Building liquid savings

Savings accounts and money market accounts are two of the most basic ways to stash some cash. Savings accounts come in two flavors, passbook and statement. Money market accounts generally pay slightly better interest. Both types of accounts are currently insured up to $250,000 by the Federal Deposit Insurance Corporation, or FDIC, or the National Credit Union Share Insurance Fund, or NCUSIF, at credit unions.

Passbook vs. statement savings account

With a passbook account you're given a booklet to enter deposits, withdrawals and interest. With a statement savings account you simply receive a statement, usually once a month, detailing transactions. You don't usually get to pick -- most banks offer one or the other.

At a glance

Both savings accounts and money market accounts are liquid, meaning you can get your money out at any time. Federal regulations limit you to six electronic, telephone or preauthorized transfers per month, and no more than three of them can be by check, draft or debit card. You can make unlimited withdrawals by teller, ATM or by mail.

The minimum balance required to open a savings account is usually quite low, sometimes just $1 or $5, but don't let that fool you. A fair number of institutions require a minimum balance of $100, $500, even $1,000 to avoid paying a monthly maintenance fee. Since the interest rates on these accounts are usually so low, it doesn't take many fees to eat up your interest payments and, possibly, erode the principal.

The minimum balance to avoid fees on money market accounts can be even higher, with some banks demanding as much as $10,000 to avoid a $25 per month fee.

Shopping for a high-yield account is where you can make a big difference in your return. Most standard savings accounts pay less than 0.5 percent; money market accounts may beat that by 0.25 percent. You can do much better by signing up for a high-yield account where yields on both products are several times better than standard yields.

High-yield savings and money market accounts used to be found most often at online banks that had no brick-and-mortar facilities. The idea was that they had less overhead and could pay better rates. But that changed as the traditional banks saw customers pour money into the accounts to get higher yields. Now you can find many traditional banks offering high-yield savings and money market accounts. The catch is you have to open them online and manage the account online -- allow electronic statements, make electronic transfers and use a debit card.

Money market accounts allow you to write checks, while savings accounts don't have that feature. However, some high-yield savings accounts let you link to your checking account to make deposits and withdrawals easier.

Opening an account online is easy, but it may not be the way to go for everyone. Some people aren't comfortable putting confidential information online; some want a local branch that they can walk into and talk with someone face-to-face if there's a problem with their account. But it may be worth getting past some of the qualms if you have, or plan to build, a significant savings account.

Savings and money market account features

·         Liquid.

·         Earn interest.

·         FDIC-insured.

·         Limited electronic transfers.

·         Unlimited withdrawals at ATMs, in person or by mail.

·         Minimum balance to avoid fees may be required.

·         High-yield accounts are primarily online.

A savings or money market account can be a great place to build and keep your emergency fund, especially if it's a high-yield account. Everyone should have enough cash on hand to last through three to six months of unemployment. An emergency fund can also be used to see you through a true emergency: Getting your only car running again is an emergency, replacing a broken television is not.


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