Bank accounts and banking can seem challenging if you are just starting out with money management or if you are new to the different types of bank accounts that are available to you. In order to be able to manage your money and accounts properly it is important to understand the difference between various account types.
Different Types of Bank Accounts
There are roughly 5 core different types of key bank accounts that you can hold with a bank. There are many other types of accounts that can be made however they are generally based on the core accounts with minor variations.
The 5 main or basic types of accounts are:
- Checking account
- Savings account
- Money market account
- Certificate of deposit (CD) account
- Individual retirement arrangement (IRA) account
A checking account is the most basic type of account you can hold with a bank. It is also known as a day to day account or a current account. This account generally allows you to have many or an unlimited number of transactions. Often these accounts come with a service charge.
Checking accounts are used to cover everyday purchases and bills. Although they do not have a minimum amount that you must maintain, you do need to ensure that you have enough to cover your spending.
Savings accounts are used to encourage saving and provide you with limited access to your funds. Generally, withdrawal of funds is discouraged by penalties and longer wait times to receive funds. These accounts usually provide an incentive to keep your money in the account; by providing interest on the money in the account.
These accounts generally require you to deposit a certain amount each month into the account or have a required minimum amount that must always remain in the account to avoid penalties.
Money Market Account
Money market accounts are like savings accounts, that allow limited access to your money and provide you with interest. However, they offer an interest rate based on the current interest rates in the money markets. This type of account is generally best suited or most beneficial if your country has relatively high interest rates.
However, this type of account is more a dynamic form of saving money and thus it may not be a good idea for those who are starting out with investing or are infrequent investors. It is also not a suitable account choice if you are having money issues.
Certificate of Deposit Account
CD or certificate of deposit is a bank account type which are a low risk way to invest your money. CDs can have fixed or variable interest rates. CD’s generally offer a higher rate of return the longer the period of the term is. This means a four-year long CD will have a higher interest rate than one that matures in two years. One thing to remember with CD accounts is that there are quite hefty penalties or fees if you do withdraw your funds before the CD matures.
Individual Retirement Arrangement (IRA)
IRA accounts are a type of bank account that is created by the IRS (Internal Revenue Service in USA) to help people save up for retirement. You can make set contributions to your IRA account each year and the amount stays in the account until you reach the age of retirement. IRA account types earn tax free interest although any withdrawals will be taxed. Also, early withdrawals can result in penalties as well. The finer details of contributions and withdrawals would depend on your bank.
These are some of the base level accounts that all banks will offer, although the specific features, fees and benefits can differ based on your bank. It is always important to note down and ensure you are aware of the fees and benefits of any account type before you decide.