There are different types of bank accounts out there to choose from. Each offers features that match the needs and preferences of certain customers.
If you haven’t known yet, as a potential bank customer or a bank customer (if you are at the moment), it is important that you are fully aware of the various types of bank accounts. This way, you get to choose the one that fits best based on your needs.
Knowing the different bank account types will also help you maximize the product to its full potential.
For instance, knowing your options will help you find out which bank account has the highest interest rate.
In an article published by GO Banking Rates, it says that unfortunately, “one-third of Americans do not know what type of bank account usually has the highest interest rate,” which we find is the very reason why you need to know not just what these bank accounts are all about, but also what you can get out of each of them.
So, having said that, we are going to particularly talk about the following types of bank accounts, and the important things you need to know about each type:
- Savings accounts
- Checking accounts
- Money market accounts
- Certificates of deposit (CDs)
- Retirement accounts or Individual retirement arrangement (IRA)
Before we look into each of the accounts mentioned above, here’s a quick glance about each of them for your reference:
|Type of Account||Why Choose It|
|Savings accounts||You do not need to access the money frequently. You can leave it securely, at the same time, you get to earn nominal interest from it.|
|Checking accounts||It’s ideal for people who want unlimited access to their money. It’s also good for those who do not mind not earning interest.|
|Money market accounts||This one’s ideal for people who want a blend between savings and checking accounts. This allows limited access to your funds in a month.|
|Certificates of deposit (CDs)||This type of bank account is best for those who want a secure way to invest their money for a particular period of time.|
|Retirement accounts||This one’s a tax-deductible or tax-deferred way to invest money for your retirement in the future.|
If you want to know the different types of bank accounts to choose from, here’s an informative video resource from Joyful Investor. Click the play button to watch the whole thing:
So, now that you already have an idea about each of the five major types of bank accounts available in banks today, let’s proceed to get to know more about each bank account type.
Savings accounts are popular with those who want to earn a certain amount of interest from their money in the bank. More so, most consumers use this particular type of bank account to save money up for future use.
What we like about savings accounts is the fact that your money is secured, (as mentioned earlier) you do not need to access it regularly, and of course, it earns. Your money grows over time.
Normally, savings accounts are the first official bank account that people get for themselves — which is not surprising because ultimately, apart from keeping our money safe in the bank, we wanted to grow our money as well (no matter how small or big the APY is).
Opening a savings account is not only ideal for adults but for children as well. Usually, the bank allows kids to open a savings account with a parent. Doing so helps the child establish a pattern of saving — and also it’s a good way to teach children the value of money.
Just the same teens can also open accounts to stash cash from their first job or household chores, and eventually, manage money while in school or in college.
Opening a savings account also marks the start of your relationship with a bank just like when joining a credit union wherein your “share” establishes your membership in the organization.
As mentioned earlier, having a savings account is an excellent way to park cash for financial goals or for emergency purposes. It’s one way to keep money separated from the funds you use on your day-to-day expenses.
HOW TO OPEN A SAVINGS ACCOUNT
Generally, opening a savings account should take less than an hour. Once the accounts are opened, it will serve you for many years to come.
While you can go visit a branch of the bank of your choice, you can also open an account online using either your mobile device or your laptop.
To formally open an account, the bank will require you to fill up certain bank forms, and you will need to provide personal information like your name, address, contact number, as well as your Social Security number and identification cards will also be requested to confirm your identity.
Furthermore, the account holder must be 18 years old and above, otherwise, a parent or guardian needs to open an account with you.
TIPS WHEN OPENING A SAVINGS ACCOUNT
When opening a savings account, make sure to do the following first:
- Compare banks based on fees, interest rates, minimum balance requirements, minimum opening deposit requirements, and more.
- Check the requirements set by the bank when opening a savings account.
- Choose the bank that meets your personal needs as a consumer. Opt for an account that is easy to use, and that you will get to put money into easily.
- Gather all the information and documents you need to open a savings account.
- Go to the bank open an account, or you may opt to open an account online if the bank you are eyeing for permits it.
- Fund the account with an initial deposit if the bank requires it (though even if now, we highly recommend you put money in there as soon as you open one).
WHAT TO LIKE: Savings account is ideal for kids, teens, and/or adults who are looking for a place to keep their money, at the same time, earn interest over time. It’s ideal for those who want to stay away from getting tempted to using their money.
WHAT NOT TO LIKE: Generally speaking, savings accounts yield a lower interest rate as compared to CDs and money markets. Also, unlike checking accounts, they do not normally come with a debit card that can be used to make purchases. Furthermore, banks have limited consumers to no more than six withdrawals a month for this particular bank account type.
