Thinking of opening a savings account? There are lots of different savers out there on the market to choose from, each with their own perks. Depending on how you plan to use your saver, you could find that a certain account is better suited for your needs. Below are just a few tips on finding the right saver.
How much money have you got to deposit initially?
Some savings accounts require you to place an initial deposit to open them. Minimum deposits can range from $5 to $5,000. Often savers with large minimum deposits have higher interest rates. However, you need to make sure that the money in this account never dips below the minimum balance – in some cases there could be a fee for doing so or you may not earn any interest that month.
Don’t have a lot of money to deposit initially? Here are a few savers that have a low minimum balance. This could allow you to start saving without having lots of money already set aside.
How regularly will you put money in?
Will you be putting money in each month? Or do you plan to throw some money in and let it grow by itself?
Most accounts will allow you to contribute money when you want. Some are even designed to encourage monthly contributions by having a minimum monthly contribution – if you don’t deposit a certain amount of money each month, you won’t earn interest on your savings.
Other accounts are designed to put money in without having to make personal contributions. These high yield accounts may have locked access for a certain amount of time (Certificates of Deposit – or CDs as they are often referred to – are a popular example of this). The rule of 72 is worth considering when opening such an account – this will help you to work out exactly how long it will take to double your money by generating interest alone. High deposit accounts may also be great for this purpose as they often have high interest rates.
How regularly will you need to take money out?
You should also consider how often you will need to withdraw money. If you’re saving for a goal such as a wedding, your retirement or a down payment on a home, it’s likely you won’t want to withdraw any money until you’ve reached your goal. If you’re setting up a rainy day fund for emergencies however, regular access may be important.
Some accounts are designed to discourage regular access. These are ideal for savings goals. A few examples of savers that discourage regular access include:
- Online savers: Unlike traditional brick-and-mortar banks, you cannot easily withdraw money in cash from an online saver. If you want to avoid cash withdrawals, such savers could be a good option (they often have good interest rates too).
- Savings accounts with withdrawal fees/penalties: Some savings accounts will charge a fee if you withdraw money. Others may not pay you interest that month. These fees and penalties could be another good incentive to prevent you dipping into your account.
- Saving accounts with locked access: Some savings accounts physically don’t allow you to withdraw money for a certain period (i.e. CDs). There are also children’s savings accounts and trust funds that are ideal for saving money for a child or grandchild – once the money is contributed, you may not be able to withdraw it.
If you haven’t got a long-term savings goal and want to set up a savings account that you can access regularly, it’s worth looking out for savings accounts that don’t charge a withdrawal fee.
Don’t want to pay tax on your savings?
Many savings accounts require you to pay tax on your earnings. However, there are some savings accounts that don’t require you to pay tax on earnings. Some are even tax-deductible – allowing your earning to be contributed straight into these accounts without having to pay tax on these earnings.
Tax-efficient savings accounts are usually designed to fit a certain purpose. A few examples include:
- Individual retirement funds (IRAs): These accounts are ideal for retirement savings – all interest earned in these accounts is tax free.
- 401(k) plans: These are employer-sponsored retirement plan accounts. Some of your earnings each month are contributed straight into this account – you don’t have to pay tax on these earnings. You do however have to pay tax when you withdraw.
- FSAs: These are employer-sponsored accounts into which tax-free earnings are deposited, which can be spent on healthcare and childcare-related expenses. You do not earn interest however, and all money contributed must be spent within the year otherwise you lose it.
- HSAs: Available to anyone with a high deductible health insurance plan, these accounts allow you to contribute tax-free earnings to be spent on healthcare expenses. Unlike FSAs, these accounts earn interest and your money rolls over year to year.
- 529 plans: If you’re savings up for a child’s tuition fees, these tax-free savers could be a good option.
This guide to tax-free savings accounts offers more information on some of the savers that are available.
Have you considered alternatives to savings accounts?
Savings accounts aren’t the only way to make a return. In fact, most savers offer a very low return compared to the range of other investment opportunities out there. Of course, such alternative investments are often a little riskier, which is something you need to weigh up. A few examples of alternatives to savings accounts include:
Bonds
Government and corporate bonds are a popular alternative to savings accounts. They’re essentially a loan to the government or a corporation – after a certain amount of time (usually a few years) the loan is then paid back with interest. You cannot access the bond during this period and must wait until the bond has ‘matured’. Interest rates earned on bonds are usually much higher than savers. Government bonds are practically as low risk as savers, as are most corporate bonds (some corporate bonds from emerging corporations are slightly more risky and generally have higher interest rates).
Peer-to-peer lending
Peer-to-peer lending is a bit like a bond – but instead of lending money to the government or companies, you lend money to other individuals. Your money is then paid back over a certain amount of time with interest. Online P2P lending platforms allow you to link up with prospective borrowers. These sites are regulated by the FCA and so there’s little risk of losing your money. The interest earned is often much greater than a savings account.
Stocks and shares
A popular way to make a return is to invest in stocks and shares. Many of today’s broker platforms allow you to invest money without paying any broker fees – and in some cases you can invest as little as $1 into a share. Stocks and shares are definitely a much more hands-on investment and there is a lot more risk involved. However, you have the potential to make big returns that would never be possible with a savings account.
Crypto
Buying cryptocurrency is another very popular investment option. Buy at the right time and the crypto value may go up dramatically. You can then sell this cryptocurrency and make a huge return. This is by far the most risky of all the investment opportunities listed so far – however arguably has the most potential to make a sizable quick return.
