The one big decision an individual handling his or her money has is the choice of selecting the best bank account to meet his or her financial needs. Of the numerous types of bank accounts offered, at times choosing the appropriate type may be quite confusing. Whether you save for the future, pay some bills, or just make ends meet, it makes a huge difference on which type of bank account you will have to manage your funds. We will break down the common types of bank accounts: checking and savings accounts. We will compare them with significant features and nod towards how you should be choosing the right account type based on your financial goal.
There are different types of bank accounts, and each of them is created for a specific purpose. Knowing the options is the first step in selecting the right type of account for your needs. The most common types of bank accounts are given below.
Checking accounts are the most common type of account in banks. They are for regular transactions: paying bills, depositing a paycheck, and making purchases. One of the best features of checking accounts is their accessibility. You may write checks, use debit cards, and access ATMs without restrictions. The online banking services are also part of many checking accounts; this way, you may easily monitor your balance, transfer funds, and pay bills remotely.
However, checking accounts do not really earn much in terms of interest. They simply follow the record of your daily funds or cash flow rather than saving money. Banking institutions may also charge monthly maintenance fees for its usage, overdraft charges, and other possible additional fees.
Savings accounts are for those who want to save money over a long time period and earn interest. Though you cannot usually write checks or use a debit card to spend money daily, it offers a place to keep your money safe with the added benefit of earning interest. Generally, a savings account offers a higher rate of interest than a checking account.
One of the reasons you save with a savings account is because these accounts promote saving as it cannot allow one to make more withdrawal checks. This keeps many from wasting their money spent in frivolous activities. Savings accounts may not be assessed higher fees than checking, but may have a withdrawal or minimum balance fee among others.
There are other kinds of savings accounts; some of these accounts will normally pay a higher interest rate in exchange for requiring a larger minimum balance. A money market account can sometimes act as a hybrid between a savings account and a checking account because it can allow limited check-writing capability, debit card usage, yet there is usually some kind of restriction on how many withdrawals or transfers a customer is allowed to make monthly.
These money market accounts are ideal for those with a larger sum of money that they intend to save but may need access to in case of emergencies. The interest rates vary between banks but are higher than the regular savings account.
A certificate of deposit is a type of savings account in which you agree to keep deposited with the bank for a specified period of time, ranging from just a few months to several years. For this agreement, the bank pays out a fixed interest rate on the money you deposited. CDs are best suited for those who have some amount saved and can let the funds be idle for a period and who require a sure return.
The disadvantage of CDs is you can't access your money without penalties until the term is over. On the other hand, if you don't mind locking up your money for a fixed period, CDs can pay higher interest rates than saving or money market accounts.
An IRA is a type of savings account tailored for retirement. There are two significant types of IRAs: the traditional and the Roth, both offering tax benefits: deferral of taxation on earnings or tax-free distributions at retirement, depending upon which kind of IRA you have. However, contribution limits exist, and even some rules about when to access your money without the penalty.
IRAs are not for short-term saving but do well in terms of long-term planning. Hence, if you are planning to save for retirement, it would be appropriate if an IRA is chosen for the purpose of savings.
Perhaps one of the most commonly selected decisions a person makes regarding a specific type of bank account to choose is whether or not they should get a checking account or open up a savings account. These two different types of accounts each hold two different purposes; knowing the main differences between the two would be greatly beneficial in this process.
Purpose:
Checking accounts are for frequently made deposits and withdrawals-you can access your money when you need it. You use a debit card, write a check, and can even now do it online.
A savings account is for the person that has a plan to be saving for the future yet wants to earn money for that savings. Withdraw is limited, so maybe even encourages some savings.
Interest:
Checking accounts hardly have any interest. So, your money won't grow much in time.
Savings accounts, however, earn interest, so your money can grow. The interest rate is different, but is generally higher than that offered on checking accounts.
Access:
Checking accounts are highly liquid and can make unlimited withdrawals and transfers, which is suitable for paying bills and meeting everyday expenses.
Savings accounts are not that liquid as the withdrawal and transfer opportunities are restricted. Most banks put some restrictions on the number of withdrawals or transfers in a month to encourage savings.
Fees:
Monthly maintenance fees
Overdraft fees
Charges to use other banks' ATMs.
Savings accounts generally have lower fees but might charge for excessive withdrawals or low balances.
Comparing the key features of different types of bank accounts will decide your choice. Here are some things to consider while making your decision:
Account Fees:First thing one will notice and pay attention to are account fees, and there will always be some charges attached to every account type. Some will charge a maintenance fee at the end of every month, while others will automatically deduct overdraft or insufficient funds fees. Always delve deeper into the fee structure and ensure that the chosen account will not take money out of your pocket.
Interest Rates: Interest rates can vary significantly between accounts. If your goal is to save money, a higher interest rate is essential to ensure your savings grow over time. Compare rates among different types of savings accounts, money market accounts, and CDs to find the best return on your investment.
Accessibility: Consider when you might need access to cash. If you foresee making lots of withdrawals, then a checking account is the better option. But if you do not think that the money you are saving will be needed anytime soon, saving in a savings account or CD would be the better option.
Minimum balance requirements: Some bank accounts require a minimum balance to be maintained and not incur some charges or earn interest on deposits. Make sure you are comfortable with the minimum balance requirement before opening an account, so you do not incur extra charges.
Account Features: Most new banks offer extra features including mobile banking, ATM access, and sometimes rewards programs. If you need the above features, then try an account that has them all. Some accounts also allow for online budgeting which may help you track your spending so that you can save more.
To make the right decision on which type of bank account is right for you, it's important to align your choice with your financial goals. Here are some tips for choosing the best account based on your needs:
For Everyday Purposes: If you are going to use this for your daily expenses like bills to be paid or buy things in store, then you really have to get a checking account. To get a checking account, make sure that there are minimal fees and ready accessibility plus online banking is there.
For Saving Money: If your aim is to save money for some future objective, a savings account or money market account would be more suitable. Compare interest rates, fees, and features offered by different savings accounts and identify the one best suited to your needs.
For Long-term Saving: If you save money for long-term goals, then saving in an IRA or CD can be the best options because these accounts have relatively high interest rates and tax benefits that can be tapped in to create wealth over a period of time.
For Large Sums of Money: If the amount is high, but you do not need to use it in the short term, then a money market account or a CD would be the right one for you. It is better at interest rates and is appropriate for savings at this level.
Choosing the right type of bank account will be one of the most important decisions that you make about your financial future. Whether you want to manage every day's cost, save for the future, or build wealth, there is an account directly suited to your needs. It is helpful to know what checking and savings accounts and other products such as money market accounts and CDs are so that you can more effectively match a product to objectives. Consider the fees, interest rates, and access associated with your chosen account. Be sure to look at which features will matter most to you in that particular account; with more time spent deciding on a proper account for yourself, managing your money becomes easy, you gain more confidence about achieving financial goals, and you're on track to success.
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