Maybe you’re saving money for a down payment on a home, or perhaps you’re planning a trip to France to see, once and for all, just how many croissants you can eat in one day. But where are you going to put that cash as you sock it away? After all, you probably want to earn interest on that money while you’re waiting to use it.
That’s where interest bearing accounts can come into play. There are actually a few types of interest bearing accounts to choose from, and they have differences in terms of ease of access to your cash, the annual percentage yields (APY) offered, fees, and terms.
If you’re like a lot of people, you’re likely as confused by all your interest-bearing account options as you are by all the toothpaste choices at the drugstore. Don’t worry—picking between the various types of accounts is easier than trying to figure out what the difference between peppermint, spearmint, or cool mint is.
Basic Checking and Savings Accounts
First, let’s talk about what’s not a high-yield account. A checking account usually has very low monthly account fees or no monthly account fees. It allows you to write checks and get an ATM card or debit card. You might get access to online and mobile banking apps so that you can mobile deposit money and pay your bills, but you could be limited to a certain number of transactions or pay extra if you go over your allowed transactions.
These basic checking accounts rarely pay you interest, which means that it doesn’t make sense to keep significant amounts of money in them. You’re better off using them just as an account to deposit your paycheck into before you either use that money to pay bills or transfer your cash into other accounts to save it.
On the other hand, most savings accounts don’t charge account fees, although some require that you have a certain minimum balance and if you go below that amount they will charge you a fee. This minimum balance varies from bank to bank but could be as little as $300.
With savings accounts, you can’t usually write checks or get an ATM or debit card for your account so you can’t access your money as easily once it’s in a savings account. You’ll have to either go into a branch or use online banking if you want to transfer money or pay a bill from your savings account.
Savings accounts typically pay more in interest than a checking account, but they still don’t pay a lot. Traditional banks will often pay under 1% APY whereas some online banks can will pay up to 2% APY or more. If you’re looking to park your money somewhere for a while, you might be better off getting a money market account, CD, or investing it to earn a higher interest rate.
Interest-Bearing Investment Account Options
Money Market Accounts
A money market account is an investment account. Usually your money is invested relatively safely, potentially in government securities or commercial paper. This type of investment could be a good fit If you don’t need to frequently access your money.
While it depends on the institution, you might need to have at least $1,000 (or more) to open a money market account. Incentives are sometimes available for higher investments, for example for accounts with balances over $25,000.
Money market accounts often have restrictions on the number of withdrawals you can make per month—maybe you’d be limited to six per month, and only three check withdrawals.
Certificates of Deposits (CDs)
There are a few types of CDs. Some are traded on the market as securities, and others are offered by banks, and aren’t considered securities. While you might think of CDs as those things you (or your parents) used to listen to in the 90s, in the financial world, CD stands for Certificate of Deposit. In contrast to some other investments, CDs have a fixed maturity date, meaning you can’t easily take your money out before that date.
CDs offer different term lengths that can range from one month to 20 years. Interest rates tend to be higher for longer terms. For example, you might earn 1% to 2% for a 12-month CD, and 2% to 3% for a five-year CD. Some CDs have a minimum deposit amount that can be over $1,000 or more, though there are banks that offer CDs in any amount.
Sounds good? Well, it is if you know you won’t be touching that money for the entire term length. If you suddenly need the money because your brother-in-law is looking for investors in his mini-golf business and you’ve always wanted to own a mini-windmill you can putt through, then you will likely have to pay a penalty to withdraw money early from your CD.
While you can get no-penalty CDs or early withdrawal CDs, make sure to read the fine print as many of these accounts only have no penalties or withdrawal fees if you take money out during the first few weeks after you invest your money. In return for that withdrawal window, you often give up a significant amount in APY.
If ease of access is a concern, it might make sense to find a CDs that features fewer restrictions around withdrawals. Or alternatively, you could set up a CD ladder strategy where you buy CDs at regular intervals, ensuring access to funds as your CDs mature at a staggered intervals.
Interest-Bearing Deposit Account Options
Interest bearing checking accounts aren’t securities or investment accounts. These are bank products, with incentives. If basic checking is the like a basic car model, then an interest-bearing checking account could be the Rolls Royce of checking accounts. That’s because you usually get a lot more options for how to use your money.
You will still be able to write checks and use an ATM or debit card, but you likely won’t have a transaction limit. In return for this freedom, you’ll probably either pay a higher monthly fee or be required to maintain a higher minimum balance in your account.
The benefit of an interest-bearing checking account is that you’ll always have access to your money.
The benefit of an interest-bearing checking account is that you’ll always have access to your money and you’ll have less limitations on how to use your account—all while still earning a bit of interest.
Cash Management Accounts
What’s a cash management account? Another non-investment account, a cash management account might combine benefits of a lot of other kinds of non-investment interest-bearing accounts into one package.
Cash management accounts work very similarly to bank accounts in that you can often get checks, an ATM card, and online or mobile banking access in order to pay your bills.
They are sometimes offered by a brokerage firm or other financial institution. These accounts often have no fees, no minimum balances and allow you to handle your checking needs. The best news? It pays interest! In fact, some can pay 1% or more APY.
Not only that, they typically don’t have as many fees or restrictions as other accounts. So they’re perfect for someone who needs flexibility and also wants to earn more interest.
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