Bank Accounts: The Basics
Bank accounts, most people have one, but not everyone knows about the different kinds and their best uses. While they may seem like a drag to understand, knowing what each one does for your money can make you a savvier saver.
One key concept to look at before we get started is annual percentage yield. This concept is a good thing to keep in mind when selecting certain account types for savings.
Annual Percentage Yield (APY): the total rate of return for an interest-bearing account over a 1-year period.
Now that that is covered, let's go over some of the basic types of accounts.
Types of Bank Accounts
1. Checking Account
The checking account is the place where most people receive paychecks, spend money, and pay off bills. Checking accounts usually have a lower interest rate for the money you keep here, meaning you should look for alternative accounts to keep your savings.
2. Savings Account
The savings account is designed for money you don’t plan on spending immediately. While the checking account is used for spending, the savings account is used for building up money you don’t want to spend immediately. The classic savings account offers a relatively low interest rate, leaving better options on the table for where to keep your savings.
3. Money Market Account (MMA)
The Money Market Account is almost like a mesh of a classic checking and savings account. Depending on the institution, they can offer the liquidity of a checking account while also providing a higher interest rate while the money is kept there. This does vary by institution, some may carry restrictions, account minimums, and certain fees. One other thing to consider is the tiered interest rates, where the amount of cash in the account determines your interest rate. Checking these specifications beforehand is recommended so that you can find the best fit for you.
4. High Yield Savings Account (HYSA)
High-yield savings accounts (HYSAs) work similarly to traditional savings accounts but may offer higher interest rates. Rates vary between financial institutions and can change over time, so it's important to compare current rates, fees, minimum balance requirements, and account features. If the account is offered by an FDIC-insured bank, eligible deposits are generally insured up to $250,000 per depositor, per insured bank, for each ownership category.
5. CD - Certificate of Deposit
A Certificate of Deposit is another type of account offered by most banks and credit unions. This account is a type of savings where your money is locked in for a period of time. While locked up, this money gains an interest rate based on the period of time selected by you. However, if you try to take that money out before the maturity date, you can incur some penalties on the money withdrawn. If you have any planned future expenses AND you won’t be needing the money in the CD, it can be a great option for planning that out.
That’s a lot of information, is there an easier way to remember that?
Of course! One way to simplify it is with these examples below:
Checking - Where you pay/spend money
Savings - Money goes here that you want to save (lowest interest)
Money Market - Hybrid checkings/savings with higher interest rate (FDIC insured)
HYSA - Savings account with current highest interest rate (FDIC insured (usually))
CD - Account with competitive interest rates but locks up your money
If you have any other questions or just want to know more about banking, book an appointment here at the Financial Wellness Center. The center provides 1-on-1 counseling for students, meaning if you want to discuss other banking options or any other financial topic, this is the place for you!
Depending on your goals, each one of these accounts can benefit you in some way. By knowing what each one of these accounts does, you’ll be able to discern what works best for you!