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Compare savings accounts, money market accounts and CDs

By Joe Taylor | Money Rates Columnist

Comparing savings accounts

FDIC-insured deposit accounts can provide an excellent place to securely store your savings -- and earn a guaranteed return. But given the various types of savings vehicles available at banks today, choosing the right account for your needs can be challenging.

Picking the wrong kind of account can lead to hefty fees, lackluster dividends or inconvenient access restrictions. But by knowing what types of accounts are available, you can make a choice that fits with your financial needs and lifestyle.

Here are some of the key features of some of the most common types of deposit accounts: savings accounts, money market accounts and certificates of deposit (CDs):

Savings accounts: Lower interest, higher flexibility

Your first trip to the bank as a child may have involved a savings account. And some may still think basic savings accounts are for kids, offering meager returns and little excitement. However, the banking industry has leveraged technology to make simple savings accounts more attractive. One notable trend has been the emergence of the high-yield savings account -- a savings account that offers rates that may rival those of money market accounts or CDs.

Why choose high interest savings accounts

High yield savings accounts may appeal to customers who:

  • Like to handle their banking online
  • Have less than $250,000 to invest
  • Want to open their accounts with less than $2,500
  • Require frequent access to their funds

Online savings accounts: How to open new accounts

Many banks that offer high yield savings accounts are based online, which allows them to manage their cost and consequently offer higher rates. Opening an online savings account usually takes just a few minutes and requires linking your account to an existing checking account. Most online banks allow you to transfer funds electronically, and may offer accounts with minimal fees and no minimum deposits.

Some online savings accounts even offer ATM cards, allowing you to access funds through a network of ATMs. If you intend to access your short-term savings frequently for major purchases, such as covering a tuition bill or making a down payment on a car, a high-yield savings account may be a good choice.

A chart comparing savings accounts, money market accounts and certificates of deposits (CDs)

*Source for national interest rate: FDIC, updated August 15, 2016

Money market accounts: Higher interest rates, higher minimums

As the name suggests, money market accounts (MMAs) follow the trends of financial markets to generate interest for depositors. Instead of using these deposits to fund mortgages and other credit instruments, banks reinvest your savings into traditionally secure, short-term holdings. Treasury bills, bonds and other stable investments tend to make up the bulk of banks' money market account investments. Banks pass along these dividends to you in the form of higher interest rates than you might receive on a conventional savings account.

What is a money market account: What to expect

In exchange for these higher rates, money market accounts often come with more restrictions. Many money market accounts require initial deposits of $2,500 or more. Although some banks allow new customers to start accounts with as little as $1,000, minimum balance amounts may also apply, which can quickly negate the extra dividends from your higher interest rate.

Depending on your bank and state of residence, you may also qualify for check-writing privileges on your money market account. But the number of checks and other types of withdrawals allowed per month are limited by federal law, so don't expect to use your money market account like a checking account.

Why select a money market account

Money market accounts may appeal to depositors who:

  • Can afford to start an account with more than $2,500
  • Intend to keep a sizable balance in the account
  • Enjoy the flexibility of writing some checks from the account
  • Require regular access to their funds

Many new savers often confuse the money market accounts offered by banks and credit unions with the money market funds offered by brokerages. Although both savings instruments leverage the power of short-term investments to generate interest, only money market accounts from chartered banks carry FDIC insurance, which protects up to $250,000 in deposits per customer, per institution.

Conversely, like other mutual funds in your portfolio, a money market fund may fluctuate in value and lose money over time. Therefore, if security is paramount, be sure to verify with your bank that your deposits are going be held in a money market account and not a money market fund.

Certificates of deposit: Higher rates, longer commitments

Many financial planners counsel their clients to take any money they might need in the next five years out of the stock market. A growing number of Americans have taken that advice even further, opting to keep their cash away from Wall Street entirely. Investors with more money to save, but with a need to make routine withdrawals, may prefer to use certificates of deposit (CDs).

Why choose CDs

CDs may appeal to savers who:

  • Won't need access to their funds in the near future
  • Favor FDIC insurance over the uncertain yields of non-insured investments
  • May want to attempt a CD laddering strategy

How to get the best CD rates

Banks offer higher rates of return on CDs to attract long-term investors. When a bank knows that it does not have to cash out a CD for one, three or five years, it can use those deposits more aggressively to fund longer-term investments. Taking an early withdrawal on these accounts is possible, but it will typically trigger penalties. If you would like to have some access to your money periodically, consider using a CD laddering technique to leverage the best CD rates without sacrificing flexibility.

Using a five-year time horizon, you can stagger the terms of your certificates to mature every three, six or 12 months. This way, some portion of your savings is always accessible to you on a quarterly basis. You can then choose to cash out your certificate, or to roll it over into a new, longer-term certificate. This strategy requires a higher degree of organization and record-keeping than a high-yield savings account, but over time it may net you significantly higher dividends.

Finding the best bank rates

In the past, investors sought the best interest rates by watching branch windows or billboards for special announcements. Today, sophisticated savers have more tools at their disposal to learn about special bank offers.

Three of the most effective techniques for finding the best interest rates are:

  • Hunting for rates online. With no drive-thru windows or expensive lobbies to pay for, online-only banks can offer rates of return that most brick-and-mortar branches cannot match. And web sites such as MoneyRates.com can help you compare them at a glance.
  • Leveraging your entire portfolio. If you intend to invest a large amount of money through a single institution, speak with a branch manager or a call-center supervisor about whether they can match today's best online interest rate. Large depositors are often in demand at institutions, so it never hurts to see what they can do for you.
  • Looking for multiple-account bonuses. Some banks now offer special incentives to customers who maintain a variety of accounts at once. Holding a checking account, money market account and a few CDs at the same bank may earn you better interest rates or reduced fees.

Speaking of fees, be wary of the nickel-and-dime charges that can appear on your statements. These charges can counteract high interest rates and even leave you with less than your initial deposit. Banks may charge fees for speaking to a live teller, failing to meet minimum balances or requesting copies of statements. But by watching your statements closely, you can protect your short- and medium-term savings from excess charges and maximize your returns.

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