Types of savings account, compared

A bank does not pay interest for holding your money. It pays for being able to count on it. A deposit that can leave tomorrow is unstable funding: the bank has to hold liquid assets against it, and liquidity rules treat it as the least reliable money on the balance sheet. A deposit committed for two years carries none of that offset, so more of it can be lent long. That is why the rate on a deposit account is largely the price of the access you agree not to use.

That one trade explains most of the product range. Read it as a ladder rather than a list.

Three other forces sit alongside access. The first is what it costs the bank to serve you and how badly it needs the money: a branchless bank has no branch network to pay for, and no captive current-account balances that stay put whatever it pays, so it has to bid for money that moves. That is a large part of why online savings accounts pay more than the one attached to a big bank's checking, and the stickiness of those big-bank balances is most of the rest.

The second is the general level of short-term rates, which moves every variable rate in the same direction at once. The third is what the market expects rates to do next, and it is the force that breaks the ladder. A fixed term is priced off the rates expected across its whole life, so when cuts are expected a three year term can pay less than instant access at the same bank. Read "usually the highest" in that last row as a tendency to check rather than a rule; the yield curve is the same expectation drawn out along time.

Note the last column. Variable means the bank can change the rate, subject only to whatever notice the terms and local rules require. Fixed means fixed, and that is precisely what the term commitment buys.

Checking, or a current account. A transaction account: card payments, direct debits, incoming pay. It is built for movement rather than return, and most pay little or no interest. Some pay a rate in exchange for conditions, such as a minimum monthly deposit or a set number of card payments, which makes the rate conditional rather than automatic.

Savings. An interest-bearing deposit account you move money into and out of by transfer rather than spending from directly. Some carry a limit on the number of withdrawals in a statement period. Where such a limit applies it comes from the account terms or from local rules, and those rules have been changed before, so the terms are the answer rather than a remembered number.

High-yield savings. Not a separate legal product. It is an ordinary savings account sold by a bank with a lower cost base, usually online only, competing on rate. What lets it pay more is cost and the need to attract money that moves, not extra risk taken with the deposit, and it is insured on exactly the same basis as any other deposit at that bank. Worth confirming, though, is whether the provider is a bank at all: some products marketed as high-yield savings come from non-bank firms that pass balances on to partner banks, in which case the insurance follows those banks and depends on the records being right.

Money market deposit account. A savings account with limited cheque writing or card access attached, often with a higher minimum balance and rates tiered by balance. It is a bank deposit. A money market fund is not. That is an investment holding short-term debt: its value is not promised by a bank and deposit insurance does not apply to it. The two names sit one word apart and cover different things.

Certificates of deposit, term deposits, fixed rate bonds. One deposit, one fixed rate, one fixed end date. The rate cannot fall under you. Getting out early is whatever the contract allows rather than a right: many United States certificates permit it for a stated interest penalty, many United Kingdom fixed rate bonds do not permit it at all, and a brokered certificate is not broken early but sold, at whatever price the market gives that day.

Here is $15,000 left alone for three years, interest credited monthly, nothing added. The rates are illustrative, chosen to show the shape rather than to quote a market, and every ratio below depends on them.

On these figures, moving from checking to savings multiplies the interest by about 85, and moving from savings to a locked three year term adds roughly 13 percent more interest on top of that. Treat the 85 as a property of the gap between two chosen rates rather than a fact about savings accounts: it is that large only because the checking rate is near zero, and it would be closer to 8 if the checking account paid 0.5 percent. What survives the choice of numbers is the shape. The step from a near-zero rate to a market rate is worth much more than the step from a market rate to a locked one, and it is also the cheaper step, since it costs a transfer rather than three years.

What the third row costs is optionality. Where the terms allow an early exit at all, they usually take back a stated amount of interest, and on United States certificates something like 90 days' worth on a short term and more on a long one is a common convention. Since 90 days of interest is roughly a quarter of a year's interest, breaking one in its first weeks can hand back more than it has earned, and United States rules allow that shortfall to come out of the deposit itself.

A fixed rate also carries a risk pointing the other way: lock for three years and you are protected if rates fall and stuck if they rise. Splitting the money across several maturity dates, a ladder, leaves part of it maturing every year, so some of the balance can always be renewed at the current rate. It is not free. When longer terms pay more, a ladder's average rate sits below the longest rung, and that shortfall is the price of not having to guess which way rates go. Maturity is a decision point rather than an ending, and a term that rolls over automatically renews at the rate on offer that day rather than the one you signed up for. United States certificates normally carry a grace period of roughly a week to ten days after maturity in which the money can be taken or moved with no penalty, and once it passes the new term has begun.

Two accounts can quote the same rate and pay different amounts, because a rate says nothing about how often interest is added to the balance. Once interest is credited it starts earning interest of its own, so a rate credited monthly beats the same rate credited once at the end of the year.

The number that already contains that schedule is the yield. In the United States, deposit accounts are advertised with an annual percentage yield, which folds the compounding in, so two APYs can be set side by side and the larger one really is larger. In the United Kingdom the equivalent published figure is the annual equivalent rate, doing the same job. A bare interest rate with no compounding schedule attached is not comparable to anything.

