Not every type of bank account is created equal. Some may not require a minimum balance or charge fees—win! While others may penalize you if you take money out at the wrong time. Basic checking and savings accounts are a great starting place for everybody. And then from there, you can branch out into different types of bank accounts where your money can really start to add up.
1. Checking Account
The most basic type of bank account is the checking account. Think of it as home base. For most people, it’s where their paycheck gets deposited, where bills get paid from, and where they keep the money they need to get to quickly.
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Checking accounts, which you can set up at a traditional or online bank, come with a debit card. It works a lot like cash. But now you don’t have to carry around a pocketful of money. It can go in your checking account instead. Then when you go to the grocery store or gas station, you can swipe your debit card. The amount is usually deducted from your checking account right on the spot. Depending on the vendor, some transactions may take a couple of days to process. In that case, you want to make sure you don’t double spend that money. More on that in a second!
A checking account also makes budgeting and bill-paying a breeze. When you set up automatic bill pay, payments are deducted straight from your checking account when they’re due. No more scrounging up a stamp and envelope to mail in your mortgage payment or forgetting to pay the light bill. And when you use a budgeting app, you can connect your monthly budget to your checking account so you can easily track all your expenses and keep moving toward your money goals.
Features to Look for in a Checking Account
- No minimum balance required to set up or maintain
- Direct deposit
- Online banking through your bank’s app or website
Things to Watch Out for in a Checking Account
Big banks, and even credit unions, are notorious for charging fees. It’s one of the ways they make their money. So, do your research before you open your checking account and find out what you could be on the hook for.
Here are some of the most common fees:
- Overdraft fees. One of the good things about spending only cash is that you can’t spend more than you’ve got. But with a checking account, it’s possible to spend more than you have. That’s called overdrawing your account, and it comes with penalties.
- Returned (“bounced”) check fees. The tricky thing with paper checks is there’s a lag between when you write it and when it gets cashed. In fact, technically, there’s no “expiration date” on checks, but most banks won’t cash anything more than six months old. So, when you write a check, consider that money gone. Write it down in your check ledger so you don’t forget. If you don’t, you could accidentally spend that money twice. Then, if your check gets cashed and you don’t have the funds to cover it, it will “bounce.” And your bank will charge you a fee to process the bounced check.
- Monthly maintenance fee. This is another place banks make a ton of easy money. Basically, they’re charging you a fee to keep your money in their bank. Even at $5 per month, you’re looking at $60 a year. That’s money that could be going toward your debt snowball or into savings!
2. Savings Account
A checking account and savings account go together like Batman and Robin. They make a great team, and if you’re setting one up, you might as well set up the other. A savings account is exactly what it sounds like: a place to put your money that you want to save. It’s a great spot for funds that you don’t need right away but want to have nearby just in case.
Take car maintenance, for example. If you set up a car maintenance sinking fund (a stash of money for expenses you know are coming) in your budget for things like oil changes, tire rotations and tune ups, you’re going to want to put that money in a savings account. You don’t need it every week, or even every month, but you need it to be easy to get to when the time comes. And if you keep it in your checking account, you might accidentally spend it.
You won’t get rich keeping your money in a savings accounts (most average interest rates right now aren’t even a full percent), but it does help you budget better, build up your saving muscle, and give you a place to store excess cash you don’t need right away.
Features to Look for in a Savings Account
- No monthly maintenance fee
- Online access to your account, including transfers from your checking account
- A competitive interest rate (It won’t be much, but something is better than nothing!)
Things to Watch Out for in a Savings Account
- Interest earned is considered taxable income
- Some banks may require you to maintain a minimum balance
- Might be limits on the number of transfers and withdrawals you can make each month
3. Money Market Deposit Account
Let’s pretend a checking account and a savings account had a baby. This sweet little money baby would be a money market account. Like a checking account, a money market account might come with a debit card, although some banks don’t offer this feature.
And like a savings account, a money market account earns interest (not a lot, but usually slightly more than a savings account) while keeping your money separate from your everyday funds. This type of bank account is a good place to store your 3- to 6-month emergency fund so that it’s close if you need it but out of your everyday checking account.
