Understanding the Four Types of Bank Accounts
Where you decide to put your money plays a significant role in determining your financial security and future. Bank accounts provide a place to securely deposit your cash, allowing you to save for a specific goal or access your money when you need to pay bills. Several types of bank accounts are available. Each one serves a slightly different purpose, and the rules that govern one might not apply to others.
Perhaps you are opening a new account for the first time or want to be more informed about where your money goes. No matter your situation, learn more about the different types of bank accounts and their features below.
What Are Four Types of Bank Accounts?
Generally speaking, you have four options if you decide to open an account at a bank. Some accounts are designed to encourage you to save, while others provide a place to store your money until you need to spend it.
No matter which type of account you choose, look for protection from the Federal Deposit Insurance Corporation (FDIC). The FDIC insures many bank accounts for up to $250,000 per depositor (per bank account category) per bank. FDIC insurance protection means your covered deposits are guaranteed and your money is safe.
From there, you may be able to choose from these types of bank accounts:
1. Checking Account
Think of a checking account is as your “everyday account.” It’s a place to keep the money you use to pay your bills or cover everyday expenses. Usually, the money you deposit into a checking account is there on a short-term basis. You might deposit your paycheck into the account only to withdraw it to buy items or pay your mortgage and utility bills.
You can deposit money into a checking account in a few ways. Your employer might offer direct deposit, which electronically transfers your salary to the account using the bank’s routing number and the account number. You can also deposit money using paper checks or cash, or by electronic transfers.
There are several ways to access funds in the checking account. You can write a check to yourself or another person or company when making a payment. You can also withdraw cash from the account by visiting a teller at the bank or using a debit card at an ATM. Debit cards also work at stores, meaning you can use yours to pay for purchases when shopping in-person or online. You can connect your checking account to peer-to-peer payment apps to make payments to friends and family.
Mid Penn Bank offers several checking accounts that have no monthly maintenance fees and no minimum balance fees. Be aware that some banks charge a monthly fee just for having the account open. Banks may charge a fee for an overdrawn account, the term used when a check is written or transactions are processed and there aren’t enough funds which is in the account to cover the transaction.
Since many people use checking accounts for expenses, most checking accounts do not earn interest. Consider opening a savings account in addition to a checking account.
2. Savings Account
A savings account is a place to deposit money you want to accumulate. Savings accounts typically have several features in place to encourage you to leave your money in the account for as long as possible. Many pay interest, meaning the value of the deposit will grow over time. The amount of interest an account earns will vary based on market conditions and financial institution. Some banks offer higher interest rates than others.
While the money in a savings account is liquid, meaning you can easily withdraw it, it’s a little less liquid than the money in a checking account since there are no checks provided on a savings account. You can withdraw cash from your savings account using an ATM card, or you can transfer money electronically to and from this account. You can also set up regularly scheduled automatic transfers into and out of your savings account.
While many savings accounts are free, monthly maintenance fees and transfers may be charged to your account. Also, some savings accounts have account minimums and may charge a fee if the balance falls below a certain threshold. At Mid Penn Bank, our savings accounts have no minimum balance fees, no monthly maintenance charges, and no fees for transfers to other Mid Penn Bank accounts.
Savings accounts can be ideal for money you know you might need eventually, such as an emergency fund or a vacation fund. To save for longer-term goals, you might find opening an account with the potential for a higher return is a better option.
3. Money Market Account
A money market account is a savings account with additional features. The interest rate a money market account offers is typically higher than a savings account’s rate. Some banks require a higher minimum deposit in a money market account than in a savings account. A bank might also offer a higher rate to accounts with deposits above a certain threshold and a lower rate to accounts with a balance below that threshold.
Think of a money market account as a sort of hybrid between a checking and savings account. Many accounts include checks or a debit card, allowing you to use the account to make purchases. Some money market accounts may limit how many checks you can write from the account each month.
If you have a high savings balance and can get a higher interest rate from a money market account, it might be worth it to open one. A money market account with a higher interest rate than other savings accounts might be a good place to keep money for a down payment on a home. Otherwise, a standard savings account might be more appropriate for your shorter-term needs.
4. Certificate of Deposit (CD)
When you open a certificate of deposit with a financial institution, you agree to leave the money in the CD for a specified term. CD terms typically range from six months to five years but may be shorter or longer, depending on the length of the term.
In exchange for leaving the money alone for several months or years, a bank will often offer a higher interest rate than is typically available on savings accounts. Often, the longer the CD term, the higher the interest rate.
At the end of the CD term, you have the option of transferring the money, plus any interest earned, to another account. You can also renew the CD for another term. If you renew the CD, the interest rate will usually adjust to the current market rate. It’s possible to get a higher or lower rate at renewal than you had on the original CD.
While CDs are less liquid than savings or money market accounts, you can still access the money in the account if you need it before the term is up. Many banks charge an early withdrawal penalty to discourage people from withdrawing funds before the CD matures or reaches the end of its term. The penalty might be a few month’s worth of interest, which can be significant depending on the account’s value and the current rate.
One way to make CDs more liquid is to start a CD ladder. With a CD ladder, you break up the deposit into smaller chunks. Instead of opening one CD worth $10,000, you open 10 CDs with $1,000 in them. Space the deposits one month or one year apart so each one matures on a different date. You still get the advantage of higher interest rates and get access to your funds if necessary without triggering a penalty.
How Many Bank Accounts Should You Have?
Is one bank account enough, or should you have multiple? The answer depends on your overall goals. Many people find that having at least a checking account and a savings account works for them. You can use the checking account for everyday financial transactions and the savings account to set aside money for emergencies or another financial goal. If you’re married or in a long-term relationship, you and your partner might want to have a shared account and separate accounts, too.
People often find that opening several accounts lets them work on and achieve financial goals more easily. If you plan on retiring one day, it makes sense to have a separate retirement account from your emergency savings account. Many retirement accounts offer tax advantages, so it makes sense to save as much as you can in them to reduce your tax bill now and in the future.
In some cases, it makes sense to have several savings accounts at the same financial institution. You might decide to open a money market account to start saving for a down payment on a home. You might have one savings account earmarked for your vacation and another dedicated to your emergency fund.
It is possible to open too many accounts, though. While separating your money based on the goals you’re trying to reach makes sense, things can get too complex. If you work with a financial institution that charges fees for each account, you might end up paying more than necessary to keep several open. A better option might be to consolidate accounts or to work with a bank that offers free accounts.
Mid Penn Bank offers bank accounts, including free checking and savings accounts, to individuals and businesses across Pennsylvania. Whether you’d like to start saving for a rainy day, want a longer-term saving option or need a checking account for everyday expenses, we have accounts for you. Contact us today to learn more about our accounts and services. We’re happy to answer any questions you have.
The material on this site was created for educational purposes. It is not intended to be and should not be treated as legal, tax, investment, accounting, or other professional advice.
Securities and Insurance Products:
NOT A DEPOSIT | NOT FDIC INSURED | NOT BANK GUARANTEED | NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY | MAY LOSE VALUE