You could be earning money while you’re busy living your life. Yes, really!
That’s exactly what savings accounts do—they turn your money into an earnings engine, generating extra cash while you sleep, work, or binge-watch your favorite shows.
You won’t get rich off the interest you earn in a savings account, but it can help you grow your money passively over time versus leaving it in a regular checking account.
But with traditional accounts, high-yield options, money markets, and certificates of deposit (CDs) all claiming to be the “best” choice, figuring out how to choose a savings account can feel like trying to pick the right Netflix show to fit your mood on a Friday night.
Overwhelming? Absolutely.
The trick isn’t finding the “perfect” savings account: it’s finding the one that fits your life, your goals, and your financial situation.
We’ll delve into the differences between checking vs. savings accounts, what each type of savings account offers, help you figure out which features matter most to you, and share some simple strategies to maximize savings, no matter which account you choose.
Checking vs. Savings Accounts
To understand types of savings account options, it helps to know how they differ from checking accounts. While both are offered by banks and credit unions and allow you to deposit money, they serve different purposes in your financial life.
Let’s look at the differences between checking vs. savings accounts.
Checking Accounts
Think of your checking account as your financial workhorse.
It’s where you manage day-to-day expenses, like paying bills, buying groceries, grabbing coffee, and handling all the routine transactions that keep life moving.
Checking accounts are sometimes also called “spending accounts”—the only difference is that spending accounts don’t offer check writing.
Key features of checking accounts include:
- Debit cards for daily purchases and ATM access.
- Online and mobile banking for convenient account management.
- Direct deposit for your paycheck or other regular payment.
- Bill pay services.
- Unlimited debit card purchases and ATM withdrawals (though some banks may charge fees for certain transactions, such as using an out-of-network ATM).
Simply put, your checking account is where your paycheck probably gets deposited and where most of your spending happens.
Some checking accounts might pay a small amount of interest, but for the most part, they’re built for easy access to cash and convenience, not for growing your money.
Savings Accounts
While checking accounts are designed for most everyday financial needs, savings accounts have one goal: to grow your money over time.
When it comes to answering the question of what is a savings account, think of it as a dedicated place where your money earns interest when you’re not using it.
Key features of savings accounts include:
- Interest rates that help your money grow (even if modestly).
- Withdrawal limitations that encourage you to leave your money alone and let it grow.
- FDIC (for banks) or NCUA (for credit unions) insurance protection up to $250,000, which means your money is protected against loss up to that amount even if the bank or credit union fails.
- Ideal for emergency funds, short-term goals, and generating income from interest earnings.
The beauty of savings accounts is their simplicity. You deposit money, the bank or credit union pays you interest for letting them hold it, and your balance gradually increases over time.
Unlike checking accounts, savings accounts help you resist the temptation to spend by making your money slightly less easy to access, which can actually help you reach your savings goals.
When it comes to checking vs. savings accounts, most financial experts recommend having both: use your checking account for daily expenses and your savings account to work toward financial milestones.
Types of Savings Accounts
Now that you know how savings accounts work, let’s explore several different types worth considering.
Each one offers different benefits, and the best choice depends on your individual needs and goals.
Traditional Savings Accounts
Traditional savings accounts are a reliable starter option—straightforward, dependable, and great for people new to saving.
These accounts typically offer the most basic features with few requirements, making them accessible to almost everyone.
What makes traditional savings accounts appealing:
- Low or no balance requirements to get started.
- Easy access to your funds when needed.
- Widely available at most banks and credit unions.
- Simple fee structures that are easy to understand.
The trade-off? Interest rates on traditional savings accounts tend to be modest, averaging just 0.42% annually. While your money may not grow quickly, these accounts are safe, accessible, and ideal for those just starting to save.
Traditional savings accounts work well if you’re building your first emergency fund, saving for a vacation, or simply want a safe place to park money you might need in the near future.
High-Yield Savings Accounts
High-yield savings accounts work like traditional savings accounts but offer better growth opportunities for your money. These accounts may have interest rates that are around 10 times higher than traditional savings accounts.
For example, the top one percent of accounts offer an interest rate of 4.2%.
On a $10,000 balance, a traditional savings account earning 0.42% would generate about $42 in interest per year. The same $10,000 in a high-yield account with an interest rate of 4.2% would earn $420 annually—a difference of $378.
The catch? High-yield savings accounts often come with requirements like:
- Higher balance minimums to avoid fees.
- Limited physical branch access (many are offered by online banks and credit unions).
- Potential restrictions on the number of free transactions.
If you want to maximize savings, especially for longer-term goals like building a substantial emergency fund or saving for a down payment on a house, high-yield savings accounts can be worth these minor inconveniences.
Money Market Accounts
Money market accounts offer features of both savings and checking accounts.
They typically have higher interest rates than traditional savings accounts while allowing some checking account-like privileges.
Unique features of money market accounts:
- Better interest rates than basic savings accounts (0.62-4.07%).
- Debit card access (in some cases).
- Higher balance requirements (often a few hundred to a few thousand dollars).
