6 Different Bank Accounts You Should Know Of
By Daksha Gehani
Simply saving doesn’t end your financial troubles. Making proper use of the money to direct it in proper spaces is important. That’s where budgeting comes into play and you create a budget to do two basic things — allocate your spendings and increase your savings.
Within the two options, there are many more things you can do with your money that you might not be aware of. You may be aware of savings accounts, for example, but there are many more different bank accounts you can have.
Each of the accounts serve a different need and based on that and your goal, you must make a decision as to which account your money needs to go into. Doing this minimizes the fees you have to pay and maximizes your return. It’s the most efficient way to manage your money.
Having said that, let’s explore the 6 types of bank accounts:
- Savings account 👛
This must be the most well-known type of all! Savings account allows you to earn interest on the money you put in it.
This account comes with restrictions on the number of withdrawals you can make from it in a month. It also comes with a minimum balance requirement at all times. This makes the account perfect for your emergency funding as those funds won’t be touched for any other reasons.
Parents can open a savings account even for a child to use as their saving stash space. So, this type of account can be a good option for your whole family- both adults and kids!
A disadvantage with savings accounts is that it yields a low-interest rate on your money, compared to other types of accounts like CDs.
2. Checking account💼
Checking accounts can be used for debit card purchases and checks, as money is withdrawn directly from the account. So, they are used as the most basic account for easy day-to-day purchases/payments and withdrawals.
Unlike savings accounts, they yield you any interest. Due to the different fees they can charge, these accounts can become expensive quickly.
Usually, there is no need for a minimum balance in a checking account; however, that is on the condition that you keep in mind not to overdraw from your account.
If you overdraw, the bank will pay the full amount of your purchase and as a penalty, you will be charged fees apart from reimbursing the payment.
3. Money Market Accounts 🏦
A MM account is a crossover between a savings and checking account. They offer higher interest rates than a savings account and you are allowed access through checks and debit cards.
With such a great option available, it makes sense for everyone to use this account, doesn’t it? Surprisingly, people usually don’t — because to open this account, you need to maintain a high minimum balance deposit.
As a result, this account can be a good option for high amounts of emergency funds. This way, your emergency fund earns you more money than a savings account would and you can maintain the minimum balance.
4. Certificates of Deposits (CDs)📜
This account is a low-risk savings instrument, wherein once you deposit money, you cannot withdraw it before it matures. This is because they have a fixed maturity date (between 3 months to 5 years) and a fixed amount of interest that is higher than savings or checking accounts.
As a result, a CD is a great way to earn some money but it’s important that you are completely sure that you won’t need the money you put in before the fixed term.
In case you withdraw it before the term is completed, you will have to pay a penalty to the bank which varies according to the length of the term, usually in the form of interest for a few months.
5. Retirement Accounts (RAs)👩🦳
This account allows you to avoid paying income tax on interest that you earn from a savings account or a CD in the year, which makes it tax advantageous! *the best!*
Note: You may or may not have to pay tax on those earnings at a later date depending on the terms.
Even so, this account is good to save for the future. It’s drawback is that every tax benefit is attached to different terms and conditions. You should read the account agreement carefully and have proper knowledge of the rules from the banker.
6. Brokerage Accounts📝
This account is an investment instrument; a way for you to invest your money in stocks and bonds. As a result, they are considered high risk because of the underlying risk in their investment instruments.
As much as the high risk means you could lose money, you can also grow the money over term, which is why if you want to earn the money and can afford to take the risk, this is the account for you.
In a nutshell, all banks offer a variety of accounts for you to best manage your money and each serves the completion of a different goal. So, it is important for you to do your research and be clear about your needs and what you intend to achieve from your money.
This article is part of the bite-size bundle ‘Banking for Students’ on the Finllect app. Find the Finllect app on Appstore today! 💁