Tips for Choosing the Right Savings Account

The reasons for saving are as varied as the types of accounts you will find at financial institutions. People set aside money for emergencies or for future major purchases. Others save for a child’s education or retirement. Knowing the reason for having a savings account will help you choose the type you need, along with these tips for choosing the right savings account.

Consider one of the following types of accounts when you’re searching for a new savings account:

• Certificates of Deposit (CDs) – CDs are best for those leaving their money for short periods of time, as little as one month up to five years. The longer you leave the money in the CD, the higher payout you will receive. There are penalties for early withdrawal; if you know you won’t need your money for a while, a CD might be a good option for you.

• Money Market Funds (MMFs) – A good choice for an “emergency fund,” the MMF allows the owner to access the money through check-writing privileges, if the need arises. They are as safe as a bank money market account, but may earn more interest than a money market account.

• Money Market Accounts (MMAs) – This type of account would also be viable as an emergency fund. They are insured by the FDIC, and interest rates are usually competitive with MMFs. You may be able to access your MMA account online through your regular check account.

• Ultra Short-Term Bond Funds – This type of account carries more risk. In fact, instead of earning interest, you may actually lose money. If having a certain amount of interest added to the money you’re saving is important, a CD would be a much better choice. The possibility of earning more interest is there, but these accounts tie up your money from six to twelve months.

• Short-Term Bond Funds – If you know you won’t need your money for two to three years, the short-term bond fund is a good option. They take longer to mature but this type of bond will receive higher yields. The downside, however, is that the funds may fall if the interest rates rise. Weigh the risk against the possible gain to determine if this account is for you.

• Mortgage-Backed Bond Funds – Often referred to as Ginnie Mae funds, these funds are invested in mortgage-backed securities. They are very sensitive to the changes in the prime interest rate and can easily lose money if funds are removed prior to maturity. Keeping the money in this fund for the duration will allow it to earn the most money. Expect these funds to be tied up at least three years.

You may also find online savings account through institutions other than your local bank. These accounts, however, may require you to deposit more initially. They may also require additional fees for keeping the account for you, and they may require a higher balance. For these reasons, an online account may not be the best choice.

Research the various types of savings accounts. Then follow these tips for choosing the right savings account for you. You just might find that your local bank has what you’re looking for and what will bring you the most return for your money.

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