Money market accounts can be ideal if you want to earn more interest than a traditional savings account, while maintaining some flexibility to access your funds by writing checks or using a debit card.
Some have monthly transaction limits, so they’re not great for everyday banking.
These accounts may work well for goals like saving for a wedding, home repairs, or unexpected expenses.
The higher balance requirements mean money market accounts are generally best for people who can comfortably maintain larger account balances without frequent withdrawals.
Certificates of Deposit (CDs)
Certificates of deposit take a different approach to saving.
Instead of offering flexible access to your money, a CD requires you to commit your funds for a specific time—a few months to several years—in exchange for higher interest rates.
Generally, longer-term CDs have higher interest rates than short-term ones.
How CDs work:
- You agree to deposit your money for a specific time (6 months, 1 year, 5 years, etc.).
- The bank guarantees a fixed interest rate for the entire term.
- You can’t access your money early without paying penalties.
- At the end of the term (called “maturity”), you get back your original deposit plus the interest.
CDs typically work best when you don’t need the money for a while, and when you have goals with specific timelines, like saving for a down payment on a house you plan to buy in two years.
The fixed interest rate means you know exactly how much you’ll earn, which protects you if rates drop before the CD matures. However, if interest rates go up, you won’t benefit from those higher rates.
Specialized Savings Options
Several types of savings accounts cater to specific situations and can offer significant advantages if you qualify:
- Student savings accounts often feature lower fees and balance requirements, usually for college students just starting to save.
- Health Savings Accounts (HSAs) offer valuable tax benefits for people with high-deductible health insurance plans, allowing you to save, invest, and withdraw money tax-free for qualified medical expenses.
- Retirement accounts such as IRAs provide tax advantages for long-term savings, helping you build wealth for your future.
Although these types of savings accounts are meant for particular circumstances, they’re worth exploring if they apply to you.
Tips To Maximize Savings
Choosing the right savings account is just the first step. If you want to maximize savings, consistent habits and smart strategies are a must, regardless of which account you choose.
Automate Savings
One of the most effective ways to build savings is to make it automatic.
Set up automatic transfers from your checking to your savings account right after payday. Even small amounts, like $25 or $50 per paycheck, add up over time.
Many employers also allow you to split your direct deposit between multiple accounts, which means you can automatically direct a portion of your paycheck to savings.
Tools like Kudzu’s Savings Habits can help you set up automatic transfers, making it easy to save automatically.
The psychology behind automatic savings is simple: you can’t spend money you don’t see. When you transfer money to savings automatically, you learn to live on what’s left in your checking account, making saving painless.
Start with an amount that feels comfortable, even if it’s just $10 per week. You can always increase it later as your income grows or you find ways to reduce expenses.
Set Clear Savings Goals
Vague goals like “save more money” rarely lead to success. Instead, create specific, measurable targets that give your savings efforts purpose and direction.
Effective savings goals follow the SMART framework:
- Specific: “Build a $1,000 emergency fund” instead of “save for emergencies”.
- Measurable: You can track your progress and know exactly when you’ve reached your goal (like watching your balance grow from $0 to $1,000).
- Achievable: The target amount is realistic based on your current income and expenses.
- Relevant: The goal matters to your life and financial situation.
- Time-bound: You have a clear deadline for reaching the goal.
Having specific goals makes it easier to choose the right type of savings account. You might put your money into a high-yield savings account to save for next year’s vacation, but open a CD to set money aside to buy a new car a few years from now.
Many banks and credit unions will let you set up multiple savings accounts, so you can create separate ones for different goals—Kudzu’s Savings Goals, for instance.
Minimize Fees
Bank fees can quickly eat into your savings, especially when you’re just getting started. Understanding and avoiding common fees helps make sure more of your money stays where it belongs—in your account.
Common savings account fees to watch for:
- Monthly fees for accounts that fall below minimum balance amounts.
- Extra charges for making too many withdrawals in one month.
- Inactivity fees if you don’t use your account for several months.
- Account closure fees if you decide to switch banks or credit unions.
Before opening any savings account, read the fine print about fees carefully. Many fees are avoidable if you understand the requirements. For example, your bank will often waive monthly fees if you maintain a minimum balance or set up direct deposit.
Consider online banks and credit unions, which typically offer lower fees and higher interest rates than traditional brick-and-mortar institutions. Without the overhead of physical branches, online banks can pass savings on to customers through better rates and fewer fees.
Your Ideal Savings Match
Figuring out how to choose a savings account comes down to matching account features with your financial goals and habits.
Whether you’re just starting to save or looking to maximize savings in existing accounts, the best choice depends on factors like how much you plan to save, how often you need access to funds, and how much growth you want.
Building strong financial habits takes time, but having the right support can make all the difference.
Kudzu’s toolkit helps you track spending, automate savings, and work toward your financial goals with features designed to complement whatever type of savings account you choose.
These features work together to help you stay on top of your finances and make the most of your savings, making it easier to reach your financial goals over time.
Download the Kudzu app and start cultivating the financial habits that will help you get ahead. With the right savings account and smart money management tools working together, you’ll be amazed at how quickly your financial confidence—and your account balance—can grow.
