Here's an overview of each type of bank account, plus how to choose which ones are best for you. Although there are various kinds of bank accounts in addition to those explained here, these are four of the most common ones available.
A checking account is the most common type of banking account. It's where most people deposit their paychecks and draw from to pay their bills. Accounts are insured by the FDIC for up to $250,000, making it a safe place to keep your money. Most banks provide a free debit card with your account, so it's easy to make cash-free purchases at stores and online. You can also get checks if you need them, although you usually must pay for them.
Which type of bank account is best for everyday transactions? That would be checking. It's easy to pay for everyday expenses like groceries and gas and automate recurring expenses, like your phone bill, life insurance premium, and Netflix subscription.
When choosing a checking account, there are a few things to watch out for, including a minimum balance and a monthly service fee. Look for accounts that don't cost you money while still providing quality services and features.
A savings account is a place where you can store money until you need it. For instance, you may put funds into a savings account that you plan to use for a vacation, car repairs, or other goals. You don't need the cash right now, but you may need it in the future.
Some banks offer a modest interest rate on the money you keep in your savings account. Often it's less than 1% APY, but it's still worth shopping around to see if you can earn more as your money sits there.
Savings accounts don't come with debit cards or checks. You must transfer the money to a different account or access your cash through an ATM. Also, note that federal regulations limit your monthly withdrawals to just six per month.
Called a CD for short, a certificate of deposit is a type of savings account that locks in your money for a set time period. But the interest rate you earn is also fixed. Terms range anywhere from a few months to several years. The longer term you choose, the higher interest rate you'll earn. You'll forfeit some of the accumulated interest as a penalty if you take out any of your money before your CD matures.
The problem with CDs today is that rates aren't much more competitive than other savings accounts that don't lock in your money. One-year CDs are still earning far less than 1%. So, for many people, it's not worth putting their money into a CD instead of a savings account. The interest earned doesn't outweigh the lack of flexibility you have in managing your money.
A money market account combines both checking and savings account features. You'll typically earn interest on your account balance, like a savings account (and often at a slightly higher rate), but you'll also get a debit card and/or checkbook attached to the account. However, it's not ideal for everyday spending because you're subject to those federal limits of six withdrawals per month. Instead, view it as easy access to that cash in case of an emergency.
The downside to a money market account is that you typically need a higher minimum balance to qualify for those higher interest rates. It's an option to consider as you grow your savings and want to earn a little bit more interest on that balance.
Opinions vary on the perfect number of bank accounts to have in your name. At the end of the day, the answer boils down to your preferred money management style. At a minimum, open at least one checking and one savings account while avoiding any unnecessary fees.
Then consider your financial goals and how you like to organize them. You may prefer to keep your money in just those two accounts, then independently track your progress towards those goals, like through a budgeting app or on paper.
Alternatively, you may decide to open multiple accounts to track where your money goes. You could have separate checking accounts for certain expenses, like fixed bills and discretionary spending that fluctuates. You could also have separate savings and money market accounts for specific goals, such as emergencies, holiday spending, and vacation. Try different systems to decide how many bank accounts make sense for your style and habits.
Understanding your options for different types of bank accounts is a great way to flex your financial muscles. Another critical "adulting" skill to learn is Life Insurance 101. Buying life insurance with Ethos is easy and affordable, especially for the peace of mind you'll get in return.