Your Guide to Savings Accounts
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You probably know that there’s a lot more to saving than just putting money into an account and letting it earn interest, particularly because banks, credit unions and other financial institutions offer a variety of accounts and rates.
But do you know how each type of account works and how they could help you save money for different types of goals?
We’ve put together a rundown of the types of accounts you’ll probably come across while looking for ways to save along with how these accounts work.
What we’ll cover
What is a savings account?
Next to piggy banks, a savings account may be the most classic place to keep your savings. You can deposit money, earn interest on it and make withdrawals. Traditional and high-yield savings accounts typically require a fairly low minimum balance to open an account. You can deposit money as often as you’d like, and, depending on your bank, you should be able to set up recurring deposits and transfers. Federal law has traditionally limited certain types of withdrawals, like electronic transfers, but in response to the coronavirus pandemic, these rules have changed. It’s not clear how long these changes will last, so it’s a good idea to check with your bank every once in a while to see if anything changed.
Highlights:
- Savings accounts are accounts that earn interest on the money you deposit
- Savings accounts offer access – you can make withdrawals throughout the year
- Savings accounts usually have low minimums, which can make it easy to start saving for a goal
Learn more: What Is a Savings Account?
How do savings accounts work? (Why do banks pay interest?)
In exchange for leaving your money deposited in a savings account, your bank pays you interest. This may sound one-sided, but it’s not. Banks accept deposits and then turn around and lend it to others at a higher rate. If you’re working with a bank that’s a member of the FDIC, your deposits are protected up to certain limits. (More on this later.)
How financial institutions set their rates depends on a lot of different factors. The federal funds rate is probably the one consideration you’ve heard of most often. Every institution is different, so while we can’t offer a definitive list of additional factors, some that may play a role include things like day-to-day business costs. For banks with physical networks, this includes costs such as staff, utilities and general maintenance.
Highlights:
- Banks pay interest because they are using your money to loan it to others at a higher rate
- Deposits are safe up to specific limits if at FDIC-insured banks and NCUA-insured credit unions
But there could be a bit more to it. For example, you may see that the rate you qualify for depends on how much money is sitting in your account.
Learn more: What Is a High-Yield Savings Account?
Reaching your goals starts with saving for it. See how Marcus could help.
Additional savings account features to consider: APY, compound frequency, fees
There are three things you’ll want to consider when looking at savings accounts:
- Annual Percentage Yield (APY). This is the amount of interest you could expect to earn if you leave your money in a savings account in a 12-month period. Savings account rates can change, which means the APY will too, but it’s an important point of comparison.
- Compounding frequency. Compounding frequency is the time period at which the interest you earn is added to the balance. Not every bank or account compounds interest with the same frequency. Some may compound it monthly, while others compound daily.
- Fees. The best reason to look into fees is because every cent you hand over for things like maintenance or account fees, statement fees, or a fee for falling below the minimum is money out of your pocket.
Individually, these three factors are all important. Altogether, they provide a pretty good picture of the type of deal you’re getting for your money.
Savings interest calculator: see how APY can make a difference
Even small differences in APYs could make a big impact when it comes to how much you earn on your savings. For instance, it may surprise you to learn that the difference between say 0.3% and 4.40% could really add up over time. Want to see how? Play around with our savings interest calculator to see how interest can add up.
Annual Percentage Yield (APY) as of September 29, 2023. APY may change at any time before or after account is opened. Maximum balance limits apply.
This calculator is for illustrative purposes only and may not apply to your individual circumstances. Calculated values assume that principal and interest remain on deposit and are rounded to the nearest dollar. All APYS are subject to change.
Rates of the selected banks reflect New York savings rates for similar products at the select banks with a minimum balance of $2,500. Rates may vary by state and do not account for bonus, special or promotional APYs. National Average is based on the APY average for high yield savings accounts with a minimum balance of at least $2,500 offered by the top 50 US banks (ranked by total deposits). Rates of selected banks and the National Average as reported by Informa Financial Intelligence, www.informars.com. Informa has obtained the data from the various financial institutions that its tracks and its accuracy cannot be guaranteed. This calculator does not include all savings accounts available in the marketplace.
Our rate as of September 29, 2023.
