3 Best Savings Account Types Every Arizonan Should Have
If you're building an emergency fund, saving for a big purchase, or getting money together to invest, using an insured savings account can put you on the right road. It may seem like the best option to hide that cash under your mattress, but there are so many other safe and valuable choices to consider.
Most banks and credit unions offer a variety of savings accounts. Some of the best savings account options include typical savings accounts, high-yield accounts, money market accounts, and certificates of deposit (CDs).
Getting Interested in the Best Savings Accounts
With a savings account, you earn interest, or a percentage of your balance, on the money in your account. Credit unions often call these 'dividends' and pay a rate on both savings AND checking accounts.
Earning dividends or interest means that your saved money is constantly growing. How quickly your money grows depends on the interest rate the credit union pays—which varies by account type and is set by the institution. These rates fluctuate based on several factors - like what other banks pay for similar accounts, what the market is doing, how high interest rates are on the lending side, and the Federal Reserve Bank policies. The interest rate is usually shown as a percentage, just like interest rates you pay out when you borrow money with a loan.
When banks advertise the interest rates on their savings accounts, they tell you the nominal rate and the annual percentage yield (APY). The nominal, or named rate, is the rate they pay. The APY is what you earn over the course of a year, expressed as a percentage of your principal. This includes funds earned via compound interest. The amount of money you earn depends on whether the account pays simple or compound interest, and how often the interest is compounded.
Simple interest is calculated annually on the amount you deposit. With compound interest, which can be paid daily, monthly, or quarterly, the interest is added to your principal to form a new base on which you earn the next round of interest. This is when you're able to earn interest, on your interest!
Simple Interest: 1% rate on $10,000 = $100
Compound Interest: 1% rate on $10,000, compounded daily = $100.50
Here's a quick tip to help you determine whether the interest you're earning is simple or compound: If the nominal rate and the APY are the same, you're earning simple interest. If the APY is higher, the interest is compounded.
Play with the numbers using our simple vs. compound interest calculator:
Insured or Bust
For everyday savings, the average Arizonan is going to want to have a federally insured savings account. All of the savings accounts we're discussing in this article are insured by the federal government - either the NCUA (for credit unions) or the FDIC (for banks). This means that your money is safe and if something were to go badly with a bank or credit union - which is very unlikely - you are guaranteed your funds are insured up to at least $250,000 or more, depending on the ownership of your account (joint owner, beneficiaries, etc.)
Now, if you already have a nest egg saved up for everything imaginable, and you want to start building wealth more aggressively by taking on more risk, you could consider investing. It's helpful to chat with a financial advisor before doing so, because investments come with the risk of losing some of your money, even though you could possibly earn much more! No risk, no reward, right?
Best Savings Account Type 1: Regular
The most basic accounts, where you can deposit and withdraw money at any time, are called regular savings accounts or statement savings accounts. What that means is that any activity in the account—deposits, withdrawals, fees, or interest earnings—and your current balance are reported in a printed or online account statement, usually once a month. This is similar to the monthly statement you receive on your checking account or credit card.
You can earn interest on a regular savings account, but some institutions have requirements you must meet in order to earn. For example - holding a minimum required balance in the account (ours is only $5). The $5 minimum is Copper State Credit Union's only requirement, but other institutions could have more - such as having an automatic deposit set up, holding a higher minimum balance, or being in an age category such as under 17 or over 65. If you do meet these requirements - great!
The downside is, the rates paid on these types of accounts tend to be pretty low. Rates on basic savings accounts tend to go up only when inflation (rising prices on goods) is incredibly high. In the 1970s, you could earn 8% APR or higher on a savings account! In 2021, you're likely to get less than one hundredth of that... savings accounts rates now are hovering around all time lows, such as 0.01% APR. But don't be discouraged, saving money will always benefit you in the future, even if it isn't earning or growing much.
Another thing to keep in mind is that if you don't meet certain criteria, you could be charged a monthly maintenance fee just for having your savings account.😱 Avoid penalties like this by opening a free savings account.
