Key insights:
- There are many places to invest your money, and finding the right account for you requires comparing the different options available
- While checking accounts are best for managing your everyday spending, savings, CDs and money market accounts are better for saving money
- Most financial plans should have a few different types of accounts to help you address a range of needs and goals
Financial management can feel complicated. There are many types of bank accounts to choose from, each offering different benefits and uses. Understanding how different types of accounts work is important to choosing the option that makes the most sense for your particular situation.
Let’s explore how checking accounts, savings accounts, CDs and money market accounts (MMAs) work, how they differ and how to choose an account that meets your needs.
Checking accounts
A checking account is a type of account typically used to deposit, withdraw and access money for regular expenses, such as:
- Rent
- Phone bills
- Utilities
- Childcare
- Car payments
- Credit card payments
Checking accounts usually come with a debit or ATM card that you can use to make purchases or access cash. Each purchase draws funds from your account. You can also withdraw cash and make deposits at ATMs or with a bank teller.
Typically, checking accounts offer little or no interest on the money in your account and may charge a monthly maintenance fee for managing the account. Some financial institutions may waive fees if you keep a minimum balance in the account or have another account or credit card at the same financial institution.
In general, some banks may offer overdraft protection options that would allow you to tie a credit line, savings or MMA to your checking account to cover you in case of an overdraft.
Checking account pros and cons
Pros
- Convenient access to your money for everyday transactions
- Direct deposit can allow you to access your earnings quickly
- Potential to earn a bonus for opening a new account
- Deposits are insured for up to $250,000 by the Federal Deposit Insurance Corporation (FDIC), as long as your bank is FDIC-insured (coverage is per depositor, for each account ownership category at that bank)
Cons
- May come with fees
- Typically offer low (or no) interest
Savings accounts
With a savings account, you earn interest on money deposited into the account. There are generally few restrictions on how long the money must stay in the account or how you can withdraw it. Some savings accounts may limit your monthly withdrawals, though many top banks (including Citi) have no withdrawal restrictions. (But any money you withdraw will no longer earn interest.)
Savings accounts are typically easy to open online or at a financial institution branch and can be a useful way to help you achieve your financial goals — whether you're saving for a new home or want to build an emergency fund. You may also open different savings accounts for each of your savings goals. For example, you could have an account dedicated to saving for a home, another for a new car and another for your dream vacation.
Some employers may also allow you to direct deposit all or part of your paycheck to your savings account each month, so your savings happen automatically. Financial institutions may also allow you to set up automatic transfers to your account.
Savings account pros and cons
Pros
- Your money can typically be withdrawn easily in an emergency (especially if your savings account is linked to your checking account)
- Deposits are insured for up to $250,000 by the FDIC, provided your bank is FDIC-insured
- Allows you to earn a higher annual percentage yield (APY) compared to a checking account
Cons
- Interest rates can be lower than MMAs and CDs, and may vary according to how much you have deposited and where you live
- Some banks may limit monthly withdrawals
Certificates of deposit (CDs)
A Certificate of Deposit (CD) is another type of savings account. In exchange for keeping your money in that account for a certain period of time, you can earn a fixed interest rate, which may be higher than what a traditional savings account offers. Most CDs are FDIC insured, up to allowable limits. Keep in mind that if you need to access your funds before the CD term ends, you’ll generally be required to pay an early withdrawal penalty.
At the end of the CD term, when the CD matures, you will have the original amount you deposited, plus earned interest. You can then withdraw the money or reinvest it in another CD or move it to another account.
There are several types of CDs, including:
- Fixed rate CDs: These offer a fixed interest rate for a fixed period (called the CD term). Your interest rate is determined when you open the account and will not change for the duration of the term.
- Step up CDs: These also offer fixed interest, but instead of sticking to the same interest rate throughout the entire term, there are predetermined rate hikes. For example, you may receive a certain interest rate increase every 12 months.
