Savings accounts are one of the basic, foundational building blocks for any sound financial plan. But savings accounts are also complex financial instruments that involve many of the same risk/reward qualities of other investment options, and they come in a myriad of forms. Before opening a savings account, it’s important to establish your financial goals and to understand your tolerance for risk.
Ask questions to get information that will make your decision easier, so you’ll be better prepared to open a savings account.
5 Questions to Ask Before You Open a Savings Account
Knowing the right questions to ask before you commit to a savings account can save you time and money. Here are some questions to ask a banker when you’re in the market for a new savings account:
1. What Kind of Financial Institutions Offer Savings Accounts?
The two main type of financial institutions to consider are banks and credit unions. The Federal Deposit Insurance Corporation insures savings accounts at U.S. banks for at least $250,000. Deposits at federally chartered credit unions are insured by the National Credit Union Administration for the same amount.
The U.S. Securities and Exchange Commission advocates tucking away enough money in savings to cover an emergency, such as losing your job. Although it might not generate as much interest income as other financial products, a savings account with three to six months’ worth of living expenses in savings is a good way to avoid excess stress when an emergency hits.
2. What Types of Savings Accounts Are Available?
The Passbook Savings Account was previously a savings staple: The account holder received a small “passbook” from the bank that was updated each time a deposit or withdrawal was made. Although many banks still offer some form of passbook account, this quaint form of record keeping has given way to various types of savings accounts, including traditional savings, money market savings and certificates of deposit.
3. What Is the Best Type of Savings Account to Open?
There’s no one-size-fits-all type of savings account. And chances are, life circumstances might change which is best for you. If you need to start small with a minimal deposit, a regular savings account is likely the best place to start. You’ll get the security of FDIC insurance and immediate access to your money when you need it.
If you have access to a larger amount of money that isn’t required for regular living expenses, consider a money market savings account for your savings. For high-yield savings, a money market account offers immediate access to your funds and typically pays a higher interest rate than a regular savings account. But this type of account also requires a higher initial deposit and minimum balance.
If you’re confident that you won’t need a portion of your savings for a while, a CD usually offers the best interest rates among savings accounts, but your bank will likely hit you with a significant interest penalty for taking an early withdrawal.
4. What Are the Fees and Minimum Balances?
Although savings account deposits are federally insured, banks and credit unions are privately held institutions. No federal laws dictate the maximum fees that national banks can charge. In some cases, state law governs maximum fees, but most of the time, the charges for their services are determined by the institutions themselves. Federal regulation does require national banks to disclose any fees at the time the savings account is opened. By comparing fees and minimum balance requirements for different types of accounts at the same institution, and similar types of accounts at different institutions, you can determine the best account to meet your needs.
5. How Can I Earn the Highest Savings Account Interest Rate?
For high-interest savings, you’ll likely earn a better interest rate by putting your money in CDs, but you’ll get the best savings account rates by shopping around. For example, some online banks may offer an online savings account with excellent interest rates. Different banks may offer different interest rates on similar CDs, and the same bank may offer a variety of CD products. Larger amounts deposited into a CD typically earn a higher interest rate, as does agreeing to leave your money in the account for a longer period.
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