What is a Savings Account & How Does a Savings Account Work?

TYPE: Article
Share Print
Most Common Types of Savings Accounts

Saving money is a matter of personal preference. You could put your money under your mattress, in a piggy bank, or in your dresser drawer. But if you’d like to earn money on your money, you’ll want to open a savings account.

With a savings account, you can deposit your money in a bank, credit union or online account in exchange for the ability to earn interest on your savings. An account will keep your savings secure (most reputable banks and credit unions offer federal insurance on your funds) and you can save as much or as little as you like — so long as you meet the minimum balance requirements.

Your bank may use your savings funds to invest in other financial matters, including lending your money to other members of your community to buy cars and homes, or to start a business. When your financial institution makes money on these investments, they pass along a portion of the earnings to you.

If you don’t plan to spend your money immediately, a savings account is a great way to organize your financial life, earn extra money and work toward your financial goals. But not every savings account is exactly alike. There are a few important differences you should know to find the best type of savings account for you.

Eight Types of Savings Accounts

Some savings accounts offer immediate access to your money, while others pay extra interest as an incentive for long-term saving. But with so many savings options, how do you know which account is right for you? Get to know the eight most common types of savings accounts to find the right one for your financial situation.



Traditional or Standard Savings Accounts

A traditional saving account is the most common type of savings account. You can open a traditional savings account at most banks or credit unions, which means you can have it alongside your checking account if you use the same place for both.

  • Pros: A traditional savings account is simple and straightforward. You’ll have easy access to your cash, earn a little interest for your funds and your money will most likely be federally insured (you should always check with your bank or credit union to make sure).
  • Cons: A traditional savings account may limit the number of withdrawals you can make in a month and potentially charge monthly or yearly maintenance fees to keep your account active. Although you’ll earn interest for your savings, it may be at a lower APY than with other accounts.

High-Yield Savings Accounts

A high-yield savings account, typically offered by online banks, is a lot like a traditional savings account, but with one key difference. As its name suggests, a high-yield account usually offers a higher APY than traditional savings.

  • Pros: Many people choose a high-yield savings account to earn more for their money, while still getting the same benefits of a traditional savings account, including federal insurance. In addition to the higher APY, the online nature of these accounts makes them easy to manage, often resulting in lower fees.
  • Cons: Because high-yield accounts are typically online accounts, you may not be able to visit a physical location to deposit or withdraw funds. Money transfers may also require additional time, making your money less liquid.

Money Market Accounts

A money market account is another type of savings account offered by banks and credit unions. Financial institutions often invest money market funds in low risk, short-term assets to help your money grow at a guaranteed rate.

  • Pros: In addition to the benefits of a traditional savings account, including federally insured funds and easy access to your money, you may earn a higher APY in a money market account. You may also be able to write checks on your money market account funds, making it more of a hybrid savings/checking account.
  • Cons: Money market accounts usually require a minimum balance and may come with monthly fees. Although money market accounts typically offer a higher APY than other accounts, interest rates are tiered, so you may have to maintain a higher balance to earn the APY you want.

CD Account

A certificate of deposit (CD) account allows you to save for a set amount of time, while forfeiting immediate access to your money. When your deposit comes due, you earn guaranteed growth on your savings at an agreed-upon rate.

  • Pros: A certificate of deposit offers competitive rates — often much higher than you can find with traditional savings accounts. Because the investment term and APY are clearly spelled out, you can know exactly how much your money will grow. If you don’t need your money right away, a certificate of deposit may help you earn more than by simply keeping your money sitting in another account.
  • Cons: The biggest drawback of a CD is that you lose access to your money for the entirety of your deposit term. If you want to make a withdrawal before the deposit comes due, you may have to pay an early withdrawal fee. Also, if market rates change during your term, your funds might be trapped in an account with a less competitive rate.

Cash Management Account

A cash management account isn’t a typical bank or credit union savings account. Instead, it allows you to keep investment money in an online account, so you can make quick money transfers, while still earning interest and receiving federal insurance on funds.

