Different types of bank accounts serve different needs. Depending on your goals, it’s wise to put money into the best account and use the right tools for spending and saving. Doing so allows you to maximize the return from your bank, minimize fees, and manage your money conveniently.
Most banks and credit unions offer the following types of accounts, which we’ll cover in detail below:
- Savings accounts
- Checking accounts, including interest checking
- Money market accounts
- Certificates of deposit (CDs)
- Retirement accounts
Savings accounts are typically the first official bank account anybody opens. Children may open an account with a parent to begin a pattern of saving. Teenagers open accounts to stash cash earned from a first job or household chores.
Savings accounts are an excellent place to park emergency cash. Opening a savings account also marks the beginning of your relationship with a financial institution. For example, when joining a credit union, your “share” or savings account establishes your membership.
- Good for: Your first bank account, kids and adults looking for a place to park savings or extra cash.
- Drawbacks: Savings accounts typically yield a low interest rate in comparison to money market accounts and CDs. They do not come with a debit card for purchases (however, If your savings account is at the same financial institution as your checking account, you could use your debit card for ATM withdrawals. Banks limit some types of withdrawals to six per month.
Savings Account Tips
- Online savings accounts often pay the most interest and charge the lowest fees. If local banks and credit unions are too expensive, look at online-only options.
- To build up your savings account, drop a lump sum of cash into an account or set up automatic monthly deposits into savings.
Checking accounts provide you with a basic account to deposit checks, make withdrawals, and pay bills. Paper checks, though slowly losing popularity, are key features of checking accounts. More recently, the debit card (or check card) has taken over as a primary form of payment from checking accounts. Most banks now offer online bill-pay services through checking accounts, helping to streamline payments.
- Good for: Anyone who needs a place to deposit a paycheck or cash or make payments, those who keep a relatively small balance, and people who enjoy the convenience of a check card. A checking account is nearly essential to make some transactions.
- Drawbacks: Checking accounts are subject to a variety of fees, which can become expensive quickly. But many checking accounts let you skip maintenance fees and minimum balance requirements.
Checking Account Tips
- Balance your checking account every month. This exercise helps you manage your money, avoid fees, and spot fraud or errors before they cause major problems.
- Set up direct deposit of your wages into checking. That way you get your money quickly, and you don’t need to visit a bank branch or ATM.
- For day-to-day spending, you might be better off using a credit card instead of a debit card. If there’s a problem with your debit card (an erroneous charge or the card number gets stolen, for example), an empty checking account can cause significant problems.
Money Market Accounts
A money market account earns more interest than either a savings or checking account but combines features of both. For those who tend to carry higher balances in checking accounts, these can be a great option to park cash. The higher rates mean your cash is working for you and earning interest.
- Good for: People who hold average balances in their account of $5,000 or more and want to earn higher interest rates.
- Drawbacks: Some money market accounts have significant minimum balance requirements ranging from $5,000 to $10,000 to maintain high rate of return or avoid fees. Interest rates can be low, and you need to monitor fees. Withdrawals are typically limited to three to six per month.
Money Market Tips
- Money market accounts can be a good place for larger emergency savings funds. You won’t access the money frequently, but it’s there when you need it.
- If you can’t find an affordable money market account, look at online banks and cash management accounts, which are typically low-cost options.
Certificate of Deposit (CD)
A CD account usually allows you to earn more than any of the accounts listed above. What's the catch? You have to commit to keeping your money in the CD for a certain amount of time. For example, you might use a six-month CD or an 18-month CD, which means you have to keep your funds locked up for those time frames.
- Good for: Money that you don't need to spend any time soon. You'll earn more by locking it up for a while.
- Drawbacks: If you want to pull your funds out early, you'll have to pay a penalty. That penalty might wipe out everything you earned, and even eat away at your initial deposit. In rare cases, banks refuse to honor early withdrawal requests, and you have to wait until the term ends.
- If you’re concerned about locking up all of your money, set up a basic CD ladder that makes a portion of your savings available periodically.
- Some banks offer flexible CDs that let you withdraw money early—without penalty. Those products might be a good fit for your needs, but learn about the tradeoffs before you use them.
Retirement accounts offer tax advantages. In very general terms, you get to avoid paying income tax on interest you earn from a savings account or CD each year. But you may have to pay taxes on those earnings at a later date. Certain types of retirement accounts offer tax shelter, either when you money in or take it out. Most banks offer IRAs (both Traditional IRAs and Roth IRAs), and they may also provide retirement accounts for small businesses.
- Good for: Saving for your future. Retirement accounts can make it easier (by easing your tax burden) to save money, and they might result in larger account balances over the long-term.
- Drawbacks: Any tax benefit you get comes with strings attached. Read up on your account agreement and ask your banker about the rules (including rules for eligibility). Speak with your tax preparer or a CPA to verify how your taxes may be affected (or not) by various options. Finally, you might have to wait a while before you can access your money. If you withdraw funds early, you may have to pay taxes and steep penalties.
Retirement Account Tips
- Retirement planning requires long-term strategies. Speak to a financial advisor to get help with planning how much you should save, what types of accounts you should have, and more.
- If your company offers a matching plan, such as a 401(k), max that out before you start putting money into a retirement account with your bank. Otherwise, you're leaving free money on the table.
Note: Justin Pritchard updated portions of this article.
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