All types of savings accounts available
Before you can do anything like buying insurance, investing in stocks and even ended up purchasing a house due to shotgun marriage; one does has to save first before accumulating investment capital.
Saving money is the beginning, not the end of the story in the quest towards financial freedom.
As a result, all of us need to know all the types of savings options available first, before having excess capital to invest in other financial instruments.
All liquid cash that you have are usually placed in following savings options.
How much to place depend on how much you have, needs and wants in the foreseeable future of at least 2 years down the road.
All the benefits and drawbacks of each are as mentioned so that one can decide which to place based on own unique situations.
Beginning with the lowest interest rate of all,
1. Usual savings accounts/passbook accounts
This is the most liquid place to put money for short term day to day financial needs.
Advantages
a. No or very low minimum balance
b. Very easy to withdraw due to ATM machines available everywhere
c. FDIC insured of initial capital.
Disadvantages
a. Lowest rate of return, though higher than stuffing cash under the mattress.
2. Certificates of deposits
This required a minimum holding period of at least 6 months for most financial institutions.
Advantages
a. Guaranteed rate of return and higher than regular savings account.
b. FDIC insured of initial capital.
Disadvantages
a. Penalty of no returns if withdraw before stated deadline. May lose a tiny fraction of initial capital if withdraw early, depending on each financial institutions.
b. Required a minimum sum and a holding period of at least 6 months.
3. Interest earning checking accounts
This is good for those who need to write check regularly.
Advantages
a. Got guaranteed interest and higher than passbook accounts.
b. Can write check on it.
c. FDIC insured of initial capital.
Disadvantages
a. Required minimum balance, if not, will charge a service charge.
b. Other costs and fees associated with writing and banking in checks.
4. Money market accounts
Another type of savings account offered by banks and credit unions but got higher interest rate.
Advantages
a. Higher interests than regular savings/fixed deposits, though not guaranteed.
b. Can write checks but got limits like only allowed 3 per month.
d. FDIC insured of initial capital.
Disadvantages
a. Higher minimum balance required than a regular savings account.
b. No interest and need to pay service charge earned if go below minimum balance.
c. High minimum balance of between $1000 to $2500.
d. Only allow 3 to 6 withdrawals per month.
5. Money market funds
This is different from money market accounts despite similar in names as illustrated below.
Both have around the same market interest rates.
The only difference being that money market accounts is FDIC insured while money market funds are not usually, though this only difference is changed recently.
Advantages
a. Higher interests than regular savings/fixed deposits, though not guaranteed.
b. Can write checks but got limits like only allowed 3 per month.
Disadvantages
a. Higher minimum balance required than a regular savings account.
b. No interest and need to pay service charge earned if go below minimum balance.
c. High minimum balance of between $1000 to $2500.
d. Only allow 3 to 6 withdrawals per month.
e. No FDIC insured of initial capital.
6. U.S. savings bonds
This is more qualified as a form of investments or maybe somewhere between the lines of savings and investing.
Advantages
a. Guaranteed rate of return and higher than regular savings/certificates of deposit account.
b. Interest earnings exempted from income taxes.
c. FDIC insured.
Disadvantages
a. Lower rate of return than stated when redeemed within 5 years.
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I would recommend savings accounts that are insured by the FDIC. In the current economic climate there is little trust in the banks. However do remember to spread this around because the FDIC only guarantee $100k per person per insitution.