is a low-risk account where you can earn interest on your money. Banks and credit unions take the money you place into your savings account and use it to finance loans for other customers. Then, they give you a portion of the interest they earn from the borrower. The average savings account APY is 0.09%, but some high-yield savings accounts offer APYs in excess of 2%. A higher APY will help your savings grow more quickly. While you can technically keep the money in your savings account indefinitely, savings accounts are best for money you plan to use in the next three to five years. Invest longer-term savings if you hope to beat inflation and actually increase your wealth over time.
A savings account isn’t the best choice if you expect to withdraw cash from your accounts often. That’s because it’s subject to Regulation D. This is a federal law that restricts savings account holders to six “convenient” withdrawals or transfers per month. Convenient transactions include transfers made online or over the phone, bill payments or other recurring transfers, and overdraft transfers. If you have more than six of these per month, your bank or credit union will charge you extra fees. You can still make additional “inconvenient” withdrawals, though, including visiting a branch location if your financial institution has them or requesting a mailed check from your bank.
Savings accounts don’t usually include checks or debit cards for accessing funds. You may need to transfer funds to a checking account before you can withdraw the money via check or debit card payment. You also need to be mindful of the account’s minimum balance requirement. If it has one and you let your balance fall below that level, you might incur additional fees.
If you’re looking for a savings account, here’s our list of the best savings accounts.
What is a certificate of deposit (CD)?
Best for: Those who want to earn a high interest rate and don’t need to spend that money anytime soon.
Not for: Those who think they’ll need to withdraw their money before the CD’s maturity date
A certificate of deposit (CD), also known as a share certificate if you’re using a credit union, is a special type of savings account that offers much higher interest rates — but there’s a catch. When you put the money into a CD, you’re agreeing that you won’t touch it for the length of the CD term. This can be anywhere from a few months to several years. Usually, the longer the loan term, the higher the interest rate. The best CDs can offer APYs of around 3%.
You can withdraw money from your account before it reaches its maturity date (the end of the CD term), but you’ll pay a high penalty. This is often a certain number of months’ worth of interest, and the farther away you are from your maturity date, the greater the penalty. A few CDs, known as no-penalty CDs, do not charge you if you withdraw your money early, but these usually have lower APYs than other types of CDs.
CD laddering is a popular strategy that lets you take advantage of the higher APYs offered by longer-term CDs’ while still giving you access to some of your funds every year. You start by investing your money into CDs with consecutive annual maturities — for example, a one-year, a two-year, a three-year, a four-year, and a five-year CD. When the one-year CD matures, you roll those funds into a new five-year CD. The next year, the two-year CD will mature and you put this into a new five-year CD as well, and so on. Every year, another CD will mature and you can withdraw the money if you decide or put it into a new one to keep growing your money.
Looking for a CD? Check out our list of the best CDs available now.
What is a money market account?
Best for: Those who want to earn a high interest rate without sacrificing their easy access to their money.
Not for: Those with small savings who cannot meet the minimum balance requirements.
Money market accounts have features of all three of the bank accounts listed above. They keep your money fairly liquid, like checking and savings accounts, and they come with checks so you can withdraw money directly from the money market account. Some may also provide debit cards so you can withdraw money at ATMs or use your money market account to make purchases at stores or online.
Their APYs are often higher than savings accounts, in some cases they’re in excess of 2%, so they’re a wise choice if you hope to grow your money more quickly without tying it up in a CD for years at a time. But that’s not to say they’re without restrictions.
Money market accounts are also subject to Regulation D, like savings accounts, so you’re limited to six online or phone transfers and withdrawals per month. Checks also count toward your six convenient withdrawals per month, but ATM withdrawals do not. Another thing that may discourage some people from choosing an MMA is that these accounts usually have a much higher minimum balance than savings accounts, sometimes up to $5,000. Those without much money in their name may not be able to open one.
If a money market sounds like the right account for you, check out our list of the best money market accounts.