How To Choose The Right Type of Savings Account

guest post by Jonny Pean

For most people, the habit of saving money is a bit difficult.  First of all, it isn’t very exciting.  If you have a choice of saving a few hundred bucks this month, or spending it on that new designer purse, which one is more satisfying??  Of course, the designer purse!

Building a substantial cushion of liquid savings is essential, though, not only for peace of mind, but also in order to build true wealth over the long-term.  In this article, we are going to discuss the 3 basic types of savings accounts.  Personal finance experts generally recommend that the average person should have at least 3 months of living expenses in an account that is highly liquid.

Traditional Bank Account
Most local banks will allow you to open a free savings account with a very low initial account deposit.  That amount can be as low as $20 at many institutions.  Unlike the forex market, this is typically the best way to get started saving money.  This type of savings account typically offers the lowest interest rates, but it is also considered the most liquid.  Funds that you hold in a traditional account can be withdrawn at any time without penalty, and with an ATM card, funds can be withdrawn around the clock.

Money Market Account
Your local bank most likely offers money market accounts as well.  These are accounts that invest 100% of its capital in U.S. treasuries and other forms of U.S. government debt.  This is seen as a very safe, conservative investment with no chance of loss, since the government can always print more money to repay its lenders.

These accounts typically offer a more aggressive interest rate return than a standard savings account, but they also are not as liquid.  Typically, it will take several business days to withdraw funds.

Certificate of Deposit
This is a favorite among conservative investors because it offers the most aggressive interest rate.  CD’s are a very popular way to invest cash savings.  The increased interest rate is the major advantage that this type of savings vehicle holds over the previously mentioned ones.  However, the primary drawback is that CD’s will require you to keep your funds invested for until the CD reaches maturity, which can be anywhere from a few months to a few years.  Typically, the longer your cash is tied up, the better interest rate you will earn.

If you want to withdraw your cash before the maturity date, you can do that, but not without paying a penalty.  This makes a CD the highest yielding investment vehicle of the three discussed here, but also the least liquid.

Understanding the interest rate payoff and degree of liquidity in each of these investment vehicles will help you determine which is right for you in your current financial situation.

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