Did you realize that there are more than two types of bank accounts for personal use?
Key to long-term financial success, starting out with the right bank account can mean the difference between earning money or losing a little bit of it along the way. Think of your bank accounts as the core of your financial life. These are tools that can be used to save money, create your budget, better manage your money or even help set you up for retirement.
In this case, knowledge really is power. It is the power to more effectively manage your money, and propel you into a better future.
There are six types of bank accounts for personal use, and each option has special features that work best for certain purposes.
The Six Types of Bank Accounts
- Checking Account
- Savings Account
- Money Market Account (MMA)
- Certificate of Deposit (CD)
- Individual Retirement Account (IRA)
- Health Savings Account (HSA)
Bank Account Choices Explained
Checking Account - A checking account is most likely what you think about when you first hear the term bank account. This account is where money is stored, or deposited, to be used to pay for goods and services.
The name comes from the use of checks (or now a debit card) attached to the account and used for payment. Checking accounts may pay monthly interest, but often this rate is not as high as it is for other account types. Many of these accounts do not even pay interest. Checking accounts will often be subject to small fees unless you maintain a minimum monthly balance.
As you would expect, a checking account is a great start for depositing checks or direct deposits which then make the money available for you to spend via a debit card, check, or withdraw and use as cash from an ATM. A checking account is essential to conducting common business transactions and forms the basic foundation of money management.
Savings Account - A savings account is another type of deposit account that most people associate with a bank. A savings account works much like a penny jar or piggy bank. The idea is that you use this account to hide away money and save it for another day. The savings can be applied towards purchasing a vehicle, home, or even to maintain an emergency fund in case you encounter that unexpected and costly repair.
Savings accounts are not designed to be used as frequently as a checking account. Therefore, certain types of transactions are limited to a maximum of six per month, with additional transactions incurring charges. Since the concept is for you to save money, no debit cards or checks are attached to the account.
Money is typically transferred from a checking account when you receive a payment, and then only transferred back when you need to pay for that surprise car repair or down payment. Some even use savings accounts to pay quarterly or annual bills, taxes, or other expenses.
Money Market Account - Money Market Accounts (MMAs) are a blend of a checking account and savings account, offering the best of both worlds under certain conditions. MMAs traditionally offer a higher interest rate than a pure checking account or even savings account. They also support a debit card or checks.
A MMA also limits certain types of transactions to six per month, just like a savings account. Additional transactions will incur a cost, often more expensive than a savings account. Money Market Accounts require a higher minimum balance to avoid maintenance fees or receive interest. Money Market accounts are a way to save additional money, but still make certain predictable payments like a monthly bill.
Certificate of Deposit - A Certificate of Deposit (CD) is a type of bank account that comes with a very specific set of conditions. A CD offers a higher interest rate than a savings account, but only by agreeing to keep the money “locked up” for a period of time, called a term, in the account. CD terms mostly range from six months to more than a year, and the amount of interest paid out will increase as the amount in the CD increases.
However, if you need to withdraw your money early from the CD, expect an early withdrawal penalty. If you may need your money in the short term, a CD may not be the best option. However, to earn higher interest over a longer period of time, a CD is a great choice that offers additional savings beyond a savings account or money market account.
Individual Retirement Account - An Individual Retirement Account (IRA) is a convenient way to save money for retirement. When you deposit money into an IRA, it will generate interest over time and increase value. However, there are rules as to when you may withdraw from an IRA.
There are different types of IRAs, with the most common being a Roth IRA and a Traditional IRA. A Roth IRA is an account where the money deposited is taxed and later withdrawn, tax free. A traditional IRA is funded with tax-deductible contributions that are taxed at a later date when you withdraw. Both types of accounts have contribution limits that should be discussed with your tax advisor.
Health Savings Account - A Health Savings Account (HSA) is another account specific to certain situations. A HSA is a way to save for costs when enrolled in a high deductible healthcare plan. These accounts are designed to reduce your overall tax burden when you save for specific, qualified medical expenses. These accounts, like a regular checking account, offer the use of a debit card or checks for medical expenses. Contributions to this account may be tax deductible and the interest generated by an HSA may be tax-deferred depending upon your specific circumstance. Contribution limits for tax deferrals should be discussed with your tax advisor.
Choose The Right Account
Chances are that you will need more than one type of bank account. Often people get started with a checking and savings account, with the ability to grow into money market, CDs, IRAs and HSAs as needs and funds permit. Once the different account types are understood, the setup that works best for you can start to become a little clearer.
Give us a call or visit a First Palmetto location for assistance in setting up the right account for you. You can find your nearest office on our locations page.
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