  • Pros: With a cash management account, you can earn interest on money that you plan to invest — often at a higher APY than a traditional savings account. A cash management account may also offer higher federal insurance coverage limits and give you fast access to your funds for investing purposes.
  • Cons: You may be able to earn a higher APY with other savings options, such as a high-yield savings account. If investing isn’t one of your current financial goals, you may not be as interested in this kind of account.

Health Savings Accounts

A health savings account (HSA) is a dedicated account that lets you save pre-tax dollars to pay for healthcare related expenses only, including insurance deductibles, co-payments, medications, and other related costs.

  • Pros: An HSA gives you immediate tax savings on a portion of your income. You can also earn interest and grow your HSA dollars tax-free. It’s a convenient, affordable way to save and pay for medical expenses.
  • Cons: An HSA account limits how you can spend your money and may penalize you for using savings or withdrawing funds for any other purposes. While it can be a great option to earn interest for your health expenses, you won’t be able to use those funds for any other expenses.

Child & Student Savings Accounts

With a child or student savings account, you can help your children to save for college and other future expenses. Often a parent or guardian will serve as a joint account holder and make decisions about deposits, withdrawals, and transfers.

  • Pros: These accounts can be a great way to teach your kids about money. Your kids will earn interest on their savings, so they can watch their money grow. Many child and student accounts also come with low or no minimum balance requirements and minimal account fees. It also gives you the opportunity to invest in your child’s future.
  • Cons: Managing multiple accounts for you and your child requires extra time and effort. These accounts may also limit the number of transactions you can make in a month. Some child and students savings accounts come with monthly maintenance fees, potentially adding an expense that could be prevented by consolidating accounts.

Other Specialized Savings Accounts

If you want to save for a very specific purpose, such as retirement, a specialized savings account can give you benefits, including potential tax savings, above and beyond other savings options. As with other accounts, you can earn interest while saving for your financial goals, but specialized saving accounts often restrict access to your money and come with penalties for early withdrawals.

  • 401(k) Account: A 401(k) deducts pre-tax dollars from your paycheck to be contributed to your savings plan. Depending on your plan, your tax savings might come at the time you contribute or when you withdraw. Your 401(k) funds are invested to help you earn tax-shielded, tax-deferred returns and save for retirement.
  • Traditional IRA: A Traditional IRA, or individual retirement account, lets you make pre-tax contributions to your savings. These funds are invested to help your money grow. You won’t pay taxes on your earnings until you retire or withdraw retirement funds.
  • Roth IRA: A Roth IRA is similar to a Traditional IRA, except you pay taxes on the money you contribute to the account upfront. Your money then grows tax free.

How Much Money Should You Keep In Your Savings Account

How much you save is up to you, but you should always be aware of any savings restrictions on your accounts (including minimum balances and limits on transactions and withdrawals). You should also be aware of current federal insurance limitations and APY thresholds to help you get the most from your savings money.

When it comes to federal insurance, your money is only insured up to a certain amount. By diversifying your savings and opening multiple accounts, you may be able to fully insure every penny of your savings, giving you added peace of mind. You should also pay attention to any APY tiers that come with your accounts. If your money dips below a certain dollar amount, you may automatically earn a lower APY.

The amount you save also depends on your personal financial goals. If you’re saving for a family emergency, it’s wise to save three-to-six months’ worth of expenses. If you’re saving for a down payment on a home or to buy a car, make sure to find an account that can accommodate your specific savings needs.

Key Takeaways with Merrick Bank

Now that you know the pros and cons of each of the eight common savings accounts, it’s up to you to decide what’s best for you and your money. In many instances, the right answer might be to open and maintain multiple accounts.

A combination of savings, specialized, and retirement accounts can help you work toward several savings goals at the same time, while helping to keep your finances secure and organized, every step of the way.

As with any financial decision, take the time to ask questions and learn the benefits and drawbacks of each individual account. Compare multiple options to find the right combination of account features to help you get the most for your money.

With a little work, the right knowledge, and the right savings account, you can set up a personalized savings plan to help you achieve your unique financial goals.