Deposit accounts typically refer to any account where you can freely deposit and withdraw money. For most consumers, this means savings and checking accounts. Certificates of Deposit (CD) and money market accounts also technically qualify, although CDs place greater restrictions on withdrawal timing. In many cases, deposit accounts fall by the wayside when discussing long-term financial strategies. These accounts offer comparatively low yields (or no yields at all) versus securities accounts, making them unfavorable for long-term investing. Despite this, accounts of this type have an essential role to play in any sound financial strategy.

The Bread and Butter of Checking and Savings

Most Americans have a checking account, and many have one or more savings accounts. Although checking accounts should not be used for long-term saving or storing of money, they are crucial for day-to-day transactions. It is for this reason that these accounts are commonly known as transactional accounts. Using a checking account effectively means keeping only enough money in it to cover expenses, and transferring even short-term savings to higher yield accounts.

Speaking of higher yield accounts – what about a savings account? While many Americans grew up learning the value of saving, using a typical savings account isn't always the right strategy. The primary advantage of this account type is that it offers FDIC protection along with (exceptionally modest) growth potential. Savings accounts can be useful for short-term (1-3 month) savings, but the low interest rate makes them unsuitable for the long term. Instead, choose high-yield savings accounts to store emergency expenses or tax funds, as they offer the same benefits with much higher interest rates.

When Should You Use CDs?

When it comes to deposit accounts, the certificate of deposit is ironically often forgotten. A CD allows you to receive relatively good interest rates along with FDIC protection in exchange for committing to a set withdrawal schedule. A CD typically comes with a 6-month, 1-year, 3-year, or 5-year term, with longer terms offering higher interest rates. Withdrawing money from a CD before the term ends comes with a hefty penalty, so it is crucial to avoid these accounts for money that you may need.

Unfortunately, the higher interest rates offered by high-yield savings accounts leave CDs in an odd position. The best way to make use of CDs is to open multiple accounts in a CD "ladder." To do this, you invest in a new 5-year CD every year. Setting your deposits up in this way allows your CDs to mature each year, but at the higher interest rate offered by the longer term. Doing this can enable CDs to remain competitive with (or better than) high-yield savings accounts.

Putting It All Together

For long-term savings and investing, securities and brokerage accounts are the way the go. Deposit accounts have significant advantages for budgeting and short-term savings, however. Making good use of checking, saving, and CD accounts can allow you to better budget your money and plan for the future, helping you to save more money and remain more financially secure.