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 many different types of interest-bearing accounts to choose from, and they all have differences in terms of ease of access to your cash, the annual percentage yields (APY) offered fees, and terms.
If you’re feeling confused or overwhelmed by all the different account options that are available these days, not to worry. Below we break down some of the most common types of deposit accounts, including the advantages and disadvantages of each.
Basic Checking and Savings Accounts
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.
These basic checking accounts rarely pay you interest, which means that it may not make sense to keep significant amounts of money in them.
You may be 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.
With savings accounts, you can’t usually write checks or get a debit card. You may, however, be able to get an ATM card that could be used to make transactions at any ATM within the bank’s network.
Savings accounts typically pay more in interest than a checking account, but they typically still don’t pay a lot. You may also be limited to making no more than six transfers or withdrawals from a savings deposit account per statement cycle, or pay extra if you go over your allowed transactions. While the Federal Reserve has lifted the six-transaction limitation on savings accounts due to the pandemic, many banks still impose some transfer and withdrawal limitations on savings accounts.
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Other Interest-Bearing Deposit Account Options
High-Interest Savings Accounts
Some banks offer special, high-interest savings accounts that can offer much higher rates than traditional savings accounts. Some institutions don’t charge monthly fees for these accounts while others do but will waive them if you meet a balance minimum.
As with all savings accounts, you may be limited in terms of the number of withdrawals or transfers you can make each month.
One good place to look for this type of account is at an online bank. Because these institutions typically have lower operating expenses than brick-and-mortar banks, they can often offer rates that can be considerably higher than traditional banks, and may also be less likely to charge monthly fees.
Money Market Accounts
A money market account is a type of deposit account that pays interest on deposits and allows withdrawals.
Money market accounts are similar to standard savings and checking accounts, except that they typically pay higher interest rates, require higher initial deposits, and may also require minimum balances, which can run anywhere from $100 to $10,000.
Some money market accounts require a minimum of $25,000 to earn the best interest rates.
Unlike standard savings accounts, some money market accounts also come with a debit card and checks, although institutions may require that they not be used more than six times per month.
You may want to keep in mind that a money market account is very different from a money market fund. A money market account is a federally insured banking instrument, whereas a money market fund is an investment account.
Typically, money market funds invest in cash and cash-equivalent securities. It is considered low risk but doesn’t have a guaranteed return.
Certificates of Deposits (CDs)
A certificate of deposit (CD) is a product offered by consumer financial institutions, including banks and credit unions, that provides a premium interest rate in exchange for leaving a lump-sum deposit untouched for a certain period of time.
The bank determines the terms of a CD, including the duration (or term) of the CD, how much higher the rate will be compared to the bank’s savings and money market products, and what penalties will be applied for early withdrawal.
CDs offer different term lengths that can range from one month to 20 years. Interest rates tend to be higher for longer terms. 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, 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, it’s a good idea to 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. 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 invest in CDs that feature fewer restrictions around withdrawals. Or, you could set up a CD ladder strategy where you buy CDs that have different maturity dates, ensuring access to funds as your CDs mature at staggered intervals.
High-Yield Checking Accounts
Though interest is normally associated with savings, and not checking, accounts, many financial institutions offer high-yield checking accounts.
These interest-bearing accounts, sometimes called rewards checking, work like regular checking accounts and come with checks and an ATM or debit card.
In return for getting a higher interest rate, these accounts often come with rules and restrictions. You may, for example, only earn the higher rate on money up to a certain limit. Any money over that amount would then earn a significantly lower rate.
You may also be required to make a certain number of debit card purchases per month and sign up for direct deposit in order to earn the higher (or rewards) rate and to avoid a monthly fee.
The benefit of an interest-bearing checking account is that you’ll always have access to your money and you may have fewer limitations on how you can use your account than you might with a savings account, all while still earning a bit of interest.
Cash Management Accounts
A cash management account is a cash account offered by a financial institution other than a bank or credit union, such as a brokerage firm. These accounts are designed for managing cash, making payments, and earning interest all in one place.
Cash management accounts often allow you to get checks, an ATM card, and online or mobile banking access in order to pay your bills. They also typically pay interest that is higher than standard savings accounts.
Cash management accounts also generally don’t have as many fees or restrictions as traditional savings accounts, but it’s important to read the fine print.
Before opening a cash management account, you may want to ask about monthly account fees and minimum balance requirements.
Some brokerage firms require a sizable opening deposit and/or charge monthly fees if your account falls below a certain minimum. Others will have no monthly fees and no minimums.
If you’re looking for a safe, convenient place to keep your money and also earn some interest while you’re at it, there are a number of great options to pick from.
You might consider opening a high-interest checking or savings account at a traditional or online bank, or, if you don’t need to access the money every day, you may also want to look into a money market account or CD.
Open a SoFi Checking and Savings Account
Another option is to open a checking and savings account, such as SoFi Checking and Savings®. With SoFi Checking and Savings, you can earn a competitive interest rate, spend, and save–all in one account.
You can also write checks, set up bill pay, and have access to 55,000+ (fee-free) ATMs worldwide.
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SoFi members with direct deposit can earn up to 3.75% annual percentage yield (APY) interest on Savings account balances (including Vaults) and up to 2.50% APY on Checking account balances. There is no minimum direct deposit amount required to qualify for these rates. Members without direct deposit will earn 1.20% APY on all account balances in Checking and Savings (including Vaults). Interest rates are variable and subject to change at any time. These rates are current as of 12/16/2022. Additional information can be found at http://www.sofi.com/legal/banking-rate-sheet