Bank accounts are an excellent way to safely store your money. People can access bank accounts through multiple institutions like traditional brick-and-mortar banks, online banks, or credit unions. There are various types of bank accounts, each with its own unique purpose and features. Before opening a bank account, it is important to understand what type of account best fits your needs.
Checking Accounts
Checking accounts are designed to store funds that you plan to spend. Typically, people utilize checking accounts to handle everyday financial transactions. A person’s wages can easily be deposited, and money can be simply withdrawn to spend or pay bills. Checking accounts typically come with options to have a debit card and may also include paper checks. Some banks offer customized checking accounts to better fit the needs of a certain demographic, such as a teen or student checking account.
When selecting a checking account, there are multiple criteria you may want to consider. First, do you prefer having an account at a traditional bank or an online bank? Consider if you need physical branch access or any perks that individual institutions may offer. It is also important to understand an account’s minimum balance requirements, potential monthly or overdraft fees, and ATM network availability. Some factors may be more impactful to you than others, so it is important to shop around and find an offering that best fits your needs.
Savings Accounts
Savings accounts are designed to hold funds that you don’t plan to spend right away. These accounts can be thought of as a tool to put aside money for short- and long-term goals. Savings accounts differ from checking accounts in that they typically don’t offer debit cards or check-writing. Most savings accounts offer to pay interest on deposits, though the interest rate can look very different from bank to bank. Additionally, savings accounts are subject to Regulation D, which ordinarily limits account holders to six withdrawals each month.
High-yield savings accounts (HYSAs) are a subset of savings accounts that usually offer interest rates significantly higher than average savings account rates. These higher rates can make a big difference in the amount of interest an account can earn over time. Most institutions that offer HYSAs are online-only, without physical branch access.
In the selection process for a savings account, it is again very important to compare between institutions. Online banks have been known to offer lower fees and higher interest rates than traditional banks, largely due to their lower operating costs. Traditional banks may be more convenient by offering in-person branch access.
Money Market Accounts (MMAs)
A Money Market Account is an interest-bearing account that combines features of both checking and savings accounts. MMAs can offer check-writing and debit card access like checking accounts. They are also subject to Regulation D, typically limiting withdrawals to six per month like savings accounts. Often there will be a minimum initial deposit to open MMA accounts. Additionally, there may be minimum balance requirements that the account must maintain or risk insufficient balance fees.
MMAs are great tools to earn interest on the money that you aren’t currently spending while making it easy to eventually spend. There is a major convenience factor in those accounts that offer check-writing or debit cards. However, a person does need to pay attention to any minimum initial deposits or minimum balance requirements.
Certificate of Deposit Accounts (CDs)
A Certificate of Deposit is a type of interest-bearing time deposit account. Time deposits involve setting aside a certain amount of money with the intention of not having access to it for a set amount of time. The higher interest rates that CD accounts offer come with the trade-off of having limited access to deposited funds. The CD term is the length of time that the account will be open, which is selected by the customer in advance. These terms can range in length from 1 month to 10 years, but most accounts fall between 3 months and 5 years. Typically, there are penalties in place for withdrawing funds before the term ends.
CDs are made to set aside funds that you will not need in the near future. Accounts are often utilized to plan to meet an upcoming obligation, such as a downpayment or a vacation. They are very effective tools if you know when an expected obligation will come due. However, if circumstances change and a person needs access to funds before the CD term ends, penalties can be a major disadvantage. Overall, CDs offer relatively high locked-in rates at the cost of having limited access to deposits.
To learn more about setting savings goals or what account type fits your needs, schedule an appointment with Powercat Financial!
References:
https://www.forbes.com/advisor/banking/what-are-the-different-types-of-bank-accounts/
Gage Burdiek
Peer Counselor I
Powercat Financial
