The ABCs of savings
Basic banking terms and their meanings
April 6, 2022 5 min read
Whether you’ve just landed your first job, received a gift from a relative or found some cash in your old coat pocket (best feeling ever), a new savings account may be an excellent place for your money. Why? Because it can provide security for your cash and help your money grow.
But savings accounts are also rich with financial jargon, which can be confusing no matter how bank savvy you are. That’s why we’ve broken down some key banking terms, so you can feel comfortable and confident finding the right place for your money.
A savings account may be the most basic option for putting your money away, other than stashing it in your piggy bank. Savings accounts provide security for your money and pay interest (more on that in a moment). They offer flexible access to your cash and can be a great tool for those who are new to saving.1
Want free money? Meet interest, or the money paid on a balance. When it comes to savings accounts, the bank periodically pays you a percentage of what you deposit, just for having your money in the account.2 It really is that simple. Plus, the more you save, the more you’ll earn, and interest usually shows up in your account every month.
The annual percentage yield (APY) shows you how much interest you’ll make on your savings account balance in a year.3 Let’s say you deposit $1,000 into a savings account with a 1.00% APY. In one year, you’ll earn $10. If that doesn’t sound like a lot, don’t worry. Interest adds money to your account over time, so you’ll eventually earn interest on the interest you’ve already earned. This is known as compounding interest.4 In other words, the bank will give you free money just for holding on to what they’ve already given you. (Seeing those dollar signs yet?) It’s how savings accounts work to grow your money.
With all that money you could be saving and earning, you want to know that it won’t be messed with. That’s why when you make deposits to your savings, checking or money market accounts, the Federal Deposit Insurance Corporation (FDIC) has your back, along with the Federal Reserve.56 This dynamic duo uses a system of government checks and balances that works to keep our economy stable by regulating and monitoring banks. The FDIC watches over banks to make sure your money is safe. It also insures or guarantees your cash.
Let’s get back to that free money concept. Want to earn even more of it? Look into certificates of deposit (CDs), which usually pay a higher interest rate than regular savings accounts.7 They’re great for savers who are willing to put away their money for a set period of time, generally somewhere between 6 months and 5 years. The longer the time period on a CD, the higher the rate typically is, but you can always choose the length of time that works for you.
Worried about not having access to your cash? CDs don’t have to tie your money down. A strategy known as CD laddering allows savers to stagger multiple CD start times so they always have access to some of their money, while the rest is earning interest.8
Money market account
When you hear the term “money market account,” do you immediately think “stock markets”? Let’s clear up the confusion. A money market account typically functions just like a savings account, only with more interest.9 In order to earn that higher rate, money market accounts sometimes require a set amount of cash to be in the account at all times and, like a savings account, withdrawals may be limited each month.10 Money market accounts shouldn’t be confused with money market funds. Those are actually investment accounts (which might be why you were thinking “stock market”) and not insured by the FDIC.11
Liquidity measures access to your cash. The easier it is to spend or withdraw your money, the more “liquid” it is.12 Accounts with high liquidity (like checking accounts) are good for money you’ll need immediately. Accounts with lower liquidity (like CDs) work better for money you don’t need right away.
Now that you’re armed with this banking terminology, you can feel confident about what to do with your extra cash. You know how interest and APY affect your bottom line, are able to compare CDs and money market accounts and feel secure in the protection that the FDIC delivers. That’s a solid foundation to build a bright financial future.