What are the different types of bank accounts to consider?

Kumiko Ehrmantraut
Kumiko Ehrmantraut

Latest posts by Kumiko Ehrmantraut (see everything)

Just as there are different types of banks with different benefits, there are several types of accounts that you can open.  Let's examine the options available.

A bank account is a bank account, it doesn’t matter where you go, right?

Not quite.

Just as there are different types of banks with different benefits, there are several types of accounts that you can open. Having a bank account or credit union account is an integral part of managing your finances, so it is important to know the options available to you.

Before opening a bank account, some factors to consider are minimum balance requirements, fees, interest, and the general convenience of banking with a particular bank.

The most important thing is to determine the type of bank account you want. But you can only do that if you know the types that are available.

What are the four main types of bank accounts?

Most banks offer four types of accounts, although some larger banks can offer up to six.

The four main types of bank accounts you can expect to find at your local bank or credit union are:

  1. Checking accounts
  2. Keeping accounts
  3. Money Market Accounts
  4. Certificates of Deposit (CD)

Larger banks, conglomerates, and affiliates often offer two additional types of accounts:

  1. Individual Retirement Accounts (IRA)
  2. Brokerage accounts

While most people often associate these types of accounts with traditional brokerage and investment houses, more and more banks are offering them to their clients.

Let’s take a look at why you might want one specific account type over another.

Checking accounts

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For most people, a free checking account is considered the “home base.” This type of account essentially provides unlimited access to your money for little or no interest, although there are “premium” checking accounts that offer interest if you maintain a high balance. It’s an easy account for people to deposit paychecks, pay bills, and quickly sign in when they need money.

A checking account comes with a debit card, which works similar to cash and a credit card. When you go to a grocery store or gas station, you can swipe the debit card like a credit card, but instead of accumulating a balance, the money is deducted from your checking account. Keep in mind that some transactions can take several business days to process, so it’s especially important to keep track of your spending with a debit card or you could accidentally double spend money!

Two key features to consider when looking for a checking account are (1) direct deposit capabilities and (2) online banking through an app or the bank’s website. Although these features are becoming more and more standard, there are still some smaller local banks that don’t offer them yet.

When looking for a place to open a checking account, ask about their fees. Remember, large banks and credit unions make money by charging fees, so it is important to know these costs in advance. Typical fees include overdraft fees, bounced (returned) check fees, and monthly maintenance fees.

Keeping accounts

A savings account is exactly what it sounds like – an account where you can save your money! This is a great place to store money that you don’t need right away, but can be quickly accessed just in case. Unlike investing in the stock market, you don’t have to worry about a market downturn in case you need the money. While you won’t get rich by putting your money in a savings account, it is a great place to create an emergency fund.

I personally recommend CIT Bank Savings Generator, since they offer tiered interest rates of 0.40%. Since the average interest rate on the savings account today is 0.06%, the best thing for my family is definitely saving with CIT Bank.

This begs the question: why open a savings account in the first place? Why not keep everything in your checking account until you need it?

Because opening a savings account adds another layer of self-responsibility. If the money is kept in your checking account, you could accidentally spend it. Plus, by keeping your money in a separate account, you reduce the temptation of impulsive purchases that can quickly deplete your balance.

Since checking accounts are not designed for daily spending, there are generally limits on how much you can withdraw each month. This limit is 6 monthly withdrawals, although you may want to check with your bank and inquire about fees or penalties if you need to withdraw from your savings more than 6 times a month.

Money Market Accounts

Money market accounts, which are also known as MMAs, combine key features of checking and savings accounts. When you create an MMA, you can get checks and a debit card. However, the limit of six withdrawals also applies to this account.

The main benefit of an MMA is that they offer much higher interest rates. To qualify and maintain these rates, a large initial minimum deposit is required. The deposit typically ranges from $ 2,500 to $ 25,000. Most banks also require you to maintain a high daily balance requirement.

Certificates of Deposit (CD)

A certificate of deposit (CD) is a specific type of savings account that keeps your money locked up in the bank until the expiration date. CDs can last from a few months to several years. In exchange for keeping the money invested, you enjoy a higher interest rate. However, the average return is around 1%, which is much lower than the inflation rate, as well as the returns you could get on other investments. In general, the longer the term of the CD, the higher the interest rate.

If you need to make an early withdrawal before the due date, you can. However, this comes with a hefty penalty.

For people who want to keep their money in the bank instead of investing it, a CD can make sense. But if you need to withdraw your funds early or don’t like the idea of ​​your money being “pinned down,” then a traditional savings account is probably the best option.

Individual Retirement Accounts (IRA)

IRAs provide tax-deductible or tax-deferred forms for people to save and invest for retirement.

However, it is important to note that you cannot buy and trade stocks directly through a bank. Most banks have a brokerage arm or a relationship with another company that will allow you to do this. For example, Bank of America allows you to trade online through Merrill Edge, its discount brokerage. Similarly, JP Morgan Chase has Pursue your business investment and Ally offers investment opportunities with Ally Invest.

Some brokerage firms that were previously known exclusively for investing, such as Charles Schwabb, are beginning to offer checking and savings account services to their investors. The lines between banking and investment are different, but they are beginning to blur.

It is a complex area with many nuances, so if you have any questions, feel free to ask your local bank team!

Brokerage accounts

If you want to invest money in the stock market or mutual funds, but don’t want to do it specifically for retirement, then a brokerage account is for you! You can withdraw your investments at any time, while IRAs have age requirements for distributions.

You own the money and investments that are in your brokerage account. Online brokerage accounts allow you to manage your own investments directly. If you are new to investing or prefer to have an experienced expert do it for you, you can opt for a managed brokerage account. Investor heists, which are automated investment systems that circumvent the need for a human investment manager, are also gaining popularity.

What is the difference between a bank and a credit union?

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Now that we’ve covered the different types of financial accounts available, it’s time to discuss the differences between credit unions and banks. While both institutions generally offer the same financial products and services, the way these institutions are structured varies greatly.

The key differences include:

  • Property.

    Banks are for-profit organizations and are owned by investors. Credit unions, on the other hand, are non-profit and directly owned by their members. Because of this, it is much more difficult to join a credit union, as they only accept members based on their place of employment, membership in local organizations, or if you have an immediate family member who is already a member.

  • Rates.

    Since credit unions are not for profit, they generally offer better benefits compared to a normal bank. This translates to lower interest rates on credit cards or loans and higher interest rates on your checking and savings accounts.

  • Scale.

    Most banks have a national or regional presence, while credit unions are usually tied to a geographic area. If you bank with a national bank, for example, you can access their network of ATMs and branches across the country whenever you travel. To compensate for this, credit unions have established cooperative networks so that members can still deposit and access funds on the go.

  • Customer service.

    It’s not that national banks can’t have good customer service. Rather, it is that credit unions are explicitly community-centered. If you frequent your local credit union, you are more likely to establish a meaningful business relationship. Credit unions are founded to benefit the local community, so their success depends on your own financial success.

A third type of bank that is gaining popularity are online and mobile banks.

While traditional banks allow you to access your account online and through a mobile app, they still have physical storefronts. You can stop by the nearest branch in person. However, a true online and mobile bank no longer needs a physical branch. Since the bank does not need to pay the overhead costs of a physical location, they tend to offer lower fees and higher interest rates.

This is one of the many reasons I do business with CIT Bank.

By reviewing the different types of accounts and financial institutions available, I hope you can find the best solution for you and your family.

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