How to Save Money: Understanding Your Account Options

Long gone are the days where savings are kept under the mattress. Today, many financial products pay dividends on the money you save in your accounts.

With an early start and regular deposits, your savings can take off and build the financial security you've always wanted.

What is a Savings Account?

A savings account is the most common type of account for storing your extra money. Savings accounts are available at all credit unions and banks (credit unions may refer to them as share accounts).

In order to open a savings account, you'll need to deposit some amount of money into it. After opening an account, you can make withdrawals and transfers online as you'd like. Or, if your financial institution offers, you can use an ATM card for savings account withdrawals.

Since you are allowing your financial institution to take care of your extra cash, they return the favor in the form of dividends (or interest if you use a bank). These dividends help grow your account little by little. Traditional savings accounts earn dividends, but it's typically very low. High-yield savings accounts, on the other hand, offer better yields.

What is a Money Market Savings Account?

A money market savings account is a savings product, available at most banks and credit unions, that earns a higher yield than traditional savings. A money market account may also offer checking, ATM services, and a debit card. This type of account makes it easier to use your money when you need or want, as opposed to a less flexible savings account.

The type of money market accounts that offer the highest yield may require a higher minimum balance, monthly fees, or have other strict requirements. This makes them more popular with people who have larger balances and want the flexibility to make large purchases.

What is a Money Market Certificate?

A money market certificate is similar to a certificate of deposit (CD). While banks use the term "certificate of deposit," credit unions use "certificate."

Certificate savings are another option that offers higher yields. In exchange for locking up your money for a period of time, your account will draw compound dividends at a fixed rate. Once you open an account, you won't be able to withdraw the money or void the agreement without paying a penalty fee. It's an ideal situation if you have money to save that you're confident you won't need to touch for months or even years.

Usually, the longer the term, the higher the yield. Plus, money market certificates are federally insured.

The yield for money market certificates usually does not change once the account is opened. If yields do rise, a CD or money market certificate will usually remain at the lower yield until the term is up.

This option also allows you to take advantage of certificate laddering to maximize your earning potential.

Try this certificate calculator to see how much money you could earn over time.

What is an Individual Retirement Account (IRA)

An IRA is an account that allows you to save money for retirement with tax-free growth or on a tax-deferred basis. There are several different types of IRAs to choose from, each with its own features and benefits. A financial advisor could help you determine which IRA type is right for you.

IRAs are a great option to supplement your other retirement savings strategies.

How Do I Choose the Right Account?

It is important to consider the goals with your extra money before choosing the right savings account. So, where should you start? After reviewing your options, ask yourself the following questions.

• How much money do I have to put away? If you have a small amount of money ready to save, which won't earn much in the long run, consider a traditional savings account. Once you've built up your savings, consider moving your money to an account with higher yields or more features — like a certificate or CD.

• Do I need constant access to my savings? If you think you will need to pull from your savings or transfer money from your savings in the near future, steer clear of certificate accounts. But, if you have a good chunk of savings ready to set aside for a while, those certificates will give you more bang for your buck in the long run.

• How much do you care about the yields associated with your savings account? If your goal is to make money off of larger savings you have ready to put away, choose a savings account with a high yield. This includes a money market savings or certificate account. Again, if you're starting out, keep it simple with a traditional savings account.

• What are you saving for? If you're saving for retirement, an IRA is likely your best option. If you're saving for something long-term, like a house down payment or a new car, and you don't need access to your money during that time, try a certificate account. But if you need access to your money, a high-yield savings or money market account are your best options.

After reviewing your goals and understanding how to save money with each account option, you'll be ready to take your savings to the next level.