Walking into a bank to open an account can seem daunting at first, there’s so many different accounts to choose from! It doesn’t have to be daunting once you know the different types of accounts that you can open. We’ll take a look at the different accounts that a bank offers below and see what advantages that each account has.
Checking Accounts
Checking accounts are one of the oldest ways to have an account that you use day-by-day. Paper Checks may be outdated and going the way of the Dodo in the next ten years, but like vinyl records and cassette tapes, they still hang around for good reason as Paper Checks are almost always accepted with proper identification.
There are different variants of checking accounts that you can open at a bank. Some are interest-bearing which means that if you have a certain minimum amount in the account, it will accrue interest every month or every quarter. Some are completely free to use every month with a certain fee schedule affixed to the account (overdraft fees, etc.). Some checking accounts will even pay for your checks, usually you pay for the creation of the checks and have them mailed to you along with a checkbook.
The basic tenements of a checking account are pretty cut and dried. If you want to pay for something with a check, you write the amount and the payee on the check while making sure that you have the amount in the account to cover the amount of the check you just wrote. If you don’t have enough in the account, most banks will cover the difference (overdraft) and charge you a fee for doing so, this is called an overdraft fee. Some banks do not honor overdrafts and will not cover the check and charge you with an NSF fee, NSF stands for Non-Sufficient Funds.
There are some hybrid checking accounts that combine checking and savings together in one account. These are usually termed Dividend accounts or interest checking accounts. They combine the high-interest of a savings account with the liquidity of a checking account. The only drawback to these types of accounts is that you have to have a high monthly minimum balance ($2,500 or $5,000 in some cases) to get all of the benefits of the account.
Savings Accounts
Savings accounts are meant to be used as a piggy bank of sorts, to not touch the money and watch it grow. Many banks link this type of account with your checking account to offer easy transfers between the two. Many banks also use your savings account to cover any check that may put your checking account into overdraft status.
CD (Certificate of Deposit)
This is a special type of savings account that you can use to sock money away for a defined period of time, anywhere from 3 months to 5 years. The advantage of a CD is that you experience much larger rates of return on interest in exchange for the bank’s use of your money. If you can wait it out and not be tempted to cash the CD out, you would do well to use these to experience a good rate of return on your money.
IRA Retirement Accounts
IRA’s will be the last account we’ll look at, IRA’s are a retirement account that you can add money to at any time. You can set up deposits every paycheck from your employer to add to this account. You must keep the money in the account until retirement age (either 59 1/2 years of age up to 65 years of age) otherwise you’ll be penalized 10% on your early withdrawal. You can also roll your IRA account into another IRA account if you switch banks or you can convert your IRA account into a Roth Retirement Account. Roth’s work similarly to IRA’s except that with the Roth, the taxes are already taken out at point of deposit. This means that your Roth withdrawal later on will be tax-free.