Among all the types of bank accounts in our list, checking accounts is the only type of account that does not provide your money a place to grow.
What do we mean by that? Here —
Checking accounts are designed to use for everyday spending. It comes with a linked debit card that you can use for making purchases, for ATM withdrawals, as well as for check-writing abilities.
Moreover, checking accounts let you deposit cash and/or checks, and it also allows you to pay bills. In recent years, more and more banks offer online bill-pay services. Thanks to technological advancement and the internet.
Unlike savings accounts, checking accounts normally do not earn interest. Although there are banks that offer interest-bearing checking accounts wherein you can get extra interest on top of what you get from your savings account.
Having a checking account is ideal for keeping cash for short-term use. It is also ideal to help manage your monthly cash flow.
HOW TO OPEN A CHECKING ACCOUNT
Just like when opening a savings account, you can either go to the branch of the bank you are eyeing for, or you can opt to open an account online.
You will also need to provide identifying information such as:
- A government-issued ID with your picture
- The second form of ID like a birth certificate
- An identification number, which normally is your Social Security number or passport number
An initial deposit is also usually required. The amount usually goes between $25 and $100. Unlike savings accounts, most banks do not open checking accounts for minors, which means you need to be 18 years old and above to be able to open a checking account.
Opening a checking account does not take long, too. It usually lasts for just a couple of minutes when opening online, or less than an hour when opening in person.
TIPS WHEN OPENING A CHECKING ACCOUNT
When opening a checking account, make sure to do the following first:
- Compare banks based on fees, interest rates (if available), minimum balance requirements, minimum opening deposit requirements, and others.
- Check the requirements set by the bank for checking accounts.
- Choose the bank that meets your personal needs and preferences.
- Gather all the information and documents you need to open a checking account.
- Go to the bank open an account in person, or you may opt to open an account online if available.
- Fund the account with an initial deposit as required.
Furthermore, also keep in mind the following:
- Make sure to balance your checking account regularly — ideally every month or every banking statement. This helps you manage your cash inflows and outflows, and avoid fees and errors, and allows you to spot fraudulent acts (if there’s any).
- Set up a direct deposit of your wages into your checking account.
WHAT TO LIKE: It’s ideal for anyone who needs a place to deposit cash or paycheck, as well as make payments. It’s also a good option for those who keep a relatively small balance, and those who enjoy using a debit card for purchases.
WHAT NOT TO LIKE: It does not offer interest rate, and are usually subject to a lot of fees and restrictions like maintenance fees as well as minimum balance requirements, which can get quite pricey.
MONEY MARKET ACCOUNTS
As stated earlier, money market accounts are a combination of features provided by both savings and checking accounts. It’s like enjoying the best of both worlds.
Anyway, unlike checking accounts, money market accounts offer limited check-writing privileges. It collects interest at higher rates as compared to savings and interest-bearing checking accounts.
With these features, it makes money market accounts useful for both short-term and long-term needs.
To put it simply, money market accounts are ideal for those who tend to carry big balances in their checking accounts, at the same time, enjoy the ability to earn more interest and write checks.
HOW TO OPEN A MONEY MARKET ACCOUNT
The process varies depending on where you open your money market account, but here are some of the common processes:
- You will need to submit an application wherein you will need to provide personal information like your name, date of birth, taxpayer identification number/Social Security number, mother’s maiden name, address, employment status, and income.
- You will be asked to decide whether you want to add a joint owner or not, add a beneficiary or not, receive checks to use with your account, and how much you want to deposit or transfer into your money market account.
- You will be asked to complete any verification requirements like submitting or uploading copies of your identification or income-related documents. This is to confirm the validity of the information you provided during the application.
- You will have to fund your money market account based on the minimum funding requirement of the bank.
TIPS WHEN OPENING A MONEY MARKET ACCOUNT
Before you even sign an application for a money market account, you may also consider the checking the following first:
- The account’s annual percentage yield of APY, which refers to the interest you will earn on your savings.
- The minimum balance requirement, and the fees that come with it in the event of failure to meet the required balance.
- Your withdrawal options — if the funds can be accessed through ATM, debit card, or check.
- Account fees, which include not meeting the minimum balance requirement, withdrawing money at affiliated ATMs, check writing, and excessive withdrawals. It may also include fees for bank checks, stop payments and wire transfers.
WHAT TO LIKE: Money market accounts are ideal for those who want to hold high balances in their account, at the same time want to enjoy higher interest rates.