The size of the effect is small and worth knowing exactly. Four percent credited monthly is a 4.0742 percent APY, which on $10,000 pays $407.42 over a year instead of $400, a difference of $7.42. At rates like these the crediting schedule is worth single-digit basis points while the gap between two banks' rates runs to whole percentage points, so the schedule settles a tie rather than deciding the comparison. It is not a constant, though: the same monthly-against-annual gap is worth about half a basis point at a 1 percent rate and about 47 basis points at 10 percent.

Three things bend the yield after the headline. Tiered rates apply the advertised figure to only part of the balance, or only above or below a threshold, so the yield on the whole balance is a blend. A minimum balance rule can drop an account into a lower tier the moment it falls short. And a monthly maintenance fee is a negative rate: on a small balance it can exceed the interest, which turns an advertised yield into a net loss. The APR against APY calculator converts between a quoted rate and its yield in both directions.

One more thing sits outside the advertised figure entirely. Interest is normally taxable income under the rules of wherever the depositor is tax resident, and an advertised yield is a gross number, so what a saver keeps is less than what the account pays. Many countries also run sheltered savings wrappers in which interest is untaxed or tax-deferred, and the shelter can be worth enough to let a lower headline beat a higher one. Rates, thresholds and wrapper names differ by country and get revised, so the honest comparison is after tax under the rules that apply to the account, not the one on the poster; tax-advantaged accounts covers the wrapper side of that.

A bonus rate is a rate with an expiry date. The account advertises a headline figure, part of which is a bonus running for a stated window, and when the window closes the balance earns whatever the underlying rate is.

Take $20,000 in an account paying 5 percent a year credited monthly, of which 2.5 points is a bonus for the first six months. The first half year pays $505.24 and the balance reaches $20,505.24. The second half year, at 2.5 percent, pays $257.65 and the balance reaches $20,762.89. Over the twelve months the balance grew 3.81 percent, which is neither the 5.1162 percent a reader gets by annualising the headline nor the 2.5288 percent the account settles at.

How much of that a headline figure already shows depends on where the account is sold. A United Kingdom account quotes an annual equivalent rate across a year, so a bonus shorter than a year is blended into it, and United States rules require a composite figure where the rates step down on a schedule known in advance. What is never blended is a bare quoted rate, and no advertising rule can blend the second year, when the bonus is gone and the underlying rate is usually variable. Four things to read off the terms:

• the date the bonus ends, which belongs in a calendar rather than in memory,
• whether the bonus applies to the whole balance or only to money above what you already held,
• whether the underlying rate is variable, which nearly every instant access rate is, so the rate you drop to is not fixed either,
• whether a withdrawal during the window forfeits the bonus.

There is a structural reason the pattern persists. Banks price to attract switchers, and an existing customer who does nothing is cheaper to keep than a new one is to win. So the ordinary rate on an old account can drift well below what the same bank advertises on a new one, without anything being announced. The check is mechanical: the number that matters is the rate being paid now, not the rate the account was opened at.

Deposit insurance is a fund built out of levies on banks and a promise behind every insured account: if the bank fails, the scheme pays depositors up to a limit instead of leaving them to queue as creditors. A bank that lends its deposits out cannot repay them all at once, so the guarantee is what stops a rumour becoming a run.

The structure of the limit matters more than the number. Every scheme counts per depositor, per insured institution, which means several accounts at one bank share a single limit rather than each getting its own, and two brands on one banking licence can count as one institution. Schemes then differ on how they slice one depositor's holdings. The United States adds a third dimension, per ownership category, so single, joint and certain trust or retirement accounts are counted separately and one person can be covered several times over at the same bank. Most other schemes are simpler than that: under the United Kingdom's FSCS and the European Union directive a joint account is generally treated as each holder's own share, which effectively doubles the cover on a two-person account, without the wider category structure sitting behind it.

Which scheme applies depends on where the account is: in the United States, the FDIC for banks and the National Credit Union Administration for credit unions; in the United Kingdom, the Financial Services Compensation Scheme; across the European Union, national schemes under a common directive; in Canada, CDIC for banks, with credit unions insured by provincial schemes instead. Limits, categories and which products count are set by each scheme and revised over time, so the current figure is worth reading at the scheme itself rather than anywhere that quotes it second-hand.

It covers the bank failing, and only that: not a variable rate being cut, not a money market fund or other investment bought through the bank, and not inflation reducing what the balance buys, which the real return calculator measures. Two structures are worth checking for the same reason. A brokerage cash or sweep account often passes balances to partner banks, so the coverage rests on those banks and on correct records rather than on the broker. So does a savings product from a non-bank firm: the insurance belongs to whichever bank ends up holding the money, and the firm in the middle is not itself covered.

All of which reduces to one matching problem rather than a ranking. A deposit's rate is the price of the access it takes away, so the question that sorts a balance is the date it is next needed, and an emergency fund is the part where that date is unknown and the access is therefore the point. This page describes how the products work; which of them fits a particular person is not something it can say.