Choosing the Right Account for Better Savings
Having a bank account is a significant step in having your finances in order. It is a safe and convenient way to keep your money and account for it. You can save for short and long-term purposes and deposit cash for everyday bills.
If you are new to the USA or it’s your first time opening a bank account, you first need to know that there are different types of bank accounts in the USA. And all banking accounts serve different purposes. So, your need for opening a bank account will determine the type of bank account to open. And as a first-timer, especially, it is important that you know the types of bank accounts available, so you can make an informed decision on where your money is going.
For that reason, this article will look at 5 common types of banking accounts in the US to help you determine which is best suited for you.
5 Most Popular Types of Bank Accounts
Savings Account
As the name implies, a savings account is where you save cash for specific or future use. It can save money you don’t need every other day but can also have easy access when you need it. A savings account is best for keeping excess cash you don’t need immediately. It is not suitable for everyday spending because banks charge withdrawal fees for withdrawing more than six times a month.
A savings account doesn’t come with a debit or ATM card or a paper check. All these restrictions do not defeat the purpose of the account - to save. So, it is a good way to cultivate a saving culture and save for rainy days.
Additionally, a savings account does have interest but not enough to make you rich. So, seeing this account as an investment account is not advisable. If at all, it should only serve as a way to save money to reach a particular amount you plan to invest.
Important Points to Note
- There is usually no maintenance fee with a savings account, although requirements differ from bank to bank.
- The interest earned from a savings account is considered taxable income.
- You can make transfers from your checking account to your savings account.
- Some banks require a minimum balance on the account.
Checking Account
You can think of the checking account as the opposite of a savings account. It is basically an account of your day-to-day transactions. It is where you keep money that you use to pay bills and run your daily activities. So, it is not surprising that it is the most popular bank account in the United States.
There are different types of checking accounts, and they depend on your needs, such as student checking, kids checking, and senior checking. However, basic or standard checking is the most common. Checking accounts may or may not require a minimum balance and could attract maintenance fees.
A checking account usually comes with a paper check or debit card that you can easily swipe at a grocery store or use for online transactions. You can also connect your checking account to recurring bills or subscriptions and have the money deducted automatically as due.
Besides, it can be connected to other accounts like your savings account to deduct certain amounts to save automatically. Checking accounts have an interest rate but are not as high as savings accounts.
Important Points to Note
- A checking account may or may not require a minimum balance to set up or maintain. The requirement differs for different banks. Some banks may require a maintenance fee if you don’t maintain a minimum balance.
- A checking account comes with a lower interest rate than a savings account. The interest rate is displayed as an Annual Percentage Yield (APY).
- A checking account may attract maintenance fees and other kinds of fees that differ from bank to bank. For instance, you’d be charged a fee if you “overdraw” your account and spend more than you have. Processing bounced checks also usually attracts fees.
Money Market Deposit Account
A money market deposit account is a combination of a checking account and a savings account. Like a savings account, it is an account for saving for longer periods. For example, it is a suitable account to save for the down payment on a car or a house. It attracts a high-interest rate and a six-withdrawal limit per month.
However, like the checking account, it usually comes with a paper check and a debit card. Although, the minimum deposit requirement for this type of account is higher than the two above.
Important Points to Note
- The interest rate of the money market deposit account is higher than the two above. So, you can use this account for funds you don’t need anytime soon. Interest is, however, taxable.
- The minimum deposit requirement is also higher than the savings and checking accounts.
Certificate of Deposit
A certificate of deposit (CD) account is also suitable for longer-term savings. They are accounts you use to lock up funds for a specific amount of time for high-interest rates. That means if you have a certain amount of money and think you may not need it in 6 months or 3 years, you can lock up that money in a CD.
CDs usually range from 6 months to as long as 5 years, but they could be as short as 3 months and as long as 10 years. The longer you lock up the money, the higher your interest. And withdrawing before the set date will either attract penalties or early withdrawal fees.
Important Points to Note
- CDs attract interest rates that are higher than the three above.
- CDs are tricky because they are risky - and not the good kind. The interest rate is high but not that high, and you could lose money if the economy is hit by inflation.
- You cannot access your money before the predetermined date, or you pay penalties.
Bonus: Other Types of Banking Accounts in the USA
Brokerage Account. A brokerage account is an investment account that you can use to invest money in stocks, bonds, or mutual funds.;
Retirement Account. This is a tax-advantaged account for saving money for retirement.
Final Thoughts
Knowing the different types of available bank accounts is important to help you know your choices and determine the kind of account that suits you. This way, you’d be able to make more informed choices and know what to look out for when opening a bank account in the US.