4 Types of Bank Accounts & How They Work

Everyone needs a secure place to store their cash. Checks and debit cards are handy, too. Which makes having a bank account is a great idea. But did you know there isn’t just one type of bank account?

In fact, there are four main types of bank accounts, each catering to specific needs and wants. Whether you’re just starting your financial journey or looking to take your money management to the next level, understanding these account types can make a world of difference.

A bank account is a financial arrangement between you and a banking institution. It provides a secure place for storing money, whether for daily transactions, savings, or future investments. Depending on the type of account, it might offer benefits like earning interest, making electronic transfers, or issuing checks.

The practice of lending and borrowing dates back thousands of years, but these days, the internet has made banking more convenient and accessible than ever before. Now, bank accounts function like digital wallets, allowing you to securely store your funds and manage your finances. You might have a long relationship with a bank, credit union, or other financial institution without ever stepping inside a branch.

From deposits to withdrawals, bank accounts offer safe storage and management systems for your money. Once opened with your personal identification, other KYC (know-your-customer) information, and an initial deposit, you can make fund transfers, electronic transactions, and even earn interest on certain account types. Most accounts are insured up to a limit for safety, but learning more about potential fees, like service charges or minimum balance requirements, can help ensure you’re putting your money where it belongs.

When it comes to what checking accounts are used for, think of them as a financial command center, allowing you to easily manage day-to-day transactions and keep your funds readily accessible. They’re the hub for debit card purchases, online bill payments, and paper checks. When you deposit money into a checking account, you gain the flexibility to withdraw cash, write checks, and make electronic payments whenever you need.

One of the most appealing aspects of checking accounts is their liquidity — i.e. how you can quickly access your cash without restrictions or hold-ups. This feature makes it ideal for handling everyday expenses, be it groceries, clothes, or movie tickets.

When choosing a checking account, keep an eye out for any monthly fees. Many banks offer checking accounts for free, so be sure to shop around.

Also, consider accounts that offer online and mobile banking options, which will allow you to manage your funds from your smartphone. ATM access is also important, so make sure the bank has a network of ATMs or reimburses out-of-network ATM fees.

Many banks also offer overdraft protection for checking accounts, which can be a lifesaver if you accidentally spend more than what’s in your account. Opting in for overdraft protection can help you avoid declined transactions and potentially hefty overdraft fees.

Finally, look for a bank that’s insured by the Federal Deposit Insurance Corporation (FDIC) or, for credit unions, the National Credit Union Association (NCUA) to make sure your funds are protected by the government against bank failure.

Unlike checking accounts, which are designed for frequent transactions, savings accounts are more about setting aside funds for the future.

When you open a savings account and make a deposit, you’re essentially lending your money to the bank, and in return, the bank pays you interest on your balance. This interest may not be substantial, but it’s a way to make your money work for you without much effort on your part.

When choosing a savings account, consider the interest rate being offered. A higher interest rate means your money will grow faster over time. Look for accounts with minimal or no fees, as these can eat into your earnings. Online banks often offer higher percentage yields and lower fees due to their lower overhead costs.

A savings account is perfect for those who want to build an emergency fund, save for a specific goal like a vacation or a down payment on a house, or simply watch their money grow over time. It provides a safe place to accumulate funds — and helps you avoid the temptation to spend on impulse purchases.

Money market accounts are like a super-charged savings account. With a money market account, your funds are invested in short-term, low-risk securities like government bonds. This allows the bank to offer you a higher interest rate than what you might get with a traditional savings account. While the interest rate is still relatively low compared to other investment options, it’s a safe way to earn a bit more on your funds.

When choosing a money market account, pay attention to the interest rate, fees, and minimum balance requirements. Some accounts may require a higher minimum balance to avoid fees. Again, online banks often provide competitive interest rates and lower fees due to their cost-efficient operations.

A money market account is a good fit for those who want to earn a bit more interest on their savings while still having easy access to their funds. It’s suitable for people who have a moderate amount of money they want to keep safe and growing but still want the option to write checks or make electronic transactions if needed.

Certificates of deposit, commonly known as CDs, are fixed-term savings accounts that offer higher interest rates than regular savings or money market accounts. When you open a CD, you agree to keep your money deposited for a specified period, known as the “term,” which can range from a few months to several years.

The interest rates on CDs are generally higher because you’re committing to leave your funds untouched for the length of the term. This can be a great way to earn more on your savings, especially if you don’t need immediate access to the money. The longer the term, the higher the interest rate tends to be.

When considering a CD, look for the interest rate, the length of the term, and any penalties for early withdrawal. Keep in mind that withdrawing your funds before the term ends may result in a penalty that could eat into your earnings.

CDs are best suited for people who have a lump sum of money they can afford to set aside for a specific period without needing immediate access to it. They’re also a good option for people looking to save for a future goal and wanting a fixed return on their investment.

Whether you’re managing your checking, savings, money market, or CD accounts, having the flexibility to tap into your hard-earned pay when you need it most can help you make the most of your money. EarnIn’s Cash Out tool lets you enjoy payday any day — accessing and using up to $100 a day and up to $750 a pay period, with no interest and no mandatory fees, for anything you want.

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