Comparison banks’ rates as of September 26, 2023.
National Average rate effective as of September 26, 2023.
Good to know:
- It could be worth comparing APYs to see if you’re getting the best rate for your savings
- Also look into the compounding frequency because compounding is about how often interest is added to your savings balance
Savings accounts that can help you save
When we talk about a savings account, at Marcus, this generally means we’re talking about our high-yield Online Savings Account. However, there are other types of products that could help you save and earn interest. Knowing what each of these offer can be a way to create a savings plan that helps you make the most of APYs by using different accounts at the same time.
Here are just some of the accounts that could help you save money and earn interest.
Traditional and high-yield savings accounts
You can find these accounts at brick-and-mortar banks, online banks and credit unions. They’re designed so you can deposit money on a regular basis and remove funds relatively easily. High-yield savings accounts could offer higher APYs than traditional ones.
- How it works: You can add money as often as you’d like and earn interest.
- Minimum balance: It depends on the bank, but tends to be low.
- Withdrawal limits: Federal law has traditionally limited certain types of withdrawals, like electronic transfers, but in response to the coronavirus pandemic, these rules have changed. It’s not clear how long these changes will last, so it’s a good idea to check with your bank every once in a while to see if anything changed.
- Interest rates: Savings accounts have variable rates, so they can go up or down.
- Things to look for: APY, compounding frequency, fees.
Certificates of deposit and no-penalty CDs
These accounts often have higher rates than regular savings accounts, and in exchange, you agree to keep your money in the account for a fixed period of time. To reinforce this time commitment, many CDs include a penalty if you try to break it before it matures.
A no-penalty CD offers a little more freedom. After an initial hands-off period, you can open the CD and withdraw the principal along with any interest you’ve earned and not pay a fee. You can expect no-penalty CDs to offer lower APYs than traditional certificates of deposit.
- How it works: You can deposit money only during the initial funding period. The money is hands-off until the CD matures.
- Minimum balance: Yes, and will vary depending on the bank.
- Withdrawal limits: You’ll likely pay a fee if you break a traditional CD before it matures. You can remove funds from a no-penalty CD any time after the initial waiting period ends.
- Interest rates: Typically fixed, which means a guaranteed return if you keep all of the money, including interest, in the account for the full term.
- Things to look for: APY, compounding frequency, fees.
See how much interest you could earn with a Marcus high-yield CD.
Money market accounts
Money market accounts offer APYs that are generally lower than ones you’d find with certificates of deposit, but money market accounts offer access typical CDs don’t. For instance, you can add money on a regular basis and may be able to withdraw funds with a debit card and/or checks along with digital transfers.
- How it works: You can add money as often as you’d like and earn interest.
- Minimum balance: Usually yes, but it varies depending on the bank.
- Withdrawal limits: Federal law has traditionally limited certain types of withdrawals, like electronic transfers, but in response to the coronavirus pandemic, these rules have changed. It’s not clear how long these changes will last, so it’s a good idea to check with your bank every once in a while to see if anything changed.
- Interest rates: Money market accounts offer variable rates, so they can go up or down.
- Things to look for: APY, compounding rate, fees.
- Additional things to know: The account could include a debit card and checks for withdrawals.
Investment accounts that can help you save for specific goals and expenses
When it comes to saving money, financial advisors may discuss specific accounts that you can use to save for certain goals and expenses. Although they are used for saving and could help your money grow, some of these may actually be investment accounts. These are some of the accounts you may come across:
- For education expenses: 529 Plans
- For retirement: Traditional and Roth IRAs
- For qualified medical expenses (including co-pays): Health Savings Account (HSA)
Types of savings accounts
Savings Account
Certificate of Deposit
No Penalty CD
Money Market Account
Savings Account
Certificate of Deposit
No Penalty CD
Money Market Account
APY
Variable
Can be fixed
Can be fixed
Variable
Minimum deposit
Maybe
Yes
Yes
Typically, yes
Can you add money to the account?
Yes
Typically not after the account is funded
Typically not after the account is funded
Yes
Can you withdraw money from the account?
