Looking to Open a Bank Account?
Bank accounts are not just for those who need to stash away their riches, and just about anyone can open one. To put it simply, a bank account is a place to store your money to keep it safe.
Bank accounts are the core of most people’s personal finances, as money flows into and out of your account on a daily basis. It’s important to know which type of bank account is optimal for your money and spending habits, so, before opening an account, start by thinking about your financial goals in the short and long term.
Your reason for opening an account will dictate the type of bank account you should open. Compare the services and fees at a few banks/credit unions to get a feel for which one most closely aligns with your goals. In researching options, you’ll also discover six main types of bank accounts that you can open, depending on your needs.
Most Common Types of Bank Accounts to Know
- Checking Accounts
- Savings Accounts
- Money Market Accounts
- Certificates of Deposit (CDs)
- Individual Retirement Accounts
- Traditional
- Roth
- Brokerage Accounts
Checking Accounts
The most basic type of banking account is the checking account, as it is used for everyday spending. It is most useful for depositing paychecks, paying bills, and stowing cash for short-term use.
Checking accounts often comes with a debit card which allows you to access your money with just one swipe, which means you won’t need to carry large amounts of cash to make day-to-day purchases. It also comes with checks, hence the name, which provide a level of security in your transactions that cash does not.
While there are many advantages to maintaining a checking account, there are also a few things you must consider in order to avoid expensive fees. Checking account holders have access to online and mobile banking, ATMs, and automatic bill-pay, making transactions extremely convenient. However, you easily can incur an array of fees, like ATM withdrawal fees, in-bank transaction fees, or monthly maintenance fees if you are not aware of the restrictions your bank has in place.
Some banks also require you to maintain a minimum balance in your account at all times, so, in order to avoid any and all overdraft fees, it’s smart to keep a close eye on your money in these accounts, a task made easy thanks to mobile banking.
Savings Accounts
Tempted to spend the money you should be saving? Opening a savings account may help deter that urge, and allow you to find comfort in knowing that you have money set aside for future use.
Setting up a savings account at the same time you open a checking account is an exceptionally wise move which all people should consider. By doing this, you will be able to link the accounts and transfer money between them easily. Separating the money you use for ongoing expenses and the money you may need for emergencies or financial goals is a key part of your personal money management.
Good news… You do not need a huge amount of money to start a savings account, which is why a savings account is a common first bank account. Saving accounts also offer a higher interest rate than checking accounts (albeit a modest one at that), but it will allow you to passively grow your deposit over time.
As there is no debit card linked to a savings account, it’s easier to keep that money “safe” from impulse purchases, and thus save. However, if you do need to tap into the money in the account, it is easy to do so, and you can withdraw or transfer the funds at any time. But just be aware of any limits and restrictions on the number of transfers/withdrawals you can make per month without penalty.
Just like checking accounts, some banks may require you to keep a minimum balance in your saving accounts, so be absolutely sure to budget accordingly.
Money Market Accounts
Like some of the features of a checking account, some of a savings account, and want the best of both worlds? Perhaps consider opening a money market account. Money market accounts walk the line between checking and saving accounts, and possess some of the best features of each.
If you’re someone who may want to hold high balances in your checking account and write checks, but also collect interest at higher rates than that of a savings account, a money market account may be the perfect fit for you. Although you may receive a debit card with this type of account, it is not for daily use, and you will be limited to making six transfers/withdrawals per statement cycle.
This makes money market accounts the perfect spot to park cash for emergencies, large expenses, or short-term goals. But just like savings and checking accounts, you must keep an eye out for those vexing fees.
Certificates of Deposit (CDs)
Most similar to a savings account- but depending on your goals and needs, less appealing- is a certificate of deposit. A Certificate of Deposit, or CD is a type of bank account that “locks up” your money for a fixed term (ranging from a few months to several years), but allows you to earn a higher interest rate than accounts previously mentioned.
A CD may be a good choice for a very conservative investor with long-term financial goals, as it provides a safe place to park cash that accrues some interest, but is more liquid than other long-term investments.
However, if you’ll need to access that cash before the fixed terms is up, you’ll be subject to a penalty fee- which may erase both the interest and also possibly some of your initial deposit (yikes).
Individual Retirement Accounts
Even if you’re only in your twenties today, it is never too early to think about saving for retirement. While it may seem a bit backwards to worry about money you won’t touch for decades while struggling to make ends meet today, but saving early- even a very small amount- allows you to be more flexible later on in life.
Individual retirement accounts are used for long-term planning and allow you to set aside money that you’ll be able to spend in retirement. The two main types of IRAs are Traditional and Roth, both offer tax advantages and allow you to invest your money in the stock market.
Traditional IRA contributions reduce your taxes now, but you will eventually have to pay taxes on withdrawals later. Versus Roth IRA, which will not reduce your taxes now, however you will not have to pay taxes on withdrawals later.
Additionally, if you decide to withdraw money from either of these types of IRAs before the age of 59 and a half, you will have to pay taxes on it. It helps to educate yourself on the account agreement and reach out to your banker about the terms and rules.
It’s important to note that the tax benefits associated with both IRAs have limitations that may affect you differently, so it’s recommended that you speak with a financial advisor before selecting a plan.
Brokerage Accounts
Last, but certainly not least, are brokerage accounts. These accounts are what most investors use to buy and sell securities like stocks, bonds, and mutual funds.
With a brokerage account comes access to the stock market and other investments, as well as the ability to transfer money between investments. There are a variety of licensed brokerage firms where you can set up an account, and many discount brokerages also offer online accounts that can be set up quickly and for little cost.
Standard brokerage accounts do not offer the tax benefits associated with IRAs, so balancing short and long term financial goals is important when selecting a type of investment account.
Choosing Between a Bank and a Credit Union
Once you’ve selected the kind of bank account you want to open, you’ll next need to consider where you’ll open said account. Despite the name, you have the option to open a “bank” account at a credit union.
Like a bank, a credit union is a financial institution. But unlike a bank, credit unions are member owned and are nonprofits. So rather than focusing on earning a profit for shareholders (like banks have to), credit unions can focus on serving members with better service rates, lower loan rates, and reduced fees, while remaining a safe place for members to deposit money.
While credit unions are excellent choices for some, banks offer a wider range of banking, loan, and retirement products, and much more accessibility to branches, ATMs, and mobile banking options.
As you look into the two, consider what is most relevant and pertinent to you. Would you enjoy the convenience of ATMs or paying very miniscule fees on your accounts?
Related: Credit Union vs. Bank: Which is Right for You?
What You’ll Need When the Time is Right
Once you’re ready to open an account at your local bank or credit union, it’s time to gather relevant documents and head to the bank/credit union.
Whether banking online or in-person, you will need to prove you are who you say you are with a valid government-issued photo ID, like a driver’s license or passport. You may also need other personal information like your birthdate, Social Security number/Taxpayer Identification Number, or phone number.
Depending on the type of account and financial institution you choose, there may be differing initial deposit requirements, so understanding this in advance will make the application process smoother and less disappointing.
While opening a bank account is often the first step to financial success, remember that banks are a business, and they make their money off the fees you pay. Understanding the fee structure of the account you choose will help to ensure that your money stays where it belongs- in your account!
