Once upon a time, there was no bank and people used to keep their money at home. But with the passage of time, a safe place for keeping people’s money was invented which is known as a bank. Nowadays anybody knows that it is safe and wise to keep the money in a bank. But everyone may not have a clear idea about the different types of bank accounts. Different bank account serves your different needs. You should put your money into the appropriate account and apply the appropriate tools for saving and spending according to your goals. Thus, you can minimize fees, manage the money conveniently and maximize your return from the bank.
Types of Bank Accounts
All banks offer different types of accounts for the account holders, but among them six are basic:
- Savings Accounts
- Checking Accounts
- Interest-Bearing Checking Accounts
- Certificate of Deposit (CDs)
- Money Market Accounts
- Retirement Accounts
Each of the types is described below:
Savings Accounts
Whenever anyone thinks of opening an official bank account typically s/he opens a savings account. A parent can open an account for her/his children to encourage her/his children’s habit of saving. Teenagers open savings accounts to save money earned from household chores or from a first job.
You can save cash for emergency purposes very conveniently in savings accounts. You can start a financial relationship with a bank if you open a savings account. These accounts are good for both adults and kids who look for a place to save extra cash.
Savings accounts generally have a lower interest rate than a certificate of deposits and money market accounts. Banks put some limitations on withdrawals such as six per month and the like.
Tips for Savings Accounts:
- Online savings accounts have higher interest rates and the cost is the lowest. If credit unions and local banks are very expensive, you can go for online-only options.
- You can put a lump sum of cash into your savings account or set up automatic deposits per month into savings.
Checking Accounts
Checking accounts are basic accounts to deposit checks, pay bills, and make withdrawals. “No frills” is another name of these accounts. Paper checks are the basic characteristics of checking accounts. Nowadays the check card or debit card has become a more popular form of payment through checking accounts. Most of the banks are now offering bill pay services online through checking accounts for fast payments.
These accounts are good for the people who need a place for depositing cash or a paycheck, who keep a comparatively small balance, and who prefer the convenience of a debit card or check card.
Generally, these accounts don’t have any interest, and they can impose or restrict extra fees for additional activities like to write more than a specific number of checks every month.
Checking accounts charge different kinds of fees and become expensive quickly. But you can skip minimum requirements for balance and maintenance fees in case of some checking accounts.
Tips for Checking Accounts:
- If you have a checking account, you should balance it every month. Thus, you can avoid fees, spot errors or fraud and manage your money properly.
- You can set up deposit directly of your salaries into checking.
- A credit card is better than a debit card for daily spending. If you have a problem in the debit card like the card number has been stolen or an erroneous charge, then the empty checking account will create significant problems.
Interest-Bearing Checking Accounts
Interest-bearing checking accounts offer a far-reaching set of services than usual checking accounts or “no frills” accounts because these accounts have a higher rate of interest. Again, you have no limitation on how many times you are writing checks. NOW or negotiable order of withdrawal is another name of these accounts. The size of your account balance often determines the interest rate of these accounts. If your balance declines below a certain level, most of the accounts will charge a service fee monthly.
Certificate of Deposit (CDs)
“Time deposit” is another name of these accounts. Because here, the account holder agrees to keep her/his money in the account for a specific time, which can be from 3 months to 6 years. The account holder doesn’t have any access to the money which is compensated with a higher rate of interest. This interest rate will be increased with time duration. The account holder will be able to withdraw the money at the maturity date.
These accounts are good for that money you don’t need to spend now. You can earn more money by keeping it locked up for a specific time.
The drawback of these accounts is that you must pay a penalty for early withdrawal. The penalty may eat away all the amount you have earned and sometimes even wipe out your initial deposit. The banks rarely refuse your request for early withdrawal and if refuses you must wait till the maturity date.
Tips for CDs:
- If you are thinking of locking up all your money, you should make a basic ladder for your CD so that a part of the savings will be available periodically.
- There are some banks which are flexible and offer CDs which let you withdraw your money earlier without any penalty. These CDs may be good for you, but you must read all the terms and conditions carefully before using them.
Money Market Accounts
Money market accounts have a combination of features of a checking or savings account but have interest rates higher than both accounts. The people who have checking accounts with higher balances can keep their money more conveniently in these accounts.
These accounts are good for the people having average account balances of about $5000 or Tk 422,000 approximately or more and have desires to earn higher rates of interest.
Many money market accounts set balance requirements of minimum $5000 to $10,000 i.e. Tk 422,000 to Tk 844,000 approximately. Rates of interest may be low, fees need to be monitored. There are typically three or so limited monthly withdrawals.
Tips for Money Market Accounts:
- If you want emergency savings for larger funds, these accounts can be a suitable choice. The accounts won’t be accessed frequently, but the money is there as per your need.
- Online cash management accounts and bank accounts are typical low-cost options for money market accounts.
Retirement Accounts
You can get tax advantages from retirement accounts. Generally, you can avoid income tax payable on your earned interest from a CD or a savings account every year. But later you may need to pay those taxes. Most of the banks offer Individual Retirement Accounts or IRAs. Some of the banks may offer retirement accounts for small business too.
These accounts are good for your savings for the future. Savings can become easier because of the tax advantage. You may require paying the tax for larger account balances in the long run.
The drawback is that every tax benefit is attached to different terms and conditions. You should read the account agreement carefully and have proper knowledge of the rules from the banker. You should also talk to a tax lawyer whether your taxes are affected or not. It may also happen that you must wait for a while to access your account. You require to pay high penalties and taxes for early withdrawal.
