Banking Basics: 5 Types of Bank Accounts
Bank accounts can be a necessity for modern life. They’re convenient (using a debit card is faster and simpler than cash—the people in line behind you at Starbucks thank you), they’re safe (money in the bank is insured up to $100k), and many types of bank accounts pay interest (meaning your money earns you more money). So, let’s dive into the basics of bank accounts and see which can work best for you now.
A basic checking account is what’s known as a transactional account. These are designed for daily purchases. You deposit money into a checking account with the intention of spending, rather than saving. A checking account will come with—you guessed it—checks, and/or a debit card for a more convenient way to spend.
Unlike other accounts, checking accounts don’t usually pay interest. And you’ll want to watch out for penalties like overdraft fees. There may be other limitations or fees as well. Some banks only allow you to write a certain amount of checks per month. So make sure to read the fine print when evaluating new checking accounts.1
It’s all in the name. A savings account is designed to save you money. Money you put into a savings account will actually grow over time by accruing interest. Interest is, essentially, the money you charge the bank for letting them store your money. This value is expressed in a percentage called the interest rate. If you put $100 in a savings account that pays an interest rate of 1%, at the end of the year, you’re savings account would have $101. You earned interest!
The amount of interest that accrues, the service fees and the minimum opening deposit will all very depending on the bank. These are all details you’ll want to know before deciding which bank and savings account is right for you.2
Certificate of Deposit (CD)
A CD account allows you to save money at a set interest rate, for a specific amount of time. While a CD is also designed for saving, it’s different than a savings account. With a CD you don’t have access to the money you’re saving throughout the life of the certificate. Because of this, the interest that accrues on a CD is usually higher than a savings account.
Think of it like putting money into a time capsule and burying it in the backyard. Only this time capsule is magic, and it multiplies your money. That’s a CD. The life of the certificate can last a few months to several years. If you’re considering a CD, make sure you won’t need to withdraw the cash before the certificate is over, as this could lead to fees and penalties.2
Money Market Account
These accounts are also similar to a savings accounts, only you’re required to maintain a certain amount of money in the account. Having less will lead to fees. Another difference from a traditional savings account is that the interest accrued in a money market account will fluctuate based on the financial markets. Some accounts will even have the option to withdraw funds using checks.1
Money Market accounts typically pay out higher interest rates, but of course they also require more money to get started. (Hey, you gotta pay to play.)
Individual Retirement Accounts (IRA)
Just like your Uncle Joe, IRAs are all about retirement. They’re broken down into two types: a traditional IRA and a Roth IRA.
A traditional IRA is tax deductible and allows deposits of up to $4k per year (or more if you’re over 50 years old). You contribute to this account through your yearly income. With a Roth IRA, the taxes are deducted when the funds are deposited, so you don’t owe taxes when you withdraw your funds. However, there are certain requirements and contribution limits for both types, so talk to your employer or provider to get more information.2
No matter which bank accounts you use, the important thing is to focus on saving. Having a checking account is necessary for everyday spending, but it’s also beneficial to have other accounts for long-term saving.
- “5 Different Types of Bank Accounts” Investorguide.com. Accessed February 10, 2016. https://www.investorguide.com/article/11655/types-of-accounts-typically-offered-by-banks-igu/
- “Types of Bank Accounts” Wells Fargo. Accessed February 10, 2016. https://www.wellsfargo.com/financial-education/basic-finances/manage-money/options/bank-account-types/