Understanding The Different Types Of Bank Accounts

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Bank accounts are useful tools that can help you manage your finances. The varied types of accounts allow you to save and keep track of spending, and some will even earn you more money in the form of interest.

If you’re interested in opening a bank account, you must decide among the different kinds and familiarize yourself with the rules for each. You can determine which accounts best meet your lifestyle and goals. Most banks offer four types of accounts.

Checking accounts

A checking account provides easy access to your money for daily spending. Checking accounts are the most accessible type of bank account, since they allow you to deposit and withdraw money typically with few or no limits. Though checking accounts don’t traditionally earn any interest, some banks and credit unions do offer interest-bearing checking accounts. 

Checking accounts typically come with a debit card, which you can use to make purchases or withdraw cash from ATMs.

Some checking accounts charge fees for maintenance, ATM withdrawals and minimum balance violations. Comparing options can help you find a checking account with the lowest fees and best terms for you, such as whether an account refunds ATM fees, should you frequently need to withdraw cash.

“Check to see if your bank accounts are FDIC insured, so that your money is protected up to $250,000,” says financial wellness coach Katy Chen Mazzara. “Next, make sure your bank isn’t nickel-and-diming you on fees, since they do add up.”

Mazzara says, for a checking account, there should be an ease of deposit, withdrawals, and again, no fees or minimum balances, because your checking account should be fluid, and you don’t want to get dinged every time your checking dips below a certain amount.

Savings accounts

A savings account is a good place to park money that’s not to be spent immediately. Savings accounts earn interest on the funds you deposit, and they can help you build up an emergency fund or work toward a savings goal, like a down payment on a house. Some banks, especially online-only banks, offer high-yield savings accounts, which earn a much higher yield than a standard savings account.

Unlike most checking accounts, savings accounts may impose restrictions on how many withdrawals or transfers you can make each month, typically six maximum. Most also don’t come with checks or a debit card.

Savings accounts vary in interest rates, method of compounding interest, service fees and minimum opening deposits.

Savings accounts are the right place for money you’re preparing to use for short-term goals and emergencies. This includes funds set aside for car repairs or replacement, appliances or furniture, and periods of no income (between jobs). Separate savings accounts for each of your goals help you keep this money distinct from daily spending so you’re ready when these needs or opportunities arise.

— Todd Christensen
housing counseling and education manager at MoneyFit.org and author of Everyday Money for Everyday People

Money market accounts

At its core, a money market account (or MMA) is typically a combination of a checking and savings account. Money market accounts tend to offer a high annual percentage yield (APY), but they may also have a higher minimum balance requirement. Some money market accounts come with checks or debit cards, but the number of monthly withdrawals from the account is usually limited just like a savings account.

CDs

Certificates of deposit (CDs) allow you to invest money for a specified period at a fixed interest rate with minimal risk. Terms range from a few months to several years. CDs typically pay higher APYs than other bank accounts, in exchange for a commitment to keep the money in the account for the entire term. Taking money out before the term ends can result in a lofty early withdrawal penalty, though some banks offer no-penalty CDs that forego early withdrawal fees in exchange for lower interest rates.

Which bank account is right for me?

It’s common for people to have more than one bank account to fulfill their different financial needs. For example, you could have a savings account for money not needed right away and a checking account for daily spending. If you’re looking for a place to stash some extra cash away and grow your wealth, then you might also want to open a CD.

Confirm your bank is FDIC-insured before you open your account. Consider these factors when deciding what combination of bank accounts you want to have:

Moreover, when choosing which bank account to open, there’s more to consider than just the type. It’s also important to make sure the fees are minimal or waivable, you can meet any minimum opening deposit requirements and the features offered suit your needs.

Bottom line

Remember that you can open more than one bank account to meet your various financial needs and goals. Many banks offer several types of bank accounts, so you can do all your banking with one institution, though finding the best deal may require opening accounts at separate financial institutions.