Banks as financial institutions have been around since ever and the primary service they have provided over the years, besides lending money is the management of savings accounts for their customers. The capital base of a bank is strengthened by the amount of deposits that its customers invest in it.
These deposits mainly come in the form of savings accounts. Here, you'll be introduced to the different types of savings accounts that you could open with banks in USA. Before we dive into all that, let me define what are savings accounts and how they serve the interests of account holders and the banks offering them.
What is a Savings Account?
A savings account is created through a contractual agreement of a customer with a bank or credit union, whereby, the financial institution offers an interest on the money deposited, along with other services. Depending on the nature of the account, there may or may not be a restriction on the minimum balance that needs to be maintained by an account holder.
The interest offered is of a compounding nature, being fractionally deposited to the account over time. Again depending on the nature of the account, there may be restrictions on the number of free cash withdrawals per month. A checkbook usage facility is also an optional feature that you may not find with all savings accounts.
When there is no limit on minimal balance requirements, the interest rate offered by the bank is low. On the other hand, savings accounts with high interest rates require that you strictly maintain a minimum balance. Most savings accounts come with a debit card, that lets you withdraw money in cash from automatic teller machines (ATMs).
Obviously, there is no limit on the number of deposits you may make in the account. Only withdrawals beyond a limit, may be charged. Majority of savings account deposits are protected by the FDIC (Federal Deposit Insurance Corporation), a federal government body, which was created for the purpose of safeguarding deposits of the US citizens.
Understanding Different Types of Savings Accounts
Although the range of services offered along with the account may vary from bank to bank, the three primary kinds of savings accounts offered by banks are the following.
Basic Savings Account
Also known as regular savings accounts or passbook accounts, these come with no limit on the number of withdrawals per month. Geared to be used for regular expenses, these accounts come with a low minimum balance demand.
Some are even deemed to be zero balance accounts with no minimum balance requirement whatsoever. They are equipped with a debit card and checkbook facility. Interest rates offered on the deposit are quite low with most being less than 1%.
Money Market Account
Offering a higher interest rate, money market accounts come with a substantial amount of restrictions. The minimum balance expected to be maintained in such an account is substantially high, compared to basic accounts, due to the high promised interest rate.
Only a fixed number of withdrawals are allowed for free, after which they are charged. The banks offering such accounts primarily invest in securities and promise high returns.
Certificate of Deposit Account
A third option is a certificate of deposit account, which locks in the account holder's deposit for a fixed period of time, after which it's returned with interest.
These accounts offer the highest interest rates and penalize all withdrawals that are made before the maturity of the certificate of deposit. It is a classic time deposit with lock in periods ranging from 1 month to more than 5 years.
If you are looking for an expense account that you plan to use for shopping, paying your bills and handling other such expenses, a basic savings account is what you are looking for.
In case you are looking for a bank account that earns you a decent interest rate and you don't intent to use it as an expense account for regular transactions, a money market account is what you need.
If you are looking for still higher returns, a certificate of deposit account is the ideal choice. Evaluate your exact requirements and choose the option which is most conducive for your plans.