Once you’ve entered into the adult world and the workforce, bank accounts are something you should highly consider getting, since you need a safe place to keep the money you’ve earned. With how easy banking has been made, and the convenience of online banking, there is virtually no reason for you to not put your money in a trusted institution, especially since you can earn interest on it.
Types of Bank Accounts
Although banks offer many different types of bank accounts, the two main types of bank accounts used by regular people are checking and savings. The other three main types of bank accounts are certificates of deposit, money market accounts, and individual retirement accounts. If you’re confused and lost as to which type of bank account is the right fit for you, not to worry, since you’ll get detailed information about each type of bank account below. This should hopefully help you make a well-informed decision on opening the perfect type of bank account for your personal situation.
A checking account is what almost all bank customers have. You typically deposit your paychecks into a checking account so you can easily access it to make purchases or to pay bills with. You can access this money by either withdrawing money at an ATM, using ATM card (either by typing it in online or swiping it at retailers), or writing checks. With the advent of ATM cards, writing checks has become almost obsolete besides in the cases of paying rent and utilities. In this day and age, many landlords let you pay rent and utilities online a lot, so you may never even need checks.
With most checking accounts, you do not earn any interest on the money you put in them. They may also come with monthly fees, but you do have options of certain packages to waive these fees at times. Be sure to compare the different packages and fee amounts to choose the checking account that costs the least for you.
A savings account functions similarly to a checking account since a lot of people put their paychecks into a savings account as well. The difference is that you’re able to earn interest on the money you keep in a savings account. People usually leave a certain amount of their paycheck in their checking account for spending and necessities then leave the rest in a savings account so they can earn some interest on it. The money accumulated in this type of bank account is then used for large purchases, such as a down payment for a house, car, honeymoon, wedding, or vacation.
The interest earned on a savings account can be compounded on a daily, weekly, monthly, or even annual basis. When you’re browsing your options for a savings account, take into account the minimum opening deposit amounts, interest rates, any monthly service fees, and how the interest is compounded. All of these factors added together may it clear to you that what an attractive savings account was before really isn’t after all.
Certificate of Deposit
A certificate of deposit, or CD, is a type of investment you can make. It is similar to a savings account, but comes with more obligations. You can typically get higher interest rates when you choose a certificate of deposit over a savings account, but you don’t have free access to your money when you want it. Instead, you have a preset amount of time the money needs to stay in the CD. The amount of time ranges from a few months to a few years.
A CD is a good type of bank account to sign up for if you have a steady stream of income and won’t need the money put in a CD anytime soon. Because withdrawing any money from a CD prematurely comes with penalty fees, you should consider getting a savings account instead of a CD if you think you may need that money sooner than you think or if you’re not comfortable with the idea of leaving a stash of money alone for so long.
Money Market Account
Money market accounts are also similar to savings accounts. However, while most savings accounts don’t require a minimum balance or has a low requirement, money market accounts have higher balance requirements. If you don’t have the minimum balance, you are charged monthly fees.
Money market accounts do earn you interest just like a savings account and certificate of deposit, but where a money market account differs is the fluctuation of the interest rate. Interest rates on money market accounts aren’t fixed, but instead, change based on money markets. Some banks may offer you tiered interest rates that work in your favor should you have higher balances. Some will also allow you to write checks against your funds.
Individual Retirement Account
If you’re looking ahead and planning for your future, you should consider opening an individual retirement account, or IRA, as early as possible. In these rocky times of our economy, it is wise to put any extra money you can into a retirement fund. If your employer doesn’t offer you retirement benefits or if you just want to save in addition to what your employer offers, opening an IRA is a good option for you. There are two types of IRAs: traditional and Roth.
If you’re younger than 70.5 years old and have earned income, you can open a traditional IRA. One of the major benefits of choosing a traditional IRA over a Roth IRA is that contributions to a traditional IRA are tax deductible on both state and federal tax returns. However, the withdrawals you make from your traditional IRA when you are retired are taxed at regular income tax rates. This means you don’t pay taxes on your traditional IRA before retirement, but pay taxes afterwards.
For a traditional IRA, you must start taking out withdrawals once you reach age 70.5. Those withdrawals are called required minimum distributions, or RMDs. However, you can start taking voluntary withdrawals at age 59.5 if you wish to do so.
If you’re a first-time homebuyer, with a traditional IRA, you are allowed to withdraw up to $10,000 without the normal 10% early withdrawal penalty to use on qualified first-time homebuyer expenses. You do have to pay taxes on any of the money withdrawn though.
The Roth IRA differs from the traditional IRA in that there are income eligibility restrictions. Even if you wanted to open a Roth IRA, you may not even qualify for this type of IRA. Although you don’t get any tax breaks for making contributions to your Roth IRA before you retire, your earnings and withdrawals after retirement are usually tax free. This means you pay taxes on your Roth IRA before retirement, but don’t pay taxes afterwards.
A benefit of Roth IRAs over traditional IRAs is that there is no RMD for this type of IRA, which means you can continue to let your money sit in the IRA to gather interest. You can also take out voluntary withdrawals at age 59.5 for Roth IRAs. However, you must have made your first contribution to the Roth IRA at least five years before age 59.5.
Like with traditional IRAs, you can withdraw up to $10,000 of the funds in your Roth IRA for qualified first-time homebuyer expenses. However, you can only make the withdrawal five years after your first contribution to the IRA and the withdrawal is penalty-free.
