Dollar by dollar

We make a million decisions a day. Go to the gym or sleep in? Coffee or tea? Stairs or elevator? And the big one, what’s for dinner? If stressing about takeout weren’t enough, there are decisions to make about what to do with your money, too. You may find yourself comparing checking accounts vs. savings accounts. Or you might ask yourself, “How is a CD different from a savings account?” or “What type of savings account should I open?”

One way to simplify this decision is to break it down to the dollar level.

Let’s compare 4 dollar bills as they make their way through 4 different types of accounts: a checking account, a savings account, a money market account and a certificate of deposit (CD).

Let’s start with the most flexible type of account, a checking account. When Dollar No. 1 goes into a checking account, it never gets comfortable or takes off its shoes because it needs to be ready to go at a moment’s notice. A checking account is basically a house for your money to hang out in until you’re ready to spend it. Dollar No. 1 will stay in this house until you write a check, use your debit card, get cash from an ATM or make an electronic payment.¹

The great thing about Dollar No. 1 is that it’s flexible. Day or night, whenever you need it, you can usually use it. The trade-off for this flexibility is that Dollar No. 1 might not grow. Though some checking accounts offer interest, many do not. So, while you can usually call on Dollar No. 1 whenever you need it, if you left it alone, it wouldn’t grow any bigger.

A savings account may be a little less flexible than a checking account. But it might also be a little more profitable. Even though some checking accounts earn interest, savings accounts typically have higher interest rates.²

When Dollar No. 2 goes into a savings account, it unpacks its bags to stay for a while. As long as Dollar No. 2 stays put, it will grow thanks to interest. Let’s say a savings account gains interest at an average rate of 1%.  You can always get Dollar No. 2 out if you need it. But unlike a checking account, there might be monthly withdrawal limits.

When Dollar No. 3 goes into a money market account, it might be required to bring along a number of roommates in the form of minimum deposits and balances.³ And, like a savings account, it might only be able to leave the house a few times a month. But in a money market account, Dollar No. 3 may grow faster than Dollars 1 and 2.

A money market account is a type of savings account that usually pays an even higher interest rate than a traditional savings account. As a trade off for a better interest rate, a money market account could require a higher minimum deposit to get started. It might also require a minimum balance to keep the account open or avoid fees. And there could be withdrawal limits every month.

Dollar No. 4 is going to a CD. How is a CD different from a traditional savings account? A CD is a savings account that typically earns a higher interest rate because you agree to keep your money in the bank for a set amount of time.⁴ You typically get to choose the amount of time, such as six months, a year, five years or longer. Typically, the longer the amount of time, the higher the interest rate.⁵

Basically, Dollar No. 4 is promising the bank it won’t leave the house for a while, and in exchange, the bank will reward Dollar No. 4 with a higher interest rate. If you need to take Dollar No. 4 out of the CD, you can, but you’ll usually pay a penalty for doing so.⁵

This means that Dollar No. 4 may grow the fastest, but it could be the least accessible. For money you can live without for the immediate future, a CD may be a solid option. If you want the benefits of a CD with more accessibility, look into a CD ladder as an alternative.

Dollar No. 1 went to a checking account and might grow the least but be the most accessible. Dollar No. 2 is in a traditional savings account where it will grow a little and still stay fairly accessible. Dollar No. 3 and its buddies are in a money market account. They might earn more interest than a traditional savings account but be less accessible with a higher minimum balance. Finally, Dollar No. 4 went off to live in a CD and could earn a high interest rate. But it also has to stay put for a set amount of time.

So, where should your dollar go? Only you can make that decision, of course. At the end of the day, it’s all about determining the growth you’d like to see, the level of control and flexibility you feel comfortable with and your financial goals. Whether you choose a checking account, savings account, money market account or CD, now that you know the basics, you’ll be able to find the right place for your dollar.