Sure, you could just keep throwing your money into any old savings account, but if the interest rate you earn is lower than inflation, you could be losing money on your savings! Instead, consider a money market account, CDs or savings bonds.
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Are you trying to save up for a major purchase? Do you have your heart set on that titanium racing bike, a new iPad or a trip to Maui? Or are you just looking to finally put away that "three to six months salary" emergency fund you've heard the experts recommend? Interest rates on savings accounts are notoriously low, but there are other vehicles where you can park your money at more competitive interest rates so that it grows faster.
Money market accounts, certificates of deposit (CDs) and savings bonds are some of the best ways to save money and rack up more interest earnings, and each has their pros and cons:
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Money Market Accounts
Some experts believe that money market accounts offer "the best of both worlds"; they offer penalty-free access to your money along with higher interest rates. There is usually a minimum initial buy-in for this type of account, but interest rates will be more attractive. You'll be able to write checks and withdraw money with a limit of up to six transactions per month. The higher interest rate means your money will grow faster than a savings account.
However, if you need an account that allows a low balance and easy access, then this option might not be for you. There are fees if your account drops below the minimum balance, which can range from $1,000 to $10,000 or more. The limit of six monthly withdrawals also makes a money market account less convenient than savings accounts, which typically allow unlimited withdrawals.
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Certificates of Deposit (CDs)
A CD is a bit more of an investment than a savings vehicle. Money deposited into a CD is kept there for a predetermined amount of time -- from just a few months to several years. Since you will be leaving your money in the bank for a set amount of time, the interest rate on CDs will be higher. Also, the longer the term, the higher the interest rate will be.
There are penalties if you withdraw the money early; you may have to forfeit all your interest money if you cash out the CD before the end of the term. A CD is a smart investment when you know you won’t be spending your money for awhile; however, it's not the best place for an emergency fund. Consider a CD for money you're setting aside for a future use such as a new car, a down payment on a house or a vacation.
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This last one might be considered a bit old-fashioned, but savings bonds are still a safe, viable savings vehicle. Bonds behave more like a CD than a savings account. You are usually required to hold it for a set amount of time before cashing it out. Cashing out early could subject you to a small penalty. There are two primary types of bonds; one has an interest rate tied to the rate of inflation, and the other has a fixed rate. Bond rates change along with economic conditions, so check what rate you will be receiving before buying a savings bond.
Again, if having quick, no-penalty access to your money is a preference, a money market account or high-yield savings account are the most flexible options. However, if your goal is saving up as much money as possible for a specific purchase in the future, a CD or savings bond can help you to achieve this.