When you go to a bank to open a new account, you will have a variety of account types and features to choose from. Should you choose the basic checking option or an account that earns interest? Do you want the convenience of a bundled checking and savings account or the higher returns of a money market account?
To make these decisions, it’s helpful to first understand the differences between the most common bank account types. Here are some definitions to help you navigate your banking needs:
Checking account: A checking account offers easy access to your money for your daily transactional needs and helps keep your cash secure. Customers can use a debit card or checks to make purchases or pay bills. Accounts may have different options or packages to help waive certain monthly service fees. To determine the most economical choice, compare the benefits of different checking packages with the services you actually need.
Savings account: A savings account allows you to accumulate interest on funds you’ve saved for future needs. Interest rates can be compounded on a daily, weekly, monthly, or annual basis. Savings accounts vary by monthly service fees, interest rates, method used to calculate interest, and minimum opening deposit. Understanding the account’s terms and benefits will allow for a more informed decision on the account best suited for your needs.
Certificate of Deposit (CD): Certificates of deposit, or CDs, allow you to invest your money at a set interest rate for a pre-set period of time. CDs often have higher interest rates than traditional savings accounts because the money you deposit is tied up for the life of the certificate – which can range from a few months to several years. Be sure you do not need to draw on those funds before you open a CD, as early withdrawals may have financial penalties.
Money market account: Money market accounts are similar to savings accounts, but they require you to maintain a higher balance to avoid a monthly fee. Where savings accounts usually have a fixed interest rate, these accounts have rates that vary regularly based on money markets. Money market accounts can have tiered interest rates, providing more favorable rates based on higher balances. Some money market accounts also allow you to write checks against your funds, but on a more limited basis.
Individual Retirement Accounts (IRAs): IRAs, or individual retirement accounts, allow you to save independently for your retirement. These plans are useful if your employer doesn’t offer retirement benefits or you want to save more than your employer-sponsored plan allows. These accounts come in two types: the traditional IRA and Roth IRA. The Roth IRA is popular because the funds can be withdrawn tax-free in many situations. Others prefer traditional IRAs because these contributions are tax-deductible. Both accounts have contribution limits and other requirements you may need to discuss with your tax advisor before choosing your account.
Once you understand the types of accounts most banks offer, you can begin to determine which option might be right for you.
Interest rates can be compounded on a daily, weekly, monthly, or annual basis.
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