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You’ve got your basic checking and savings accounts—but what other account types can help you achieve your savings targets? How can you best protect your hard-earned money? As we’ve mentioned before, distributing your money across multiple accounts allows you to easily track each savings goal. For example, the funds reserved for an emergency should be kept separate from your dream vacation fund, and so forth.
Naturally, if you’re living paycheck to paycheck, you may be reluctant to split your savings into several accounts. But it’s during a challenging economy when saving should become your top priority. It’s crucial to familiarize yourself with the available options based on how much you can set aside right now. Whether you’ve been saving for years or suddenly have extra funds, here are the savings account types you should consider to help you meet your financial objectives.
Emergency Fund
An emergency fund, distinct from your other savings, is the cash you set aside specifically for unforeseen costs or financial difficulties, such as job loss, medical bills, or unexpected repairs for your car or home.
A common guideline is to target having enough funds in your emergency savings to cover six months of living expenses. However, as we recently discussed, it might be beneficial to increase your emergency fund to include nine months of take-home income.
When calculating the right amount for you, include necessary expenses such as housing, food, utilities, insurance, transportation, and debt payments. Avoid factoring in non-essentials like vacations, entertainment, or dining out when determining your 'emergency' amount.
Retirement Savings Accounts
Once your emergency fund is in place, it’s time to focus on saving for retirement. The two main options to begin are an IRA and a 401(k).
There are two primary types of IRAs: Traditional and Roth. In simple terms, with Roth IRAs, you pay taxes on your contributions now. With traditional IRAs, you pay taxes later. We've explained the differences in greater detail here, and we typically prefer Roth over traditional IRAs.
A 401(k) is a retirement savings plan offered through your employer, providing significant tax advantages. With a 401(k), the money you contribute isn’t just saved, it’s also invested. You have the option to invest in a variety of assets, such as stocks, bonds, and mutual funds. Your funds grow tax-free until you withdraw them, ideally after years of compounded growth. If your employer offers a 401(k), aim to contribute 10% to 20% of your paycheck.
Here are our guides to setting up an IRA and starting a 401(k).
High-Yield Savings Account
If you’re looking to save for goals that are a few years out—yet certainly before retirement—a high-yield savings account may be a good option. Even when savings account interest rates are low (though they are increasing now), a high-yield savings account is a smart way to earn returns on funds you plan to access in the next one to five years.
Imagine this: If you place $500 into a typical savings account, you'll earn just $0.50 in interest over the course of a year. However, with a high-yield account offering 2% APY, you’d earn $10 on that same $500—and over time, as both your balance and interest compound, the rewards grow significantly.
Check out our guide to selecting a high-yield savings account.
Top Alternatives to High-Yield Savings Accounts
If you’re looking for even better interest rates than those offered by regular or high-yield savings accounts, consider money market accounts and certificates of deposit as your main options.
Money Market Account
A money market account (MMA) allows you to earn higher interest rates compared to a regular savings account. What makes MMAs stand out is that they also offer features typically found in checking accounts, like debit cards and limited check-writing privileges. However, MMAs aren’t the best option for those with smaller savings to start, as they require a higher minimum balance, usually ranging from $5,000 to $10,000.
Certificate of Deposit
A certificate of deposit (CD) is another option for earning interest on your savings. Unlike traditional savings accounts, CDs are time-bound, often ranging from three months to five years. Longer terms generally offer higher interest rates. The catch is that withdrawing funds before the term ends comes with a penalty.
The key takeaway is that top-paying CDs offer better interest rates than high-yield savings accounts or MMAs, but they come with the downside of locking your money for a fixed period. MMAs provide easier access to your money, while a CD is more suitable for someone who can leave their savings untouched for a designated term.
Specialty Savings Accounts
For those looking for accounts designed with specific saving goals in mind, specialty savings accounts are an excellent option. You may want to set up an education savings account or a kids' savings account for minors under 18. These types of accounts often come with certain limitations on eligibility, ensuring the funds are used for a particular purpose. Such accounts can typically be found at banks, credit unions, brokerage firms, or investment companies.
If you’re considering opening multiple savings accounts, Nerdwallet offers a great range of online banking options to explore here.
