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Like many Americans, you might be hoarding your savings a little more than normal right now.
But where is the best place to keep that money?
From a traditional savings account to CDs and MMAs, it’s a confusing landscape on where to store money you want for safekeeping. New low interest rates are complicating the decision, too.
According to the Bureau of Economic Analysis, Americans were saving between 7.4% and 8.8% of their disposable income throughout 2019. A similar trend continued for the early part of 2020, until April, when this number skyrocketed to 32.2%. Interestingly, this statistic shows people were saving significantly less of their savable income before the pandemic-economy took hold.
“People responded to panic in March with a very high degree of uncertainty,” says Tim Shaler, the economist-in-residence at iTrustCapital, a digital asset IRA trading platform, “We saw people hoarding cash responding to their fear we might be in a situation where they need a lot of cash on hand.”
If the money you’re trying to save is sitting in a traditional savings account, you could be doing more with it while still keeping it safe and having access. That’s where a modern savings account comes in.
What Is a Savings Account?
For many, a savings account is secondary to your checking account at your bank of choice. Savings accounts mainly serve the purpose of storing your money, while your checking account is used for monthly expenses and everyday transactions. Since most people keep both accounts at the same place, you can easily transfer money between the two accounts as needed.
But not all savings accounts are the same these days. For example, you can opt for a high-yield savings account, which typically offers a much higher interest rate than traditional savings accounts.
Traditional Savings Account
The textbook definition of a savings account is a bank account that earns interest. Traditional savings accounts have pretty low savings rates. According to the Federal Deposit Insurance Corporation (FDIC), the current national savings rate is .06%.
A traditional savings account is one that you’ll find at a big established bank, and it’s often linked to a checking account at the same institution.
High-yield savings accounts offers significantly higher interest rates than traditional savings accounts. If you have $1,000 in a high-yield savings account with a 1.10% APY, you’ll earn $11 in interest over 12 months. A traditional savings account will earn you just $0.10 for that same amount over the same time period.
High-Yield Savings Account
Online savings accounts, or high-yield savings accounts, have become popular in recent years because of the higher interest rates they offer compared to traditional savings accounts. Without the overhead of maintaining physical branches, online banks can offer better incentives than traditional brick-and-mortar banks. As of mid-summer 2020, the best of these interest rates range from about 1.00% to 1.21% but fluctuate based on the economy and the individual bank.
A high-yield account is the perfect place to store an emergency fund.
“This could be a few thousand dollars or even tens of thousands of dollars, and it’s money you shouldn’t be using unless you absolutely have to,” says Kali Roberge, chief operations officer at Beyond Your Hammock, a financial planning company in Boston.
Compared to transferring between a savings and checking account at the same legacy brick-and-mortar bank, there may be a waiting period of a few days when you move money from an online savings account to a traditional checking account. Keep this in mind if you could be in a situation where you need the money at a moment’s notice.
Other Savings Accounts
In addition to traditional and high-yield savings accounts, there are other options for savings out there, like CDs and MMAs.
Certificate of deposits, or CDs, are a type of savings account in which you deposit money for a specific period of time and generally earn a higher interest rate the longer you keep it in the CD. The downside here is you lose the interest rate and will likely incur fees if you need to take the money out early.
Typical terms of CDs range from three to 60 months. MMAs, or money market deposit accounts, are similar to high-yield savings but typically come with higher initial deposit minimums. A key difference with MMAs is they may give account holders access to checkbooks or debit cards.
Savings Account vs. High-Yield Account
A high-yield savings account with an APY of 1.00%, is a considerably better alternative for savers than a traditional savings account with an APY of only 0.01%.
Here’s how much money you can earn with a high-yield savings account that has an APY of 1.10% compared to a traditional savings account:
Potential Earnings Over 12 Months
|Example Savings||Traditional Savings Account (0.01%)||High-Yield Savings Account (1.10%)|
|$500||$0.05 (5 cents)||$5.50|
|$1,000||$0.10 (10 cents)||$11|
|$5,000||$0.50 (50 cents)||$55|
Rates are unusually low right now due to the uncertainty around the pandemic and ensuing recession.The Federal Reserve lowered interest rates in March and again in April to stimulate spending.“What this means is money essentially is worth less, and banks are paying less for you to keep your money sitting in savings accounts,” says Jully-Alma Taveras, a NextAdvisor contributor and creator of Investing Latina.
Experts agree interest rates will stay low for the foreseeable future, most likely for the next year or so.
Still, high-yield savings accounts are a much stronger option than a traditional account for earning interest, Taveras said.
With any type of savings account, make sure to look for banks that are FDIC or NCUA insured (so your money is protected in the event the bank fails) and take note of any minimum deposit amounts required.
Why Have a Traditional Savings Account at All?
A high-yield savings account will grow your savings faster than a traditional savings account, so they are a good bet for most people. Unless you are committed to a traditional savings account for reasons that make sense for you personally, we recommend putting your savings in a high-yield savings account.