Although investors may reap larger returns with higher-risk investments such as stocks,the idea behind a savings account is to allow some money to remain liquid and grow slowly with little or no associated risk. Online banking has expanded the variety and accessibility of savings accounts.
Key Takeaways
- Interest-earning accounts are generally low-risk compared to investments such as stocks.
- Savings accounts, CDs, money market funds, treasury bills, and bonds are options for investors.
- Interest rates vary among savings instruments.
1. Savings Accounts
Banks and credit unions offer savings accounts. The money in a savings account is insured by the Federal Deposit Insurance Corporation (FDIC). Restrictions may apply to savings accounts, such as service fees for more than the permitted number of monthly transactions. Interest rates for savings accounts are characteristically low, but investors can explore online banking institutions that may provide higher-yielding savings accounts.
2. High-Yield Savings Accounts
High-yield savings accounts are a type of savings account, complete with FDIC protection, which earn a higher interest rate than a standard savings account. It may require a larger initial deposit and access to the account may be limited. Many banks and online institutions offer this type of account to valued customers who have existing accounts.
The maximum insurable amount in an FDIC-insured bank account is $250,000 per depositor, per bank.
3. Certificates of Deposit (CDs)
Like savings accounts, Certificates of Deposit (CDs) are available through most banks and credit unions and are FDIC-insured, but generally offer a higher interest rate, especially with larger and longer deposits. You will have to keep the money in the CD for a specified amount of time; otherwise, a penalty is assessed.
Popular CD maturity periods are six months, one year, and five years. Any earned interest can be added to the CD if and when the CD matures and is renewed. A CD ladder allows you to stagger your investments and take advantage of higher interest rates.
4. Money Market Funds
A money market mutual fund is a type of mutual fund that invests only in low-risk securities. Money market funds typically provide a return similar to those of short-term interest rates. Mutual funds, brokerage firms, and many banks offer money market funds. Interest rates are not guaranteed, so a bit of research can help find a money market fund that has a history of good performance.
Money market funds are not FDIC-insured. They are regulated by the Securities and Exchange Commission's (SEC) Investment Company Act of 1940.
5. Money Market Deposit Accounts
Banks offer money market deposit accounts and typically require a minimum initial deposit and balance, with a limited number of monthly transactions. Unlike money market funds, money market deposit accounts are FDIC-insured. Penalties may be assessed if the required minimum balance is not maintained or if the maximum number of monthly transactions is surpassed. The accounts typically offer lower interest rates than certificates of deposit do, but the cash is more accessible.
6. Treasury Bills and Notes
U.S. government bills or notes are often referred to as "treasuries" and are backed by the full faith and credit of the U.S. government. Treasuries are exempt from state and local taxes and are available at different maturity lengths. Bills are sold at a discount. When the bill matures, it will be worth its full face value. The difference between the purchase price and the face value is the interest. For example, a $1,000 bill might be purchased for $990; at maturity, it will be worth the full $1,000.
Treasury notes are issued with maturities of two, three, five, seven, and 10 years and earn a fixed interest rate every six months. In addition to the interest, the T-notes can be cashed in for the face value at maturity if purchased at a discount. Both Treasury bills and notes are available at a minimum purchase of $100.
7. Bonds
A bond is a low-risk debt investment issued by companies, municipalities, states, and governments to fund projects. When you purchase a bond, you are lending money to one of these entities. In exchange for the “loan,” the bond issuerpays interest for the life of the bond and returns the face value of the bond at maturity. Bonds are issued for a specific period at a fixed interest rate.
Each of these bond types involves varying degrees of risk, as well as returns and maturity periods. Also, penalties may be assessed for early withdrawal, and commissions may be required. Note that, depending on the type of bond, it may carry additional risk, as with corporate bonds, wherein a company could go bankrupt.
How Can I Buy a Treasury Bill?
You can buy U.S. Treasury bills from the government through the TreasuryDirect website. You’ll need to register and open an account. When you do, it will function like a brokerage account that holds your bonds. T-bills are auctioned on a regular schedule.
What Accounts Are FDIC Insured?
FDIC insurance covers savings, checking, and money market accounts, and certificates of deposit (CDs). The FDIC does not insure investment products such as stocks, bonds,mutual funds (including money market mutual funds), and annuities.
What Is the Savings Account Withdrawal Limit?
Due to a federal law calledRegulation D, there is a savings account withdrawal limit. You can make no more than six withdrawals per month.
If you're focused on future-proofing your finances, there are more resources here to help protect your assets.
The Bottom Line
Savings accounts allow you to save money while earning modest, low-risk returns. Due to the large variety of savings vehicles, a little research can go a long way in determining which will work hardest for you.
