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4 Ways to Watch Your Savings Grow

Remember the days of pedaling to the local bank and depositing your lawn-mowing or paper-route money into a savings account?

Life is more complicated now (as are our finances), but the idea remains the same: We want a safe place to store our money and, ideally, watch it grow.

However, many of us have been avoiding savings products for the past decade because interest rates have been historically low. Fortunately, the headwinds are shifting—interest rates are slowly inching up, and the Federal Reserve has signaled that those rates will likely continue to rise through at least this year. So, if you have savings you don’t plan to use in the near future, it might be time to make it work for you.

There are multiple ways to save, and no two savings accounts are alike (even those with the same name). Read on as we explore the features of the most common savings vehicles, and the subtle differences among them at different institutions.

Traditional savings: Straightforward, safe

A traditional savings account (known as a “share” account at credit unions) is likely one of the first accounts you’ll have. Savings accounts are uncomplicated, taking little effort or money to set up and maintain. And they’re secure because they’re federally insured for up to $250,000.

  • Minimum balance: Most institutions require only a small deposit—maybe $5—to open a savings account. But be sure to read the fine print. If your balance dips below a certain amount, you might be hit with a service charge.
  • Interest rates: A common requirement is that you must maintain a certain balance to earn the dividend. According to the National Credit Union Administration’s latest quarterly report, average interest rates for savings accounts with a minimum balance of $1,000 are at 0.14% for credit unions and banks. Larger balances will often earn you higher dividends.
  • Withdrawal rules: Some institutions may enforce the Federal Reserve Board’s Regulation D (Reg D), which sets a limit of six withdrawals or transfers per month. Anything past that could result in a fee, or your account being closed or converted to a checking account. (At SELCO, traditional savings is considered a "transactional account" and therefore doesn't fall under the regulation and allows unlimited withdrawals.)

CDs: Set ’em and forget ’em

A certificate of deposit (more commonly referred to as a CD, or a share certificate at credit unions) is a way to invest a specified amount of money for a specified period of time at a specified interest rate. CDs offer a hassle-free way to set and forget your funds and watch them grow

Of the four, CDs consistently offer the highest returns.

  • Minimum balance: Unless you opt for a jumbo CD—$100,000 or more—you won’t need a pile of money. Most institutions require a minimum deposit of $1,000 to $2,000.
  • Interest rates: The longer the term, the higher the interest earned. In the recent NCUA rates report, the average return on a two-year CD with a $10,000 minimum balance is 1.07% for credit unions and 0.88% for banks. For a 5-year CD with the same requirement, the rates are 1.81% and 1.47%, respectively. Of the four savings options in this article, CDs consistently offer the highest returns.
  • Withdrawal rules: If you need to withdraw money before the maturity date, the penalty is typically several months’ worth of accrued interest. So, depending on when the withdrawal is made, your investment will still likely get a boost.

Money Market: Best of both worlds

A money market account (MMA) is a mix of savings and checking that builds on your investment while allowing you access to your money.

  • Minimum balance: MMAs typically require a minimum deposit of between $500 and $2,500. Again, check the fine print to see if there are penalties or fees if you dip below that balance.
  • Interest rates: Similar to other savings accounts, MMA interest rates are tiered based on the investment amount. According to the NCUA quarterly data, the average APY for an MMA with a minimum balance of $2,500 is 0.21% for credit unions and 0.15% for banks. At some institutions, that can jump to nearly 2% with a larger balance.
  • Withdrawal rules: The standard—but not the rule—is a limit of six withdrawals per month, but some institutions offer unlimited transactions.

Health Savings Account: A nod to your future health

A Health Savings Account (HSA) is a tax-free way to set aside money to pay for or reimburse current or future medical expenses. You can only deposit funds into these accounts while you’re enrolled in a qualified high-deductible health insurance plan. Visit IRS.gov for details.

  • Minimum balance: Most institutions won’t require a minimum deposit to get started. Some require a small balance at the outset, while others want you to maintain a certain balance to earn a dividend or avoid fees.
  • Interest rates: The range of HSA returns is broad, with some institutions offering no interest at all and others offering up to 2%. Often, rates increase incrementally as your balance grows.
  • Withdrawal rules: There’s no limit to the number of withdrawals, but the money is earmarked for medical expenses only. Until you hit age 65 or become eligible for Medicare, there are stiff penalties for withdrawing for non-medical expenses.

Keep the big picture in plain view

As you can see, savings accounts come in all shapes and sizes. One thing to always keep in mind is what’s in the fine print. Big banks commonly charge monthly fees and impose requirements and restrictions for even the most basic savings accounts. Credit unions, on the other hand, rarely—if ever—do the same. So, when it’s time to make a decision about what to do with your nest egg, it’s wise to look broadly and carefully before tucking it away for safe keeping.

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