There are many types of savings accounts, with different accounts being best in different situations. As you consider how and why you want to save money, you'll be able to choose the best savings account for your current situation. Many people have more than one type of savings account to meet their various savings needs.
Regular Savings Account
A regular savings account is a good place to start saving. There's a low minimum balance requirement on a regular savings account; however, the interest rate you earn is also quite low. A regular savings account works well if you're saving to pay for something in the near future, such as annual premiums or savings for Christmas. Some banks will transfer money from a regular savings account into your checking account in place of overdraft protection, which can save you money.
Money Market Savings Account
A money market savings account has a higher account minimum balance -- usually over $1,000. The interest rate on this account is tied to the money market index, and is usually higher than a regular savings account. This is a good account for an emergency fund, or long-term savings that you'll need to access in the near future. Some people use this account to save up for a car, or for family vacations. It can also be used to save for a downpayment on your home.
Certificate of Deposit
A certificate of deposit (CD) is a savings product that allows you to lock in a set interest rate for a certain length of time. CDs have specific term lengths that can range from 2 months to 5 years, or longer, and during this time you won't be able to access your money without incurring a penalty. Usually such penalties require you to forfeit the entire amount of interest earned. A CD may have a higher interest rate than a money market account, and it's a good option if you know you won't need the money for a certain time. Some people put IRAs, or a portion of their home downpayment, in CDs.
Alternatives to Savings Accounts
If you've met your basic savings needs, such as your emergency fund, and are saving for future expenses, then you may be ready to move on to other types of investments to begin building wealth. These investments are riskier because the FDIC doesn't guarantee them, but the rate of return is much better. Alternatives include stocks, bonds and mutual funds. You should contact a financial planner to learn more about these products and determine which ones are the best ones for your savings and wealth-building goals.