Many people have no more than a passing familiarity with bank accounts. They still have the saving accounts their parents opened for them when they were kids so that they would have somewhere to put their allowance money and birthday money. Some have the checking account that their first employer opened for them. They’ve put no work of their own into gaining an understanding of the various products that banks offer. If this is you, here is an ordered introduction.
A checking account
At most regular jobs, employees have their pay deposited into a checking account that’s opened for them. Whether you have your employer open a checking account for you or open one by yourself at a bank, you get a set of checks and an ATM card/debit card for withdrawals, shopping, and deposits. Since these accounts allow you to take money out on demand, they are also called demand accounts.
Banks offer different types of checking account packages with different features. Joint accounts, student accounts, and business accounts are just three of various options possible. With most checking accounts, you get to make only a limited number of free withdrawals each month. Since a checking account gives you great flexibility, you don’t get to earn much interest. Interest only goes to accounts for which the bank is assured of hanging onto a certain amount of money for extended periods of time.
If you would like to save your money and earn interest on it rather than have constant access to it, a savings account can be a better idea than a checking account. In exchange for giving up full and free access to your money, you get a better rate of interest. Savings accounts can come with checks too, but you are allowed only limited use. Savings accounts typically have low minimum-balance requirements and pay less than 1% in interest. They also tend to charge annual fees.
A money market account
Money market accounts are better either than checking accounts or savings accounts when it comes to interest potential. Usually, banks give their money market products names such as “Savings plus” and “Performance.” To open a money market account with a regular bank, you need at least $250 (Internet-only banks impose no restrictions). In exchange, you get paid a 1% APY interest rate, although some offer as little as 0.1%. The more the money you deposit, the higher the interest rate you are offered. Banks usually limit to you to six withdrawals and deposits a month.
A certificate of deposit
When you are able to set aside a certain amount of money without needing to make a withdrawal for an extended period of time (usually from three months to five years), a certificate of deposit or CD can be a better idea than the three aforementioned options. People choose CDs when they wish to save money for long-term financial goals such as college and retirement. These accounts offer guaranteed safety for long-term savings, unlike the stock market.
While it’s possible to withdraw money from a CD before its due date comes around, there’s usually a penalty to pay if you do so.
You make little money on any bank account
Bank accounts usually come with interest rates in the low single digits. Inflation usually makes your cost of living rise much faster. This means that money placed in bank accounts usually lose value. For this reason, placing money in a bank account is only a good idea for small sums of money that you need regular access to or money that you may need unexpectedly — such as with an emergency fund.
Every bank offers different interest rates
If you plan to open a bank account, it’s always a good idea to shop around on the Internet. Different banks offer different interest rates and fee structures. Some banks, for instance, make all withdrawals free; at others, you pay $2 on each withdrawal. Some offer special accounts wherein you earn a high amount of interest for a short introductory period.
Bank accounts offer a number of benefits
When you have a bank account, you get online access to it. The facility allows you to make easy bill payments over the Internet. Bank accounts can also help if you use personal budgeting software such as Quicken or Mint. You can connect your account to these programs for a good deal of budgeting help.
If you’ve always had trouble managing your finances, it’s important to know that a regular banking habit can help introduce new focus. The difference between those who are effortlessly responsible with their money and those who don’t often end up being about familiarity and exposure.