- No penalty CDs: Like standard CDs, no penalty CDs also offer a fixed interest rate but provide more flexibility by allowing you to withdraw all or a portion of your money before the CD matures. These CDs let you withdraw full funds before the term ends without a penalty. In general, these CDs offer lower APYs than traditional CDs.
CDs can be useful if you need the certainty of a fixed interest rate, can put money away for a period of time and are looking to meet time-based financial and savings goals.
CD pros and cons
Pros
- Can provide a guaranteed interest rate for the CD term that’s often higher than a traditional savings account
- May be able to automatically renew your CD when your term ends
- Deposits are insured for up to $250,000 by the FDIC, as long as your bank is FDIC-insured
Cons
- Requires you to deposit funds for the CD term, which may last months or years at a time
- May include penalties for withdrawing funds before the end of the CD term
Money market accounts
A money market account (MMA) is another type of savings account that banks and credit unions offer. It’s essentially a cross between a savings account and checking account. Like a traditional savings account, MMAs allow you to earn interest on your deposit. Like a traditional checking account, MMAs may give you the ability to withdraw your funds via check, debit card or electronic transfer — although there may be transaction limits.
Money market account pros and cons
Pros
- May offer higher APYs than traditional savings accounts
- Deposits are insured for up to $250,000 by the Federal Deposit Insurance Corporation (FDIC), as long as your bank is FDIC-insured (coverage is per depositor, for each account ownership category at that bank)
- May give you access to a debit card and checks
Cons
- Often have minimum balance requirements
- Transactions are typically limited
What type of bank account should I choose?
For most people, a combination of accounts often works best. One rule of thumb is to keep enough money to cover 1 to 2 months’ worth of expenses in your checking account, plus 30% as a cushion. And it’s often advised to keep 3 to 6 months’ worth of necessary expenses in a savings account or an MMA for an emergency fund. That may be more money than you have, so think of this as a goal, not a rule.
You may also choose to put away money you want to earmark for a future expense, such as a large purchase, in a CD. That way, those funds can grow over time, without the risks associated with short-term investing.
Having a checking account to help cover everyday expenses, a savings account or an MMA to work toward short-term goals, and a CD for longer-term goals could help check all of your financial planning boxes.
Comparing savings, checking, CDs and MMAs
| Savings accounts | Checking accounts | CDs | MMAs | |
|---|---|---|---|---|
| Monthly service fee | Sometimes | Sometimes | No, but may have early withdrawal penalties | Sometimes |
| Minimum deposit or balance | Sometimes | Typically yes | Yes | Often |
| Fixed or variable return | Variable | Typically none | Fixed | Variable |
FAQs
Is it better to have a savings or a checking account?
The better option depends on your needs. For example, while savings accounts are better for earning interest and growing your money over time, a checking account is better suited to handling everyday expenses. Both types of accounts can be a valuable part of your financial life.
Is an MMA better than a CD?
It depends on your needs and goals. A CD may offer higher APYs, but if you want to access your money soon, an MMA may make more sense.
What’s the main difference between a checking and a savings account?
In general, checking accounts are designed to handle everyday transactions, such as paying bills and receiving your paychecks. Savings accounts, by contrast, are meant to allow you to save and grow your money over time.
What are the downsides of an MMA?
MMAs typically limit the number of check, debit card or electronic transfer transactions you can make each month. These accounts may also impose minimum balance requirements and charge fees for not meeting them
How much interest will $10,000 typically earn in a savings account?
It depends on your account’s APY. For example, if you have a savings account with a 3% APY, you’d earn about $300 in interest over a year. However, if your account has an interest rate of 3%, compounded daily, you’d earn approximately $305, with an APY of approximately 3.05%. Savings accounts typically have variable rates, which can change.
Disclosure: This article is for general educational purposes. It is not intended to provide financial advice. It also is not intended to completely describe any Citi product or service. You should refer to the terms and conditions financial institutions provide for various products.