Features to Look for in a Money Market Account
- Often earns more interest than a regular savings account
Things to Watch Out for in a Money Market Account
- Might be limits on the number of transfers and withdrawals you can make each month
- Minimum balance may be required to open and maintain the account to avoid fees
- Earned interest is minimal but taxable
4. Certificate of Deposit (CD)
No, a CD isn’t a throwback to compact discs. A CD is a certificate of deposit. It’s like a savings account but a savings account where you won’t earn much and you could lose even more. Yikes! So, it’s more like a certificate of depression—not a place you want to put your money.
Nowadays, CDs have an average rate of return of about 1%. And when you consider that inflation goes up about 3% each year, then you could actually lose money. Nope. No, thank you.
There are a range of CD term lengths, or “maturity dates,” and if you withdraw your funds before that date, you’ll get hit with penalty fees. CDs come in short-term (less than 12 months), mid-range (1–3 years) and long-term (4–5 years) ranges.
With a CD, you’re basically loaning your money to the bank and they’re “rewarding” you with a little bit of earned interest. The longer you loan them your money, the higher your interest rate will be.
Remember though, that “higher” interest rate is still usually not more than 1–2%. Your bank would love nothing more than for you to lose patience and cash out a mid- or long-term CD early so they can capture those early withdrawal fees.
Features to Look for in a CD
- While they’re relatively low risk and you can earn some interest, there are better places to put your money!
Things to Watch Out for in a CD
- You’ll typically earn more interest in a CD than in a traditional savings account but without the ability to access those funds whenever you want.
- You’ll pay penalties if you withdraw your funds before the CD matures.
Retirement Accounts to Know About
Once you’ve gotten comfortable with the most common types of bank accounts, you can start exploring other types of financial accounts like retirement funds. Individual retirement accounts, or IRAs, are part of a great long-term retirement savings strategy.
There are two main types of IRAs: traditional and Roth. Both are tax-advantaged retirement accounts that allow you to:
- Contribute to an IRA as long as you earn income from a job, or your spouse earns income from a job and you file taxes jointly.
- Contribute up to $6,000 per year ($7,000 per year if you’re age 50 or older) or your taxable compensation for the year if it was less than the dollar limit.
- Continue to contribute, even if you’re retired, as long as you’re earning income (like wages from a part-time or freelance job, but not pensions or Social Security)
- Open individual accounts if you’re married.
IRAs are not your typical savings account. They’re meant for long-term retirement investments, so if you withdraw money from a traditional or Roth IRA before age 59 1/2, you’ll have to pay taxes on it. Plus, you’ll be on the hook for a 10% early withdrawal fee. To make sure you’re on track for retirement, connect with an investment pro who can help you figure out where your money will grow best.
And remember, you’re not investing for retirement until Baby Step 4! Once you’ve saved up your $1,000 emergency fund (Baby Step 1), paid off all your debt (Baby Step 2), and set aside a 3- to 6-month emergency fund (Baby Step 3), then you can start investing 15% of your income for retirement.
Brokerage accounts are the big man on campus. A brokerage account is a taxable account with money you can funnel towards stocks, bonds and mutual funds. Basically, it’s investment money.
But just because you’re sitting on cash to invest doesn’t mean your money should go just anywhere. It’s important to make sure you’re putting your money in the right places. The only investment option we recommend is growth stock mutual funds with a history of strong returns. That’s it.
Good growth stock mutual funds allow you to spread risk across lots of companies—large and established to new and fast-growing—and avoid the risk that comes from investing in single stocks.
Which Type of Bank Account Is Right for You?
Part of taking control of your money means making sure you’re keeping it in the best place possible for where you are in your money journey. If you’re just starting to get ahold of your finances, a checking and savings account is the best place to start.
Then, after you’re completely out of debt and have your 3- to 6-month emergency fund saved, you can start saving for retirement by exploring IRAs and mutual funds. And don’t forget to avoid CDs, stocks, bonds and other unreliable investment strategies. Make sure your bank is working for you!
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