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Where you decide to put your money is an important part of determining your financial security and future. Bank accounts are places to deposit your cash, allowing you to save for a specific goal or access your money when you need to pay bills or purchase something.
The various types of accounts allow you to save, track spending, and even earn money in the form of interest. By being aware of how these accounts function, you can decide which accounts best meet your lifestyle and money goals. Doing this will let you maximize your return from the bank, minimize fees, and manage your money conveniently.
Bank account types
When it comes to your money, you’re looking for safety and security. But convenience goes a long way. Whether you prefer online banking or a traditional bank or credit union, there are different account options to choose from. It’s important to understand how each bank account works so you can make the best decision on where to keep and save your money. These are the most common types of bank accounts:
- Checking accounts
- Savings accounts
- Money market accounts (MMAs)
- Certificate of deposit accounts (CDs)
Now let’s take a deeper look at these 4 common bank accounts available to most consumers.
The most basic type of bank account is the checking account. It’s generally where paychecks are deposited, bills are paid, and funds are kept for quick access. A checking account can be easily opened at a bank branch, credit union, or through an online bank.
Some banks require no minimum account balance for checking accounts. Typically you need to keep just enough money in your account to cover the amount you spend. This is important so you avoid overdrawing your account and getting hit with fees.
Banks can also offer multiple checking account options to fit different banking needs, including:
- Teen checking
- Student checking
- Senior checking
- Interest checking
Checking accounts typically have FDIC insurance. This protects your money up to $250,000 per person, per bank, in the event of bank failure. All licensed U.S. banks have this type of insurance for their deposit accounts.
How to choose a checking account
If you’re ready to open a checking account, you have the options of a traditional bank (think brick and mortar) or an online bank. Both have their benefits, but you’ll want to choose one that best suits your lifestyle. If you seldom visit the branch in person, an online checking account offers the benefit of being able to do your banking from anywhere.
Next, consider which factors will affect you and your finances, such as minimum balance requirements, monthly maintenance fees, other banking fees, ATMs, and ATM locations.
A savings account is a type of deposit account where you can set aside money for the future. It depends on the bank, but most savings accounts allow you to collect interest through your deposits. Make sure to read the fine print as some savings accounts require a minimum balance and apply a monthly fee.But they typically don’t come with a debit card, because savings accounts aren’t designed for paying bills or day-to-day spending. Savings accounts can earn interest on the funds you deposit, and they can help you build an emergency fund or work toward a savings goal, like a down payment for a car.
How to choose a savings account
If you’re looking to open a savings account to put money aside for a long-term goal, consider which type of savings account may be best for those actions. And while a basic savings account can have the benefit of earning interest, these accounts will likely incur a monthly fee if you use a traditional bank.
The benefits of an online bank are typically fewer fees as well as an increased rate for those who save. A high-yield savings account often offers an annual percentage yield (APY) that’s much higher than the national savings APY, depending on the bank.
Money market account (MMA)
A money market account (MMA) is a cross between a savings and checking account that acts as a single deposit account. An MMA typically lets you earn interest on your balance, but it can also offer check-writing and debit card access for spending or paying bills.
MMAs may have higher deposit limits when you first open an account and higher minimum balance requirements to continuously maintain vs. a regular savings account. For example, an MMA may require $500 or more to open the account, while a savings account usually requires no minimum deposit. You might open an MMA if you’re looking to earn interest on money you don’t plan on spending soon, but can easily withdraw with a debit card or check when you do.
How to choose a money market account (MMA)
Choosing an MMA can be just like choosing a checking account when it comes to evaluating fees and features. If you want a debit card or check-writing abilities, make sure the particular MMA offers those features (not all of them do).
Other things to keep in mind are the minimum deposit and balance requirements of the account. Even though it’s unlikely you’ll need several thousand dollars to open an MMA, you may still need a minimum balance requirement to attain the best APY with some accounts. This is because banks may tier MMA interest rates, meaning the banks pay you a higher APY in return for depositing a higher balance.
Certificates of deposit (CDs)
Certificates of deposit (CDs) are accounts that you use to save money, where that money earns interest that you can collect after waiting a certain amount of time to withdraw it. CDs can be a low-risk way to invest your money for a set period of time at either a fixed or variable interest rate. With a traditional CD account, you’ll leave your savings in place for a period of time, called the maturity term, where you can collect the interest you earned on your balance once that time is up.
A bank may offer CD accounts with terms ranging from a few months to several years. As soon as the CD matures, you have options. If you’re looking to continue your savings, you can roll the balance right into a new CD. Or, if you want to access your funds, you can withdraw the sum of your original deposit plus the interest you’ve earned over time. This type of bank account is best for saving for financial goals with a planned end date. For example, if you know you’re going to purchase a new car in 6 months, a CD would be a good place to hold your money, letting it grow until you need it.
How to choose a CD account
When choosing a CD account, you’ll want to consider the maturity term and the interest rate or APY associated with the account. A longer term can offer better rates, but you’ll have to wait longer to touch those savings.
As with any financial decision, understanding the market of interest rates is the key. When rates are low, it’s a great time to consider an online CD. Either way, be sure to shop around for the best offers.
What type of bank account should I open first?
Most people start by opening a checking or savings account when looking for a place to manage their finances. These accounts are a great starting point for day-to-day transactions and savings goals.
How many bank accounts should I have?
This depends on your financial situation. Checking accounts are best for everyday spending, whereas savings accounts, money market accounts (MMAs), and certificates of deposit (CDs) are better for saving and earning money on funds you aren’t currently using.
Can you open an account without a Social Security number (SSN)?
The simple answer is yes because there’s no law indicating that you must have a Social Security number (SSN) to open a bank account in the U.S. However, most banks and credit unions must verify your identity, and some could require your SSN.
Which type of bank account typically offers the least interest?
Checking accounts typically offer the lowest amount of interest or no interest at all since these types of accounts are mostly used for everyday spending and paying bills. Since your money is moving in and out of a checking account frequently, it wouldn’t stand much of a chance to earn interest over time.
Which type of bank account is best for everyday transactions?
A checking account is the best bank account to use for day-to-day transactions, spending, and paying bills. Since it’s essentially an account to hold your monthly expenses, it’s the perfect account to start with and to hold your monthly paychecks.
What type of bank account cannot be garnished?
Because a lender can garnish your wages if you have outstanding debts, you may be wanting to protect your finances if they’re held in a bank account. If you fail to pay your debts within the given time frame, a court can enter a judgment against you that gives the lender the power to collect that money from you. If this were to happen, be aware that certain types of income can’t be garnished from a bank account, such as federal and state benefits, like Social Security payments.
Final thoughts: How to decide which bank account is right for you
Bank accounts serve different purposes for your personal finances. If you’re still not sure which type of bank account is right for you, consider asking yourself the following questions:
- How often do I plan to withdraw money?
- What will the money in this account be used for?
- How much do I plan to keep in the account?
- Am I looking to earn interest on my money?
These answers can guide you toward the type of account that will work best for you. You can also open more than one account. For example, you could open a checking account for everyday spending, a savings account for your savings goals, and a CD for funds you don’t plan to use for a while. Figure out the combination that works for you, do your homework on each account, and know you can always add or remove accounts as time goes on and your financial situation changes.