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What is a savings account?

Posted on August 30, 2021December 9, 2021 Author Patti E. Smith Comments Off on What is a savings account?
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Like many Americans, you may be racking up your savings a little more than usual right now.

But where is the best place to keep this money?

From a traditional savings account to CDs and MMAs, it’s a confusing landscape about where to store the money you want to keep. New low interest rates also complicate the decision.

According to the Bureau of Economic Analysis, Americans saved between 7.4% and 8.8% of their disposable income throughout 2019. A similar trend continued in early 2020, through April, when this number jumped to 32.2%. Interestingly, this statistic shows that people were saving a lot less of their saving income before the pandemic economy took hold.

“People reacted to the panic in March with a very high degree of uncertainty,” says Tim Shaler, economist in residence at iTrustCapital, an IRA digital asset trading platform, “We have seen people racking up money in response to their fear that we are in a situation where they need a lot of money on hand.

If the money you’re trying to save is in a traditional savings account, you could be doing more while still keeping it safe and having access to it. This is where a modern savings account comes in.

What is a savings account?

For many, a savings account is secondary to your checking account at the bank of your choice. Savings accounts are mainly used for storing your money, while your checking account is used for monthly expenses and daily transactions. Since most people keep both accounts in the same place, you can easily transfer money between the two accounts as needed.

But not all savings accounts are the same these days. For example, you can go for a high yield savings account, which usually offers a much higher interest rate than traditional savings accounts.

Traditional savings account

The classic definition of a savings account is a bank account that earns interest. Traditional savings accounts have fairly low savings rates. According to the Federal Deposit Insurance Corporation (FDIC), the current national savings rate is 0.06%.

A traditional savings account is one that you find at a large, established bank, and it is often linked to a checking account at the same institution.

Pro tip

High yield savings accounts offer significantly higher interest rates than traditional savings accounts. If you have $ 1,000 in a high yield savings account with an APY of 1.10%, you will earn $ 11 in interest over 12 months. A traditional savings account will only earn you $ 0.10 for the same amount over the same period.

High yield savings account

Online savings accounts, or high yield savings accounts, have become popular in recent years due to the higher interest rates they offer compared to traditional savings accounts. Without the overhead of maintaining physical branches, online banks may offer better incentives than traditional banks. As of mid-summer 2020, the best of these interest rates ranges from around 1.00% to 1.21%, but fluctuates depending on the economy and individual bank.

A high yield account is the perfect place to store an emergency fund.

“It can be a few thousand dollars, even tens of thousands of dollars, and it’s money that you shouldn’t be using unless you absolutely have to,” says Kali Roberge, COO at Beyond. Your Hammock, a financial planning firm in Boston. .

Compared to transferring between a savings account and a checking account at the same traditional bank, there may be a waiting period of a few days when you transfer money from an online savings account to a traditional current account. Keep this in mind if you find yourself in a situation where you need the cash at all times.

Other savings accounts

In addition to traditional and high yield savings accounts, there are other savings options, such as CDs and MMAs.

Certificates of deposit, or CDs, are a type of savings account where you deposit money for a specific period of time and typically earn a higher interest rate the longer you keep it on the CD. The downside here is that you lose the interest rate and you will likely have to pay a fee if you need to withdraw the money early.

The typical duration of CDs ranges from three to 60 months. MMAs, or money market deposit accounts, are similar to high yield savings, but usually come with higher initial deposit minimums. A key difference with MMAs is that they can give account holders access to check books or debit cards.

Savings account vs high yield account

A high yield savings account with an APY of 1.00% is a much better alternative for savers than a traditional savings account with an APY of only 0.01%.

Here’s how much money you can make with a high yield savings account that has an APY of 1.10% compared to a traditional savings account:

Potential earnings over 12 months

Example of savings Traditional savings account (0.01%) High yield savings account (1.10%)
$ 500 $ 0.05 (5 cents) $ 5.50
$ 1,000 $ 0.10 (10 cents) 11 $
$ 5,000 $ 0.50 (50 cents) $ 55
$ 10,000 $ 1 $ 110
$ 50,000 $ 5 $ 550
$ 100,000 $ 10 $ 1,100

Rates are exceptionally low right now due to the uncertainty surrounding the pandemic and ensuing recession. The Federal Reserve cut interest rates in March and again in April to stimulate spending. “That means the money is essentially worth less, and the banks pay less for you to keep your money in savings accounts,” says Jully-Alma Taveras, a NextAdvisor contributor and creator of Investing Latina.

Experts agree that interest rates will stay low for the foreseeable future, most likely over the next year or so.

Still, high-yield savings accounts are a much stronger option than a traditional account for earning interest, Taveras said.

Regardless of the type of savings account, be sure to research FDIC or NCUA insured banks (so your money is protected in the event of bank failure) and note the minimum deposit amounts required.

Why have a traditional savings account?

A high yield savings account will grow your savings faster than a traditional savings account, so it’s a good bet for most people. Unless you have signed up to a traditional savings account for reasons that suit you personally, we recommend that you put your savings in a high yield savings account.


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Tagged account holders, bank account, higher interest, interest rates, savings accounts
Patti E. Smith
https://palaceofreason.com

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