Types of bank accounts

When it comes to managing your finances, having a bank account is essential. Choosing the right bank account can significantly impact your financial goals, from paying bills to saving for future expenses. With various types of bank accounts available, it's easy to get confused about which one you need.

In this blog article, we'll explore the different types of bank accounts and how they work so you can make an informed decision about the best one for you.

Checking account (what is it & how does it work?)

A checking account is a standard bank account that allows you to deposit and withdraw money for daily expenses. Most checking accounts come with a debit card and allow you to write checks. They have no withdrawal restrictions and are used to pay bills, make purchases and receive payments.

Checking accounts offer different features, including free ATM access, online banking and overdraft protection, but these features may vary between financial institutions. Checking accounts typically don't pay an interest rate and some banks may charge monthly maintenance fees.

Savings account (what is it & how does it work?)

A savings account is an account that you use to save money, with an interest rate to help it grow. Money deposited into a savings account typically earns interest on the balance. Savings accounts are considered a low-risk option for keeping large balances in cash. They don't have debit card access and have withdrawal restrictions.

Financial institutions are required by law to limit the number of transactions you can make per statement cycle. Savings accounts are ideal for saving for emergencies, down payments, vacations or other future expenses. Interest rates on savings accounts may vary between banks, so it's essential to compare rates before opening one.

High-yield savings account

A high-yield savings account is a type of bank account that offers a higher interest rate than traditional savings accounts. These accounts are typically offered by online banks and credit unions, rather than traditional brick-and-mortar banks.

One of the main benefits of a high-yield savings account is its high interest rate. While traditional savings accounts may offer an interest rate of less than 1%, high-yield savings accounts can offer rates upwards of 3% to as much as 5.5%. This may not seem like a significant difference, but over time, the higher interest rate can lead to more substantial earnings.

In addition to the higher interest rates, many high-yield savings accounts also come with no monthly maintenance fees or minimum balance requirements. This makes them a great option for those looking to save money without worrying about additional fees or restrictions.

Certificate of deposit (what is it & how does it work)

A certificate of deposit (CD) is a time deposit that allows you to earn a higher interest rate for a set period. When opening a CD account, you agree to deposit a particular amount of money and lock it for a specific duration, ranging from a few months to several years.

The interest rate on CDs can be higher than a traditional savings account's interest rate, but they require a minimum deposit. In exchange, the funds earned will not fluctuate for the life of the CD or term. If you withdraw the money early, typically before the maturity date, you will be charged a penalty. The early withdrawal penalty can range from 30 days of the simple interest you would have earned on the CD to 180 days of interest or more.

No-penalty CDs

As the name suggests, no-penalty CDs allow you to withdraw your funds before the maturity date without any penalty fees. This can be a great option for people who want more flexibility with their money or who are unsure if they will need the funds in the near future.

No-penalty CDs tend to have lower interest rates since the bank is taking on more risk by allowing early withdrawals without penalty.

Rate bump CDs

On the other hand, rate bump CDs provide the opportunity to take advantage of potential interest rate increases. These types of CDs come with a predetermined "bump" option that allows you to request a higher interest rate if market rates rise during your term.

For example, let's say you invest in a 1-year rate bump CD with an initial interest rate of 2%. Six months into the term, market rates increase to 3%. With a rate bump option, you can request an increase in your interest rate to match the current market rate of 3%.

Money market account (what is it & how does it work)

A money market account is a hybrid of a checking and savings account that offers higher interest rates for a higher balance. The account usually requires a minimum deposit and has withdrawal limits. Interest rates on money market accounts are tiered, meaning the more you deposit, the higher the interest rate you earn.

Money market accounts generally have a higher minimum balance requirement than savings accounts. These accounts are ideal for those who want to earn a higher interest rate on their savings without losing liquidity.

Which bank account should you get?

Choosing the right account comes down to understanding your financial needs and goals. If you want to save money for the long term, then a savings account or certificate of deposit may be the best option. Just keep in mind that CDs have early withdrawal penalties so this account is less liquid than a regular savings account or money market account.

If you need an account for daily expenses, a checking account is a better choice. Before choosing an account, take time to compare fees, interest rates and features from multiple financial institutions.

Summary

Having a bank account is essential in managing your finances. With multiple options available, including checking accounts, savings accounts, certificates of deposit and money market accounts, choosing the right one can be overwhelming.

By understanding the difference between each type of account and your financial needs, you can choose the best account for your goals. Don't hesitate to ask questions or speak with a financial advisor if you need more guidance in making the right decision.