Savings Accounts Primer
January 17, 2009
| MoneyRates.com Senior Financial Analyst, CFA
Choosing a savings account can seem like a pretty mundane task, but often it is one of the first and longest-lasting financial decisions a person makes. So, before you simply walk into the nearest bank branch and settle for what they happen to be offering, know a little about what your options are. After all, you would probably do a little research before shopping for a car, and over time you are likely to put more money into your savings account than into your car. Here, then, is a little bit of advice on how to look under the hood of a savings account.
The Role of a Savings Account
A savings account plays an intermediate role between a checking account that you might access on a daily basis, and a long-term retirement account, which you shouldn't be touching for many years. The following are some examples of how this intermediate role can come into play:
- Getting started with savings
- Saving for emergencies
- Saving for large purchases
What makes a savings account suited to these uses is that it can pay higher interest than a checking account because you won't be drawing from it as regularly, but at the same time, it will allow you ready access to the money when needed. Remembering the role of a savings account is important when evaluating options such as high interest savings accounts or savings accounts with debit cards.
High Interest Savings Accounts
You might find high interest savings accounts online or through your local bank branch. Naturally, the idea of a high interest savings account sounds good, but here are some things you should check on first:
- The legitimacy of the institution.
- The extent of FDIC coverage. Make sure the institution is covered, and if you qualify for a high interest savings account because you are making a very large deposit, make sure it does not put you over the limit for FDIC coverage.
- Any restrictions on your access to the money. A high interest savings account may limit how often you can access your money. If you can live with those limitations, take advantage of the high interest, but if not, look for a more conventional savings account.
Savings Accounts with Debit Card Features
Another special offer may be a savings account with a debit card. This sounds like a nice perk, but first ask yourself a couple questions:
- If this account is for savings, is having instant access to it going to hurt your savings habits?
- Are you sacrificing a higher interest rate for the debit card? If so, you might be better off with a conventional checking account for your short-term funds, while finding a high interest savings account for your longer-term savings.
Looking under the hood of a savings account should start with understanding how you intend to use the account, and based on that, what features are most important.
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