Which Type of IRA Should I Choose?
It’s hard to say which type of IRA you should choose without thoroughly assessing your financial situation. The major factor to consider is if you expect your income to increase or decrease once you’ve retired, and whether tax rates will increase or decrease in the future. Although it may be a hard thing to predict, think about all the factors in your life, the current state of the economy and the direction it’s going in, and how everything could possibly change in the future. If you’re still not sure about which type of IRA to choose, experts think Roth IRAs may be the better long-term choice.
Advantages of Having a Bank Account
Putting your hard earned money into a bank account is surely a good decision. If you have a distrust of having institutions hold your money, here are a few reasons why your money is better off in a bank account rather than sitting around your home.
It Keeps Your Money Safe
You may feel uneasy with your money out of your sight and easy reach, but keeping large amounts of cash in your home is an unwise decision. Should a natural disaster such as fire or flood happen, or if your house gets robbed, all that cash goes up into thin air with no compensation.
If you put your money into a bank account, your money is automatically insured up to $250,000 by the federal government. This means that you still have access to all the money that you’ve put into your bank account even if that institution gets robbed or goes bankrupt in the future.
You Earn Extra Money
As much as we’d like to believe in money trees, if you keep your cash at home in a box, it won’t grow. Although checking accounts won’t earn you interest, a lot of other types of accounts will, so why not put your money into an account and get what is essentially free money? The best bank accounts offer generous interest rates and the money generated from interest can add up to a significant amount in the future. This can make all the difference when you’re trying to save up for a large purchase.
It’s More Convenient
Traditionally, bills and rent were paid by mailing either cash or checks to the companies and paychecks were printed onto checks for you to cash out if you didn’t have a bank account. In modern times, bank accounts now have online features where you can directly transfer money to pay bills. This saves you time and money, since you don’t have to buy envelopes and stamps, write out checks, and put them in the mail. Online transfers are also more reliable since your money has the potential to get lost in the mail.
You can also get your paycheck automatically deposited into your bank account via direct deposit. Again, this saves you time since you don’t have to drive to your local bank to either deposit or cash out your paycheck. Your money earned just automatically and easily appears in your bank account, ready to use.
You Carry Less Cash Around
When you carry large amounts of cash around, you’re at more of a risk of losing it or having it stolen from you. Keep your money safe in your bank account and make purchases with your debit card to avoid having large amounts of cash on your person. If you do need cash, you’ll be able to withdraw the amount you need at the various ATMs in the area. You can then avoid the anxiety associated with having large sums of physical money on you.
The Best Bank Accounts Available
Doing a bank accounts comparison beforehand can be highly beneficial to you if you’re interested in opening a new bank account. Here we shall be exploring the best bank accounts offers available for free checking accounts.
Ally Interest Checking Account
Ally is an online-only bank that offers a checking account that pays 0.10% annual percentage yield (APY) with a $1 minimum balance and has no monthly fee. You can withdraw your money for free at over 43,000 ATMs. They also have a call center that is reachable 24/7 and if you wish to get help over live chat, you never have to wait for more than a few minutes.
Capital One 360 Checking Account
A Capital One 360 Checking account also has no monthly fee and has an APY of 0.20% with a $1 minimum balance. You can withdraw money for free at over 40,000 ATMs. What makes them stand out from their competitors is the fact that when it comes to overdrafts, you can be charged an interest of your overdraft instead of paying the flat fee all at once. You can also have Capital One decline any of your transactions if your bank account doesn’t have enough money, or you can link a 360 Savings account to cover any overdrafts, free of charge.
Alliant Free High-Rate Checking Account
This checking account is yet another one that has no monthly fee. They have a high APY of 0.65%, but you can only qualify for it if you go paper-free for your statements and get at least one electronic deposit made every month. Although there are some small fees associated with banking at Alliant, you do get free access to over 80,000 ATMs. In order to become a member of this credit union, you must make a donation of at least $10 to a nonprofit group affiliated with them. The one downside to banking with Alliant is that if you don’t live in Chicago, you’ll have to do almost all of your banking on their online app or website.
Aspiration Summit Account
Pay no monthly fees when you open a Summit account at Aspiration. Although accounts with less than $2,500 in them earn only 0.25% APY, you can get a whopping 1.00% APY if you have over $2,500 in your account. Although this is an online-only bank account, you’ll get unlimited ATM reimbursements worldwide.
Opening a Bank Account
If you’re interested in opening a bank account, stop by the local branch of the bank you’re interested in to pick up an application. Some banks are able to set you up with an appointment and bank account on the same day you walk in. If you’re able to speak with a representative, be sure to ask all the questions you can about the type of bank account you’re interested in so you have no surprises in the future. Being well informed about the specifics of the bank account you’re signing up for can save you lots of trouble later on.
After you’ve completed the application process for a bank account and have been approved, you’ll receive information about your type of bank account and a debit card for purchases and cash withdrawals at the ATM. You can enjoy access to your funds and statements both at the bank and online. You can access your bank accounts online by logging into your bank’s website with your login username and password. You can then utilize a number of services banks offer in person, such as viewing and printing statements, transferring money to other people, ordering checks, setting travel notices, and more. If you lead a busy lifestyle and don’t have spare time to drop by the bank often, online banking through websites or apps is a great way to keep track of your bank accounts without having to go anywhere.