Beginner’s Guide to Banking | The rise of Motley Fool
Most banks and credit unions allow you to put your money in:
Let’s look at the pros and cons of each.
What is a checking account?
Best for: Those who want a safe place to keep their money with few restrictions on accessing it.
Not for: Those who want to earn a lot of interest on their money.
You need to open a checking account for the money you plan to use for your daily expenses. Unlike savings accounts, CDs, and money market accounts, there is no restriction on when or how often you can withdraw money from a checking account, as long as you do not withdraw no more money than you have. They are ideal for paying bills and you can easily turn the funds in your checking account into cash as needed with the included debit card. You can also buy checks for your checking account if you prefer to pay that way.
While some online checking accounts offer interest, these accounts are rare, and even the best interest-bearing checking accounts typically have lower annual percentage returns (APYs) than most APY savings accounts. If you are hoping to grow your money, you might be better off using one of the other bank accounts listed below.
Some current accounts charge a monthly maintenance fee, but they can be waived if you meet certain conditions, such as having a certain number of deposits per month or maintaining a minimum balance. Other fees you might encounter with current accounts are ATM fees for using ATMs outside your bank or caisse network or overdraft fees if you try to withdraw more money from your account. current that it does not contain.
What is a savings account?
Best for: Those who want a low risk way to grow their money.
Not for: Those who plan to withdraw money from their account frequently.
A savings account is a low risk account where you can earn interest on your money. Banks and credit unions take the money you put in your savings account and use it to fund loans for other customers. Then they give you a portion of the interest they earn from the borrower. The average APY savings account is 0.09%, but some high yield savings accounts offer APYs above 2%. A higher APY will help your savings grow faster. While you can technically keep the money in your savings account indefinitely, savings accounts are best for the money you plan to use for the next three to five years. Invest longer-term savings if you hope to beat inflation and increase your wealth over time.
A savings account is not the best choice if you plan to withdraw money from your accounts often. This is because it is subject to Regulation D. It is a federal law that limits savings account holders to six “convenient” withdrawals or transfers per month. Convenient transactions include transfers made online or over the phone, bill payments or other recurring transfers, and overdraft transfers. If you have more than six per month, your bank or credit union will charge you additional fees. However, you can still make additional “inconvenient” withdrawals, such as going to a branch if your financial institution has one or requesting a postal check from your bank.
Savings accounts generally don’t include checks or debit cards to access funds. You may need to transfer funds to a checking account before you can withdraw the money by check or debit card. You should also be aware of the minimum account balance requirement. If it has one and you let your balance fall below that level, you could incur additional charges.
If you’re looking for a savings account, here’s our list of the best savings accounts.
What is a certificate of deposit (CD)?
Best for: Those who want to earn a high interest rate and don’t need to spend that money anytime soon.
Not for: Those who think they have to withdraw their money before the CD’s maturity date
A certificate of deposit (CD), also known as a stock certificate if you use a credit union, is a special type of savings account that offers much higher interest rates, but there are a catch. When you put money into a CD, you agree not to touch it for the duration of the CD. It can range from a few months to several years. In general, the longer the term of the loan, the higher the interest rate. The best CDs can offer APYs of around 3%.
You can withdraw money from your account before it reaches its maturity date (the end of the CD term), but you will pay a steep penalty. This is often a certain number of months of interest, and the further away you are from your due date, the higher the penalty. A few CDs, known as no-penalty CDs, don’t charge you if you withdraw your money early, but these generally have a lower APY than other types of CDs.
CD laddering is a popular strategy that allows you to take advantage of the higher APYs offered by longer-term CDs while still giving you access to some of your funds each year. You start by investing your money in CDs with consecutive annual maturities – for example, a one-year, two-year, three-year, four-year, and five-year CD. When the one-year CD expires, you roll those funds into a new five-year CD. The next year the two-year CD will mature, and you put that into a new five-year CD as well, and so on. Each year another CD will expire and you can withdraw the money if you choose or put it in a new one to keep your money growing.
Are you looking for a CD? Check out our list of the best CDs available now.
What is a money market account?
Best for: Those who want to earn a high interest rate without sacrificing their easy access to their money.
Not for: Those with small savings who cannot meet minimum balance requirements.
Money market accounts have the characteristics of the three bank accounts listed above. They keep your money fairly liquid, like checking and savings accounts, and they come with checks so you can withdraw money directly from the money market account. Some may also provide debit cards so you can withdraw money from ATMs or use your money market account to make purchases in stores or online.
Their APYs are often higher than savings accounts, in some cases over 2%, so they’re a good choice if you’re hoping to grow your money faster without tying it up in a CD for years. But that doesn’t mean they are unrestricted.
Money market accounts are also subject to Regulation D, like savings accounts, so you’re limited to six online or phone transfers and withdrawals per month. Checks also count towards your six convenient withdrawals per month, but ATM withdrawals do not. Another thing that may discourage some people from choosing an MMA is that these accounts usually have a much higher minimum balance than savings accounts, sometimes up to $ 5,000. Those who don’t have a lot of money in their name may not be able to open one.
If a money market account seems like the right one for you, check out our list of the best money market accounts.