Federal law has traditionally limited certain types of withdrawals, like electronic transfers, but in response to the coronavirus pandemic, these rules have changed
You may pay a fee if you withdraw the principal before the term ends
You cannot withdraw any money until the hands-off period ends, and withdrawals are all or nothing – you can’t make partial withdrawals
Federal law has traditionally limited certain types of withdrawals, like electronic transfers, but in response to the coronavirus pandemic, these rules have changed
Possible uses
To save money, while keeping funds in easy reach
To save money for time-bound goals, like a down payment
To let your emergency fund sit and earn more interest than it could in a traditional savings account
To save money and add to the balance, while keeping funds in easy reach (if needed, for say, an emergency)
Where you can open them
Banks and credit unions
Banks and credit unions
Banks and credit unions
Banks and credit unions
How you could use these different types of accounts to save
Depending on how much money you may be able to divert from, say, a checking account, there are a few ways you may be able to use different savings accounts to meet different goals.
Goal: emergency fund.
- An emergency fund is money you set aside in case if you have to cover costs you didn’t expect, such as a medical emergency or home repairs. If you’ve set this money aside in advance, it can work like a cushion and ease the stress it could otherwise have on your checking or general savings account. Many agree you should have three to six months’ worth of living expenses set in your emergency fund. Accounts that could be useful here include an online savings account or money market account if you want to add money as you go, and a no-penalty CD if you already have that money set aside.
Goal: a longish-term goal like a down payment or vacation.
- If you already have the money saved for a goal and you won’t need the funds for something else, a high-yield CD could help you earn money on the lump-sum you already have. If you fund a fixed-rate CD, your rate will stay steady throughout the term.
Goal: to benefit from different CD rates.
- A CD ladder is a savings strategy where you spread your money across multiple CDs with different maturity dates. The goal is to lock in high rates across multiple CDs, and as those CDs expire your cash will free up to either use or rollover into a new CD.
- A CD barbell involves splitting a pool of money and putting funds into short-term and long-term CDs. For example, you could open two CDs – one for short term and one for long term – and deposit half your money into each. This way you can take advantage of a higher rate, long-term CD but have the flexibility of the short-term CD.
Content to keep you on the path to financial well-being.
Are online savings accounts safe?
Yes, saving accounts are a safe bet because they typically are FDIC insured. While it’s important to make sure your bank is FDIC insured – don’t worry – it won’t be hard to find a bank that’s covered.
How does FDIC insurance work?
If your bank has FDIC insurance, the standard insurance amount is $250,000 per depositor, per insured bank, for each account ownership category.
For more information on what belongs in a given category according to the FDIC, check out the FDIC-recognized account categories here.
If you have a joint account with one or more people, such as your spouse, each person is covered up to the $250,000 limit. So for example, if you and your spouse are co-owners of a CD worth $450,000, your balance is fully insured.
Highlights:
- When signing up for a savings account, make sure it is FDIC insured
The standard FDIC insurance amount is $250,000 per depositor, per insured bank, for each account ownership category.
Learn more: FDIC: Deposit Insurance and Coverage
Open a savings account to support your goals
If you’re looking to open a Marcus Online Savings Account, Certificate of Deposit or No-Penalty CD, it takes minutes:
- Begin our secure (and fast) account opening process here
- Enter your information – including name, address, date of birth and Social Security Number
- Transfer funds – link to your account at another bank
This article is for informational purposes only and is not a substitute for individualized professional advice. Individuals should consult their own tax advisor for matters specific to their own taxes and nothing communicated to you herein should be considered tax advice. This article was prepared by and approved by Marcus by Goldman Sachs, but does not reflect the institutional opinions of Goldman Sachs Bank USA, Goldman Sachs Group, Inc. or any of their affiliates, subsidiaries or division. Goldman Sachs Bank USA does not provide any financial, economic, legal, accounting, tax or other recommendation in this article. Information and opinions expressed in this article are as of the date of this material only and subject to change without notice. Information contained in this article does not constitute the provision of investment advice by Goldman Sachs Bank USA or any its affiliates. Neither Goldman Sachs Bank USA nor any of its affiliates makes any representations or warranties, express or implied, as to the accuracy or completeness of the statements or any information contained in this document and any liability therefore is expressly disclaimed.
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