Regular Savings is the best savings account option for:
- Short-term savings goals such as large new purchases or vacations
- Savings that you want to keep federally insured
- Intermittent expenses such as new tires, insurance payments, holiday savings, birthdays, and more
- Emergency savings fund: quick and easy access to your insured funds is key if a real emergency does pop up. You don't want this locked away in a risky investment!
Copper State CU allows you to open as many savings accounts as you want, for free! This helps if you're saving up for multiple goals. If you're having a hard time saving at all, you may want to download our budget plan eBook or our free budget spreadsheet download. This can help you conjure up some funds for saving and allow you to pay yourself first (like you deserve!) Or, watch our webinar on easy budgeting to have someone walk you through the process step-by-step.
Best Savings Account Type 2: Money Market Accounts
Most banks offer hybrid accounts—part checking, part saving—called money market accounts (MMAs) or money market deposit accounts. They're similar to money market mutual funds, but have the advantage of federal insurance, like we mentioned above.
MMAs typically pay higher interest rates than regular savings accounts, and may offer blended or tiered rates, which means you can earn an even higher rate on large balances or on part of your balance over a certain level. There are even options for businesses - business money market accounts can be helpful for small business owners.
And you can usually make a limited number of cash transfers or write a limited number of checks—generally a total of three—against your account each month.
The catch is that the minimum required deposit is often higher than with a regular savings account. If your account falls below that mark, you may face substantial service fees, forfeit your interest, or both. Luckily, Copper State CU does not charge fees for our money market accounts, as a benefit to members.
Money Market Accounts are the best savings account for:
- Higher dollar amounts of savings
- Savings that you want to keep federally insured
- Savings you'll occasionally want to pay out via check
- Emergency savings funds, as long as your financial institution gives you quick and easy access to the account if needed
Best Savings Account Type 3: Certificate Accounts
Certificates of deposit (CDs)— sometimes called share certificates at credit unions—are high-end savings accounts known as time deposit accounts. They generally pay interest at a higher rate than other bank or credit union accounts, so it should come as no surprise that there are some strings attached.
What makes CDs different from regular savings accounts is that they're time deposits. That means that when you open a CD you agree to leave your money in there for a specific term, or period of time. You also agree that if you withdraw money from the CD before it matures when the term ends, you'll forfeit some or all of the interest you would have earned. So this isn't the best savings account for everyone, but it is a great option if you can leave the money where it is for a little while.
Typical terms include six months, a year, a couple years, or five years - to name a few. But the term may be any period you and the bank agree on. The longer the term, the slightly higher the interest you may earn. There may be a minimum deposit—often $500—and some banks may pay slightly higher rates for large deposits. Check out Copper State CU's CD rates and terms to learn more.
When a CD matures, you can roll over the money into another CD, transfer your money to a different account, or have the bank or credit union send you a check. But you must tell the financial institution what you want it to do by the deadline it sets, or the decision will be made for you. If you do nothing, your money is usually reinvested into another CD with the same term. So speak up about it!👍
What's more, some institutions will allow you to customize a share certificate (CD). If you have bills that come due at specific times, such as tuition payments that you must make in August and again in January, your credit union may agree to let you open one or more CDs with a special term that will mature when you need your money, even if it's not the conventional six- or twelve-month period. They may even offer a slightly better rate than a shorter CD. That way, you'll not only have the money when you need it, but it will be easier to resist the temptation to spend it on something else.
CDs are the best savings account option when:
- Savings are needed on a specific date in the future
- Savings can afford to be 'locked away' for a certain period of time (at least 3-6+ months)
- You want to keep your funds federally insured
- You want to earn a bit more interest on your savings than a typical account
As you can see, every Arizonan has the need for one or more savings accounts. There are 3 primary insured account types out there that can benefit you, depending on what type of savings you're looking for! The most important thing to remember is don't stop saving, no matter what the rates are. And if you aren't saving yet - today is the perfect day to start.
This article is intended to be a general resource only and is not intended to be nor does it constitute legal advice. Any recommendations are based on opinion only. Rates, terms and conditions are subject to change and may vary based on creditworthiness, qualifications, and collateral conditions. All loans subject to approval.