Many of us are improving retirement savings thanks to default enrollment options, a slew of great educational resources, and better dialogue with each other on financial issues. But short-term savings goals can sometimes seem harder to achieve because of all the potential products out there. It can also be easy to let everyday expenses eat away at a smart savings cushion. A 2018 survey by the Federal Reserve found that only about 40 percent of families in the U.S. have savings equivalent to the generally recommended benchmark of three months of living expenses.
When picking a bank for a savings account, look for a financial institution that is insured by the Federal Deposit Insurance Corporation (FDIC). This is one of the key elements that makes savings accounts different from investment accounts. In a federally-insured savings account, you’re almost always earning potentially less interest than your investment accounts. This is because investments are not insured and do not guarantee any returns. Investments pay a higher interest rate to compensate you for taking more risk with your money.
However, don’t let lower rates or the number of options keep you out of a short-term savings plan. The smartest financial plan has both longer term retirement planning and savings for closer horizons. Think of these products as some of the possible building blocks to create your short-term savings strategy.
Traditional Savings Accounts
This is the regular, vanilla savings account that you can get at almost any traditional bank. (Traditional still meaning those who are exclusively online — often they have the best interest rates!) Federal laws limit the number of transactions you can have in a savings account — including transfers and online activity.
Be sure you understand exactly how often you can access your funds and if this aligns with your savings goals. You’ll also want to be sure that you understand any potential fees associated with in-person assistance on your account if you ever need it.
High Yield Savings
A little different from your average savings account, high yield savings are specifically geared to pay you a higher interest rate, with some restrictions. In fact, some of these products can require minimum balances or limit transactions in trade for that higher rate you are earning.
That said, if you have a good chunk of change that you need to park and are not interested in risking it in the market as an investment, a high yield savings can offer you an opportunity to earn more. One way to check out if the fees or maintenance requirements still make the account worth it is to use a compound annual interest calculator, to see exactly how much you’ll be earning versus how much it will cost you.
Money Market Accounts (MMAs)
Money Market Accounts, sometimes shortened to MMAs, often pay a higher interest rate than your traditional savings account, but they are structured a little differently. MMAs are different than money market funds which are actual investment accounts and not insured or guaranteed. This is an important distinction to understand, but one that you’re not likely to trip over getting into the product since they’re often sold by very different areas of financial firms.
You usually need a little bit higher balance for an MMA — most start at $1,000 to earn this higher rate bracket. Further, you’re still limited to six withdrawals a month for certain account and transaction types so this can’t be treated like a checking account.
Certificates of Deposit (CDs)
CDs are savings accounts that typically pay a little bit higher rate than your traditional savings account, but require you to “lock up” your money for a set period of time. This can be anywhere from a month for very short term savings (more commonly a few months) to a year or more. Allowing your bank to use your capital for this longer period of time is the reason they’ll pay you more interest, but this lock up means that you can’t access your money during that time.
If you do end up needing to withdraw in an emergency or unexpected scenario, you’ll likely end up paying a hefty fee and may possibly have to forfeit some interest. These are useful, however, if you’re building for longer term savings goals like a big purchase, know that you don’t need immediate access to the funds.
FDIC Insured 529 College Savings Accounts
Ready to start college saving for the little ones? A 529 plan pays for advanced education expenses, but that can include things ranging from tuition to room and board for students enrolled at least part-time. These plans are generally tax-deferred investments, however, a number of states now offer FDIC-insured options, meaning they act more like savings accounts and invest your money in lower risk U.S. government securities.
Again, the trade off means that lower risk likely equals lower interest rate returns, so it’s important to consider whether this makes the most sense for your family as a savings account or investment account. Read the fine print to be sure you know exactly what you’re getting.
Health Savings Accounts (HSA)
This account is a tax-free savings plan for health and medical-related expenses. Somewhat in the same way that contributions to your 401K are not taxed as they go into your account, neither are the savings you put into an HSA. Many health insurers and employers offer them adjacent to certain types of high deductible insurance plans so check with your provider to see if they are offered.
They can be a great way to plan for medical expenses — both expected like planning for a family, an unexpected like trips to the ER or hospital. Even everyday items like contact lenses and prescriptions can be paid for with your HSA. Again, spending money on these expenses pre-tax is like getting an extra boost in your savings so they can be a useful niche savings product to add to your overall plan.