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By Michelle Huffman
Savings accounts are relatively straightforward: You deposit cash into an account, and as that cash accrues, you earn interest.
But not all savings accounts are created equally, starting with that interest. The features of a savings account vary and so do the rules around minimum balances, account fees, deposits, withdrawals and rate tiers.
If you’re wondering how to choose a savings account that’s right for you — ideally one that carries a high interest rate and low requirements — this article will outline the important features of a savings account.
Savings accounts earn interest — their primary benefit over checking accounts — but even so, the interest earned could be very little. The national average is typically around .1% APY according to the FDIC. So a $10,000 balance with an interest rate of .1% APY will only earn $10 each year. However, high-interest savings accounts will earn many times that and a $10,000 balance could earn $100 or more each year.
A note on interest rates: Financial institutions will often advertise the Annual Percentage Yield (APY) over the simple interest rate, because it more accurately reflects the interest earned by taking into account compounding interest. With compounding, your account balance grows due to the interest over time, and that amount also earns interest. However, the basic interest rate and the APY are often very close, particularly when interest rates are low.
Most financial institutions require some kind of initial deposit to create the account. Typically these fees range from about $5 to $100 for standard accounts.
Many savings accounts have balance requirements, which is the lowest amount of money you must have in the account, typically assessed daily. If you drop below that amount, you may trigger fees. Look for an account that won’t punish you for dropping below a minimum.
Common fees include low balance fees, annual or monthly maintenance fees, dormancy/inactivity fees or ATM fees — though sometimes these fees are waived if you meet certain requirements such as maintaining a minimum balance, having an attached checking account. Look for an account that doesn’t make you jump through hoops.
Note: Federal regulations limit savings withdrawals to six a month (with a few exceptions) and withdrawals beyond that limit may incur a fee, up to $15 per transaction.
Some savings accounts offer a higher interest rate when you meet certain qualifications, such as maintaining a high balance or signing up for direct deposit or automatic transfers. Find an account that has a low threshold to earn interest.
Another important feature of any savings account is how accessible it is. You don’t need to have all your banking in one place and an online account could be the most convenient. Check into the process surrounding the savings account’s deposits, transfers, and withdrawals. Also see if the account includes online banking, mobile banking (preferably an app that allows mobile deposits), and ATM access.
If you have specific savings goals, such as a car, home, vacation, or wedding, you may want to open additional savings accounts beyond a primary or emergency savings account. These accounts can be labeled with the savings goal and can be filled by one-time or recurring transfers.
With all these features to consider, spending some time reviewing which account is right for you can make a difference in how much interest you’re able to earn.
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