A savings account is the right place to keep cash you don’t need to spend immediately. It’s ideal for medium-term saving because it preserves the dollar value while paying interest.
What is a savings account?
A savings account is a type of bank account that allows you to earn interest on the money you deposit. The amount of interest varies by the type of account and financial institution. Savings accounts can be a safe way to earn interest on your money if you open an account with a reputable institution, such as Patelco, where your money is insured up to $250,000 per member, per account type.
Breakdown of the basic types of savings accounts
All of these accounts are offered by Patelco.
1. Regular savings
This is the most basic type of savings account. It pays interest and is typically insured by the NCUA or FDIC. At Patelco, your money is insured by the NCUA up to $250,000 per member, per account type.
2. Money market savings
Money market savings accounts have two important advantage over basic savings accounts: you can write checks against the balance and typically enjoy higher interest rates. Money market accounts make great emergency funds, including our Money Market Select account. (Note that money market accounts are not the same thing as money market funds, which are an investment account not guaranteed by the FDIC or NCUA.)
3. Interest checking
Although technically a checking account, this type of account accomplishes the same thing as a typical savings account: an insured account with growth from interest. Traditional checking accounts don’t pay interest, but interest checking accounts do – albeit at a lower rate than most other savings accounts.
4. Share certificates
Similar to certificates of deposit (CDs) available at most banks, share certificates are offered by credit unions and are great for earning more than a basic savings account offers. The tradeoff? You won’t have easy access to your money for a set amount of time (from six months up to several years). That’s because if you withdraw the money early, you’ll typically have to pay a penalty. Share certificates make good sense when you have a set time you need the cash (in 12 months for example). They’re also a good place to save money you don’t plan to spend in the near future.
If you’re a long way from retirement, they’re probably not the best place for your retirement funds, as they typically grow much slower than other retirement investments. If you’re already retired, however, they’re a savings vehicle you should consider.
5. Health Savings Accounts
These savings account allow you to make tax-deductible contributions, grow your money tax-free and pay no tax on withdrawal – as long as the funds are used for qualifying medical expenses. In order to open an HSA, you need to be enrolled in a high-deductible health plan, usually through your employer.
6. College savings (529 plans)
A 529 plan is designed to save up for college expenses like tuition, books, and housing. Although contributions to 529 accounts are not tax-deductible, they grow tax-free and distributions are not taxable as long as used to pay for college expenses. There’s also a similar plan available called a Coverdell Education Savings Plan, which can be used for grades K-12 and higher education, but is limited to $2,000 of contributions per year.