Opening a savings account so your money can generate some interest sounds easy enough. Indeed, the process is pretty simple — and probably far easier than finding money to regularly funnel into savings. But choosing the savings account that best fits your needs can be a challenge. Here are some questions you should ask yourself to find the right savings account you.
Is this savings account FDIC-insured? Unless you’re dealing with a guy who runs a bank out of his trunk, you probably have nothing to worry about. Still, make sure your bank is insured by the Federal Deposit Insurance Corporation, says Yong Wang, associate professor of finance at Western New England University in Springfield, Massachusetts.
That means if something terrible happens, like your bank goes out of business, the federal government will replace your money, provided the account holds $250,000 or less.
To stay competitive, almost 100 percent of the nation’s banks are insured by the FDIC, according to Wang, who adds that only a few state charter banks are not.
Does the account offer a good interest rate? You can stop daydreaming about the wealth you’ll accumulate with your savings account. In recent years, interest rates in savings accounts have tended to resemble the limbo dance (how low can you go?). Still, while rates are unfortunately low — 1 percent annual percentage yield and frequently as low as .01 percent — you’d like your interest rate to be competitive with the other low rates and perhaps provide a bit higher yield.
[Read: What You Should Know About Savings Accounts .]
“With the help of the Internet, searching for the best rate for a savings account is just a few clicks away,” Wang says.
He recommends searching for a savings account and comparing interest rates at sites like Bankrate.com, Bankaholic.com and MyBankTracker.com. That said, since interest rates are currently low, other factors such as fees and ease of use become even more important.
In fact, you may decide to stick with the bank where you already have a checking account. One advantage is if your checking account goes into overdraft, most banks will automatically transfer money from your savings account to your checking account (for a fee, of course). On the other hand, you may find an online-only bank that offers a higher interest rate than your own bank or charges fewer fees.
What are the fees? It’s important to research account fees before signing on with any bank. Fees may include monthly minimum balance fees, annual fees, transfer fees, paper statement fees and if you go over the limit of withdrawals, the occasional withdrawal fee. Usually these fees are several dollars here and there, but they can add up.
“If you’re making 1 percent interest on a $10,000 account, that’s a hundred bucks,” says Frank Trotter, executive vice president at EverBank, one of the nation’s largest online banks. “If you have a $12.50 fee a month, there goes your $100.”
True, most banks will waive the minimum monthly fee if you have $10,000 in a savings account, and generally you’ll need far less than that to avoid monthly penalties. Many savings accounts require a $2,500 balance to avoid a monthly fee, while some will let you get away with $300 or less. But Trotter’s point is a good one. You should be aware of how fees will eat into your savings. If you think you’ll be raiding your savings account a lot, search for one that doesn’t impose balance fees.
[Read: What Happens If the Post Office Is Your Bank? ]
Do you want a savings account or something else? Instead of a standard savings account, you may want to consider a money market deposit account or a certificate of deposit. They’re both FDIC-insured and fairly similar, but there are some significant differences.
You probably want a savings account if you’re just starting out, and you think you may occasionally withdraw money. Savings withdrawals need to be occasional occurrences, especially if you do a lot of mobile and online banking. That’s because of Regulation D.
Regulation D is a federal law that restricts you from transferring or withdrawing money from your savings account to six times a month or per statement cycle via online or telephone banking. If you need to make more withdrawals, you’ll have to make them at your bank branch, an ATM or through the mail. (Break this regulation routinely, and you may be hit with fees, and you’ll likely see your savings account converted into a non-interest-bearing checking account.)
You may want to go with a money market deposit account, assuming the interest rate is a bit higher than the savings account, and you are pretty sure that if you need to transfer some money, you won’t need it right away. Often, you’ll have to wait a few days before you can access your money if you transfer it to your checking account. As with savings accounts, Regulation D applies here, too.
If you want to sock money away and know you won’t need access to it for a while, you may want to consider a certificate of deposit. The interest rates of CDs are typically higher than those of savings or money market accounts, but in recent years, interest rates have been so low that there hasn’t been as much of an advantage with CDs. In any case, the trade-off is agreeing to lock your money up for a period — say six months, one year, three years or five years. In most cases, you’ll have to pay a penalty to withdraw your money early. Some banks offer no-penalty CDs, but usually for a lower interest rate than conventional CDs. Still, if you think you’ll need to raid your CD, you may be better off with a money market account or savings account. Recently, the average interest rate for a five-year CD has been 1.5 percent. If you purchase a one-year CD, rates currently average 0.36 percent.
[See: 10 Surprising Facts About Modern Consumers .]
Have I asked all the questions I need to? If you feel queasy about socking your money away in a savings account, don’t be afraid to ask your bank manager or the bank’s customer service department any questions or relay concerns.
Because while opening a savings account is pretty straightforward, it’s hard to argue with Trotter when he says: “For a lot of financial decisions, we spend less time thinking about them than when you buy a pair of shoes or pants.”
More from U.S. News
4 Ways to Better Organize Your Bills
10 Smartphone Apps to Boost Your Budget
How to Find the Best Savings Account for You originally appeared on usnews.com
