Certain savings accounts work best for certain financial goals that you have, whether that’s retiring with a comfortable nest egg or building up a reliable emergency fund. Find out which types of savings accounts you should get depending on your goals.
1. An Individual Retirement Account (IRA)
Do you want to start saving for retirement? Then, you should open up an individual retirement account (IRA). An IRA is a tax-advantaged savings account that allows you to collect funds for your retirement and help them grow with various investments like exchange-traded funds, mutual funds and stocks.
Any adult is free to open an IRA. It is not related to your workplace — this is the main difference between an IRA and a 401(k) plan. A 401(k) is an employer-sponsored retirement account. So, if your employer doesn’t offer it, you will not be able to sign up for one. An IRA doesn’t come with this restriction.
If you already have a 401(k) plan through your workplace, you should still consider opening up an IRA. Why? If you manage to max out your 401(k) contributions before the end of the year, you can add more savings into your IRA. And if you ever happen to leave the employer that your 401(k) is tied to, you can rollover all of the savings that you’ve made into your IRA. You don’t have to lose out on your nest egg just because you don’t work in the same location.
The Types of IRAs
You can choose between a “Traditional IRA” or a “Roth IRA.” A traditional IRA allows you to reap the tax advantages of the account right away. So, the contributions that you add to the account throughout the year will not be taxed. You will be taxed on your withdrawals when you use them later on in your retirement years.
A Roth IRA reverses this situation. In a Roth IRA, your contributions are taxed, which means that you won’t be taxed on your account withdrawals during your retirement.
Pick the IRA that suits your needs!
2. A High-Yield Savings Account
Are you living without an emergency fund? That’s not the best plan.
Without an emergency fund, you might not have enough room in your personal budget to cover a sudden expense, like a home repair or an urgent veterinary appointment. You’ll have to consider different means of covering emergency expenses, like borrowing money through an online personal line of credit. While an online personal line of credit could act as your financial safety net
safety net in a crisis, it’s not as effective as an emergency fund. You will have to follow a repayment plan to give back what you borrowed. And you will have to meet eligibility requirements to even apply for the credit tool. It’s possible that you won’t even get approved.
So, if you’re planning on building an emergency fund, which savings account should you use? A high-yield savings account. A high-yield savings account has a higher interest rate than a standard savings account, so your emergency savings will yield more passive growth over the course of the year. The more savings that you have in your emergency fund, the more you can protect yourself in an emergency.
Another benefit of a high-yield savings account is that it is accessible. You can make a withdrawal from the account at any time. You do not need any approval from the bank to make this withdrawal. You do not need to consider wait times. Your savings are liquid and easy to reach. This is essential for an emergency fund since you have no idea when you’ll have to facea surprise expense.
3. Certificate of Deposit (CD)
Do you have a savings goal that’s far in the future? Maybe you’d like to save up money for a big wedding in a few years’ time. Maybe you’d like to save up enough for a down payment for a house. Or maybe you want to go on your dream vacation where no expense is spared. These are all goals that you don’t expect to reach in the next year or two.
The best savings account for this scenario is called a Certificate of Deposit (CD). A CD is an interest-bearing savings account that locks away a lump sum for a set period of time to allow it to accumulate interest. Much like a high-yield savings account, the interest rate for a CD is higher than a standard savings account. The annual percentage yield (APY) can be as high as 5%. So, your lump sum should see steady growth while it’s locked away.
A CD isn’t just ideal for future goals because of its interest rate. It’s also inaccessible! Your lump sum is supposed to be inaccessible during the set time that you chose for the account — this could be as long as 5 years. If you try to access those savings before the maturity date, you will be charged an early withdrawal penalty. So, this feature can remove the temptation to make early withdrawals and diminish your savings pool. You’re locking it away and letting it grow.
You shouldn’t choose just any old savings account on a whim. Base your choice on your savings goals. Use these tips to make the right choice!