The Different Types Of Bank Accounts

Types of bank accounts

Saving your hard-earned dough is important! However, keeping wads of cash stuffed under your mattress probably isn’t the right way to go about it. Instead, we recommend keeping your money in a bank account. But what are the types of bank accounts you could use?

Approximately 95% of U.S. households have some type of bank account. Be it a traditional bank account or credit union account. There are several different types of bank accounts out there, so it might be hard to know which one is right for you.

Let’s go over the different bank account types so you can decide which kind to open. You may even want to open multiple accounts once you get the hang of it!

Checking accounts

A checking account is a must-have for anyone with bills, i.e., everyone. It allows you to make withdrawals in the form of checks, debit cards, or transfers.

There are no limits on these withdrawals, making checking accounts perfect for paying your rent, credit card bill, and more. You’ll have fast access to cash, which is great if you have your paycheck deposited here.

That said, there are a few drawbacks to this type of account. Usually, they don’t offer interest or much at all, which means you won’t get anything for storing your money with them.

Also, some may include maintenance fees every month if you don’t meet certain requirements. There are also usually overdraft fees if you pull more money from your account than you currently have.

What to look for

If you’re in the market for a checking account, make sure the one you find doesn’t have a required minimum balance. You don’t want to be charged a fee if your balance dips below a certain amount.

You’ll also want an account that offers direct deposit and online banking. These features make it easy to manage your money with less hassle.

Finally, though it’s as rare as a unicorn, try and find a checking account with decent interest. That way, you’ll earn some extra cash while your money sits.

Savings accounts

When you have cash that you don’t want to use for bills but don’t want to invest, put it in a savings account. It’s a great place for your emergency fund because you’ll still have access to money when you need it.

And best of all, savings accounts typically earn interest! Interest is calculated based on your monthly balance and the APY of the savings account.

Unfortunately, savings account rates can be quite low. For instance, at the time of this writing, the national average is sitting at 0.05%. That means if you have a savings account with $1,000, you’ll only earn $0.50 in interest for the entire year! Ugh.

Another problem is that you can’t make more than six transfers or withdrawals in a month using a savings account. This is a federal law, and if you break it, your account may be closed.

What to look for

While the national average interest rate for savings accounts is low, that doesn’t mean all interest rates are low. If you shop around, you can find some rates closer to 1%. Typically, these are offered by online-only banks without a physical presence.

You’ll also want to find a savings accounts with no maintenance fees. Most of them don’t have these, but always make sure to read the fine print before you open an account.

Certificates of deposit (CDs)

If you’re lucky enough to have some money you don’t need to touch for a while, a CD might be a good choice. It can offer you higher interest rates than a savings account.

All you have to do is choose a pre-defined term and keep your money in the account during that time. Common terms include 12 months, three years, and five years. If you do that, you’ll be rewarded with more money than you started with.

That said, the interest rate for CDs also trend pretty low. The average national rate for a 12-month CD less than $100,000 is just 0.15% as of this writing, which isn’t much better than a savings account.

There is also a problem if you need to pull your money before the term is up. You’ll have to pay a penalty, which will effectively negate any earnings you had from the CD.

What to look for

Consider CDs that offer flexible withdrawal options. For example, some might allow you to withdraw early without paying the penalty fee. The con side of this is that rates are usually lower. You’ll also want to shop around and find CDs with the best interest rates. Make sure the rate is worth it to tie your money up for an extended period.

Finally, consider CDs with flexible term options. For example, if you know you’ll need money in about nine months to pay for a new baby, find a CD that can accommodate that timeline.

Money market accounts

Let's get into other types of bank accounts! Don’t you wish there was a hybrid of a checking and savings account? A money market account is the closest you’ll get to that combo.

It allows you to earn higher interest than a savings account on your money while still having the ability to write checks. And because there are no penalties for withdrawals like with a CD, you can access your money whenever you need it. It’s quite the popular option, as 10% of U.S. adults keep their savings in one.

Just keep in mind, you’ll pay a premium for the chance to earn higher interest. Money market accounts usually have higher minimum balances and fees than checking and savings accounts. Plus, the six-withdrawal limit still applies, so you’ll need to be careful how many times you pull money each month.

What to look for

The big benefit of a money market account is earning higher interest, so make sure the account you choose pays well. These days, that might be tricky, as the national average rate is just 0.07% as of this writing.

You should also carefully look over any and all fees the account will charge you. Find an option that has low or no fees on things like maintaining a minimum balance so you don’t cancel out the interest you earn.

Retirement accounts

Saving up so you have money to retire on is crucial, and retirement accounts can help you get there. These are accounts specifically designed for long-term holding. Generally, you let the money sit in these accounts until you’re in your 60s or 70s.

Your two main options for retirement accounts are an IRA and 401k. An estimated 54% of people who aren’t retired have a 401k or 403b, while 33% have an IRA. That said, 13% of people age 60 and older who aren’t retired have no retirement savings! Yikes, don’t let this be you.

You may know about 401ks from your job, as they are employer-sponsored retirement plans. Basically, you contribute a percentage of each paycheck to a managed fund.

An IRA is an account you open on your own. You can contribute up to $7,000 a year in 2024, according to the IRS, and decide what kinds of funds you invest in.

With both of these retirement accounts, you will face penalties for pulling money before you reach a certain age. That’s why you shouldn’t put money into these accounts that you’ll need anytime soon.

What to look for

With a 401k, you won’t have much say in the one you choose, as it will be offered by your employer. But you should check and see if you get employer matching. This is when your employer doubles your contributions up to a certain amount — a great way to get some free cash!

For IRAs, it’s important to find a service that offers free financial planning. Knowing which funds to invest in can be tricky, so make sure someone is around to help. Part of this involves choosing a reliable brokerage that you can trust.

Brokerage accounts

Are you ready to take your investments into your own hands? Good! You’ll need a brokerage account to get started. These accounts allow you to trade stocks, mutual funds, and bonds. This is obviously riskier than a stable option like a savings account, but the rewards can be much higher.

You’ll typically have two options for these accounts. Roboadvisor accounts use complicated algorithms to advise you on the smartest financial moves. An account with a traditional advisor, on the other hand, uses good old-fashioned human intelligence to make recommendations for you.

With any type of investment, if you don’t know what you are doing, things could go very wrong. You could lose money on a dropping stock or put too much money into a fund that’s already peaked. You also want to think about investing as a long-term effort.

What to look for

You’re typically charged a fee for every trade, but some brokers have low or no fees. Do your research on fees beforehand so you know what to expect.

You’ll also want to find a brokerage account that has diverse investment options. That way, you can put your eggs in more than one basket. Also, look for accounts without a minimum balance. No one should try to control how much you want to invest!

Find the right types of bank accounts right for you

Now that you know a little more about the different types of bank accounts, you should be able to find the right mix for your financial needs. These accounts can also be set up as joint accounts if you are in a relationship and the approach works for you. Keep in mind that you can also choose to close out the joint accounts if things don't work out. You can also learn how to close a bank account that you no longer use or want to replace with a new account.

Organizing your money doesn’t have to be tricky — these accounts can help you stay on the right path. Be sure to check out our tips on how to beat the banks when it comes to those pesky fees!

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