Different bank accounts are made to fulfill different needs. When choosing a bank account, consider your financial goals and pick an account that will benefit you. When you pick an account that fits your lifestyle, you can minimize fees, collect the high amounts of interest, and easily manage your money.
Banks and credit unions usually offer 5 types of bank accounts.
If you have ever had a bank account, chances are it was a savings account. Oftentimes, a savings account is a person’s first interaction with financial independence, With parental guidance, even young children can begin stockpiling money in a savings account. When these kids get older, they can store their allowance and money from their first job in this account.
Many people also open a savings account to save up for an unexpected emergency, like a job loss or hospital stay. When you become part of a credit union, your savings account allows you to become a member.
Perfect for: kids and young adults as a first account, people looking to save money for a future expense.
Not ideal for: people who need to withdraw money frequently, people who want to make purchases with a card (like a debit card, which is usually not offered for savings accounts), and people looking for a bank account that offers high-interest rates.
Additional tips for savings accounts:
- If you open your savings account through an online bank, you will be able to gain more interest and pay fewer fees. If brick-and-mortar banks are too costly for you, online banks are a good option.
- Build a high balance by depositing a large sum of money when you first open the account or automatically depositing a portion of each paycheck.
A checking account is a perfect option for people looking to make simple, everyday transactions. You can deposit and withdraw money from a checking account whenever you please. This type of account also grants you the ability to write paper checks and use a debit card. If your bank is extra high-tech, it may allow you to automatically pay your recurring bills through your checking account.
Perfect for: people who need to withdraw and deposit money frequently, people who want to keep track of their transactions, and people that enjoy paying with checks/debit cards in lieu of cash.
Not ideal for: anyone looking to avoid additional fees and expenses,
Additional tips for checking accounts:
- Make a habit of balancing your account monthly to avoid fraudulent account on your activity and dodge fees.
- Set up direct deposit with your financial institution. This will allow you to automatically deposit your paycheck into your checking account every month so you can pay bills and purchase necessities.
- If you are frequently making purchases, you may want to consider using a credit card instead to prevent a massive headache if your debit card is stolen or misplaced.
Money Market Accounts (MMA)
If you want to earn lots of interest and utilize aspects of checking and savings accounts, look no further than a money market account. The sky-high interest rates are enticing and ensure that your money is working hard.
Perfect for: people who maintain high balances in their account and want higher interest rates than a traditional savings account.
Not ideal for: people with low balances (most money market accounts have a minimum ‘start-up’ of $5,000-$10,000), people that withdraw money often, and anyone who isn’t willing to closely monitor additional expenses.
Additional tips for money market accounts:
- Similar to regular savings accounts, money market accounts are great for storing money in case of an emergency.
- MMA through physical banks can get pricey. Many online banks offer these accounts with higher interest rates and fewer expenses.
Certificates of Deposit
If you don’t need to spend your cash anytime soon and are looking for a high interest savings option, CDs could be the answer you’ve been searching for. You have to keep your money in these accounts for a certain amount of time (usually ranging from a few months to 10 years). Once time is up, you’ll have earned plenty of interest.
Perfect for: people with extra cash lying around (money that they won’t need for at least a few months).
Not ideal for: people at-risk for an emergency, since when funds are prematurely withdrawn from a certificate of deposits, most of the interest is usually wiped out.
Additional tips for certificates of deposit accounts:
- Some banks will allow you to withdraw money occasionally. This can ease some of the anxiety that comes with having your money unavailable to you.
- Some banks will even allow you to withdraw money before time is up. However, be sure to do your research on these accounts, as they can have some unforeseen drawbacks if you are not careful.
Are you looking to avoid paying income tax on interest you earn from savings accounts and CDs? Look no further than retirement accounts. Some retirement accounts shield you (at least temporarily) from having to pay taxes on money you put into or remove from the account. Almost all banks offer this kind of account, and some even extend the offer to small corporations and local businesses.
Perfect for: people wanting to avoid paying taxes on the interest they have earned (thus saving even more money).
Not ideal for: anyone who cannot read the fine print (these accounts oftentimes come with drawbacks or some sort of “catch”, so be sure to do your research before committing), people who need constant access to their money, and people who may need to take money out of the account prematurely, thus subjecting themselves to penalty fees.
Additional tips for retirement accounts:
- Before committing yourself to a retirement account, think about whether or not it fits your long term financial goals. Seek help from a financial specialist to find out just how much cash you should be saving in this type of account.
- Some companies offer their employees a matching plan (for example, 401ks). Before you open a retirement account, make sure you have taken advantage of your 401k. If you don’t, you could potentially be wasting money.