Different types of bank accounts have different purposes and target users. It is vital to know these types and their differences to decide the best to make the most of your savings and eventually reach your financial goals. Choosing the best type shall allow account owners to access the services banks offer, including money management strategies, minimal fees, and many others.
There are five types of bank accounts. These are Savings accounts, Checking accounts, Money market accounts, Certificates of deposit (CDs), and Retirement Accounts. Know more about these and their respective uses in the following:
Savings accounts are best used for people who want to save more for their future. Mostly used by beginners, savings accounts can be opened even by children and teenagers, with their parents, as a way to establish their pattern of saving or stash their earnings from household chores.
Opening this type of account for the first time also means you are marking a relationship with a financial institution. You become a member of that institution, say a credit union, which serves as the onset of your record.
Savings accounts are ideal for saving money for future use and emergency purposes. It separates your savings from your other expenses, such as electricity and housing bills, for easier tracking. However, while a savings account is the best for beginners, it has a couple for drawbacks.
It has lower interest rates than other types of accounts, such as money market accounts or Certificate of Deposits (CDs). Also, they do not come with a debit card, so you cannot use it for purchase. There are exemptions, though. If your savings account is also enrolled in the same institution as your checking account, banks can give you debit cards for withdrawal.
Aside from enrolling from local banks or credit unions, one can opt for online savings accounts with ideal interest rates and low fees for charges.
Checking accounts are ideal for everyday spending and wisely managing cash flow. This type of account comes with a debit card for purchases and ATM withdrawals with check-writing features.
Moreover, it allows you to deposit cash and checks as well as pay bills even when online.
Traditional checking accounts do not earn interest, but they are checking accounts that provide interest as an option to earn extra, aside from your savings.
An owner of this type is advised to always balance their checking account monthly to evaluate the cash inflows and outflows. This helps them avoid extra charges, manage their money wisely, and spot fraud and errors, which can cause major headaches.
Money Market Accounts
Money market accounts have a mixed feature of savings and checking accounts. They have limited check-writing privileges and gather interest pegged at higher rates than savings or checking accounts. This is advisable for account holders who have short and long terms needs.
It is a good option in parking cash if one has higher balances in checking accounts but want to have the power to earn more interest and write checks. However, money market accounts need to be maintained with higher minimum balances than other bank account types. Withdrawals for this account type is also capped traditionally at six withdrawals per month only.
It is also advised to use this type for emergency funds or to place money for bigger financial goals such as down payments for new home security or a car.
Certificates of Deposit (CDs)
Certificates of Deposits are the same as savings accounts—only your money is held on a fixed term. For people who have financial goals with specific plans—say saving money for a one-year trip or buying a new house in the next years. Be it for three months only or as long as five years, your money deposited in this type earns more than any other types of accounts. The account owner must be committed to keeping his money in the account for the fixed term until the maturity date. If not, withdrawal penalties will be impost.
One of the reasons why people save is not just for short- and long-term plans for purchasing belongings and properties. Retirement is one of the reasons why people plan for the future. This account type lets you set aside money for retirements—either personal or for small businesses. Banks have offers of Individual Retirement Arrangements (IRAs) and 401(k) accounts, which lets account owners avoid paying income tax on the growth of your contributions each year. However, they need to pay taxes at different points depending on the account type. Just like in CDs, withdrawing of fund early have penalties and taxes imposed.
To know more information about this type of account, a financial advisor can best explain the options you have and how to maximize it according to your goals.
Based on Materials from The Balance