Remember when you were ten years old and you started a savings account and had your very own pass book? You put your allowance or paper route money into the account and earned seven percent interest. You thought it was so cool that after a year your fifty dollars became $53.50. Of course, at that time your parents were paying eighteen to twenty percent on their mortgage, or more.
What to Consider in Choosing an Account
If your concern is maximizing your savings returns in today’s day and age of prime at 3.25 percent, you have to be studious and determine which type of account best suits your needs. You have to consider the following:
- Rate of return
- Liquid or fixed?
- Minimum balances
- Monthly fees
- Federal regulations on type of account
Account Types and Their Characteristics
Most savings accounts pay interest in basis points instead of full percentages. There are minimum balances to consider, as well, and monthly fees that are far greater than the tiny interest they pay. Money Market accounts are similar to savings accounts but are designed for much larger sums of money. They usually pay between two and three times the interest of a straight savings account, depending on your principal. Smaller sums pay less interest. Savings accounts and Money Market accounts are liquid assets, which means you can access the money any time you want.
Regulation D, however, controls the number of transactions you can have on these types of accounts in a month. These are not Demand Deposit Accounts, or DDAs, where you have unlimited transactions. If you go over six transactions of certain types in a calendar month, your account could suffer consequences ranging from removal of interest to closure of the account.
You also have the option of certificates of deposit, or CDs. These are fixed, non-liquid assets where the money is tied up for a predetermined period of time. There are penalties for early withdrawal. CDs generally pay the same as Money Market accounts, and sometimes much more. You will never have the returns of a high risk mutual fund portfolio, but savings type accounts offer unparalleled safety. Peace of mind is worth a lot.
As a rate comparison, remember that savings accounts offer the least growth. Money Markets and CDs offer more interest, but come with different stipulations. Check around and you will find what you need.