When do Interest-Bearing Accounts Make the Most Sense?

by Team Dinks on December 3, 2013 · 0 comments

wad of cash

You’ll find some of the best interest on savings accounts such as money market accounts (MMAs) and certificates of deposit (CDs). But, these accounts also come with limited liquidity. So, choosing to open one of these interest-bearing accounts should be a measured decision. If you’re considering it, review these savings goals and see if a high-interest savings account could help you meet them.

Saving for your child’s education

With the rising cost of tuition, room and board, it’s never too early to start saving. If this is your savings goal, consider opening a CD. This high-interest savings account makes sense for several reasons:

  • First, it’s a safe choice with the backing of FDIC insurance. You can be assured the money will be there when you need it.
  • Secondly, CDs offer the highest interest rates of your savings account options. Furthermore, the longer the CD term, the higher the rate tends to be.
  • Finally, CDs are long-term investments, meaning you must leave the money untouched for the duration of the term. This makes a CD an excellent choice for this savings goal. You won’t need the money for several years, it will accrue the most it can in interest, and because the money is bound in the CD, it will also make it difficult to spend it on something else.

Saving for a car

Unlike a college education which has a definite start date, you never know when you might find the right car. When saving for this purpose, it’s a wise idea to choose a money market because you’ll get a competitive interest rate and the ability to extract your money when you need it. MMAs limit access to your funds to usually between three and six times a month. That works out well for buying a car: you can withdraw your down payment or monthly payment when you need it.

Building a rainy day fund

When you’re saving to build an emergency fund, you may want to open a couple interest-bearing accounts – a CD to help maximize your earnings and an MMA to give you access to some of the money as you are working towards your savings goal. The point of a rainy day fund is to have something to fall back on in the event of financial distress. So, tying up all of your funds in a CD is too restrictive. But, it can be hard to pass up the great interest rate. Putting some of the funds in a CD to capitalize on the interest and the rest in an MMA so you can get it if the need arises accomplishes both goals.

Saving a down payment for a house

Choosing an interest-bearing account here depends on how soon you plan to purchase. If a house is a long-term goal, a CD will best serve your needs. If, on the other hand, you’d like to make a bid in the next few months, you’ll want the funds to be accessible in an MMA.

Looking for the maximum return

Finally, if you’re just looking to set aside some money and get the best return on your investment, then putting a majority of your savings into a CD is probably the smartest high-interest savings option. In this scenario, you can leave most of your money in a savings account or MMA for regular access while a portion of it works its hardest in a high-interest CD.

Sponsored content was created and provided by RBS Citizens Financial Group.

Photo by AMagill

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