WHAT NOT TO LIKE: Generally, money market accounts tend to have higher minimum balance requirements as compared to other types of bank accounts. Also, interest rates tend to be low sometimes. Needless to say, you need to watch out for fees. Withdrawals are also permitted six times a month only for savings accounts.
CERTIFICATES OF DEPOSIT (CDs)
Certificates of Deposit (CDs) are comparable to savings accounts except that CDs hold your money for a fixed term, which usually lasts from three months up to five or more years depending on the financial institution.
Unlike the other types of bank accounts, CDs let you earn more interest-wise. However, you will need to commit to keeping your money for the full term or you will get penalized for early withdrawal of funds.
CDs are ideal for people who want to save for financial goals with a particular end date. For instance, if you are aiming to buy a property in a year, then a CD would be ideal so you get to keep your money and let it grow until the time you already need it.
Definitely, CDs are not ideal for emergency funding.
HOW TO START USING CDs
To start using CDs, all you need to do is to get in touch with your bank or credit union. Generally, banks explain your options and even allow you to make CD investments online.
If talking to a banker in person is not feasible, you may also consider calling the bank’s customer service.
When talking to a bank representative, make sure to explain how much you’d like to invest, and also, ask about penalties and other alternative CD products they offer. Who knows, they might have a better CD option for you. The bank may also offer higher rates, more flexibility, and/or other beneficial features.
When staring a CD, make sure to only stick with those insured through the Federal Deposit Insurance Corporation or the National Credit Union Administration for safety purposes.
TIPS WHEN USING CDs
When considering opening CDs, keep in mind the following tips:
- Consider setting up a CD ladder especially if you are concerned about locking up all your money. A CD ladder makes a portion of your savings available periodically.
- Look for banks that offer flexible CD terms. Ideally, a bank that gives you the option to withdraw money early sans charging a fee.
WHAT TO LIKE: Lets the money that you do not need to spend right away grow. It gives you the option to either keep the money on CD accounts for a short-term or long-term period.
WHAT NOT TO LIKE: Withdrawing your money early comes with a penalty, which may cost a lot.
Last but not the least type of bank account are the retirement accounts or popularly known as the Individual Retirement Arrangements (IRAs).
Obviously, this particular account is intended for people saving up for their retirement.
One day we are all going to retire, and we’ll need money to spend on our needs (wants) by then. So, the best time to prepare for retirement is not later than now.
Just to be clear, although IRAs are the most common ones, there are also other retirement accounts out there, which include 401(k) accounts and other retirement accounts for small businesses.
Most of these accounts offer tax advantages. For instance, both IRAs and 401(k) plans keep you from paying income tax on the growth of your contributions each year. However, you will have to pay taxes at certain points depending on the type of account you have.
While traditional IRA and 401(k) contributions reduce your taxes now, once you withdraw, later on, you will have to pay taxes. Meanwhile, contributions to a Roth IRA do not reduce your taxes at the moment, but you will not have to worry about paying taxes on withdrawals later on.
You see, it’s just about picking the right choice for you.
The different retirement accounts we mentioned are the best types for saving for retirement as they allow you to invest your money in the stock market creating the potential to earn greater returns.
HOW TO OPEN A RETIREMENT ACCOUNT
Opening a retirement account vary depending on the financial institution where you will open one, and of course, the type of account.
Generally speaking, however, opening an account is pretty easy. All you need to do is head on to the financial institution’s website, choose the type of retirement account you want to open, and then fill in some personal details, which include your Social Security number, name, date of birth, contact information, as well as your employment information.
In addition, make sure to keep your money handy because you will need to fund the account once you open one.
TIPS WHEN OPENING A RETIREMENT ACCOUNT
When opening a retirement account, make sure to:
- Speak to a financial advisor and get help with regards to planning how much to save for your retirement account, and also the type of account and investments that are ideal for you.
- Check if your company is offering 401(k). If yes, consider contributing enough to get the match before you start putting money into your retirement account.
WHAT TO LIKE: This particular account is ideal for those who want to save money for their future. More so, retirement accounts might result in larger account balances over time.
WHAT NOT TO LIKE: For whatever tax benefit you get comes to a string attached. That is why it’s best to consult with experts first before opening one.
FINAL THOUGHTS ON TYPES OF BANK ACCOUNTS
You see, there are a lot of bank account choices – and choosing one will definitely depend on your financial goals.
To be able to determine the right bank account type for you, the best way to do it is to consult with a bank representative or if you have a financial advisor, then you may check with him or her as well.
So, have you found the best type of bank account for you yet?