Think of banking accounts as the bicycle of financial vehicles, with the main benefit of it being quick to access. They’re not designed for long-term savings goals however, since the amount you’ll earn in interest is virtually nil. (Actually, it’s effectively less than nil, since you’ll lose value over time due to the average cost of living going up – inflation – at a average rate of 2% per year.) But for all the benefits of safety and quick access, you still need these accounts. You just don’t want to put your WHOLE nest egg in here… only what you’ll conceivably need for the next few months.
Checking account – This should be a no-fee account in which you put your money for daily use. If you have an employer that offers direct deposit of your paycheck, this is the account to which you’ll link it. If you have direct debit to pay for your mortgage, internet, regular charitable contributions, etc. it will draw from this account. At this point, you can still write paper checks to pay someone out of this account (like the old-school in-home daycare provider we used for the past 8 years), though checks may be phasing out. What’s more likely, is that you’ll receive a check and then, using the bank’s app, do an electronic deposit of the check by snapping pictures of the front and back. It’s pretty easy, saves a boatload of time, and bypasses any fees you may have had to pay using a check cashing service, thus saving you money. You may also receive a debit card to pay for transactions directly out of this account. (For certain safety reasons, I generally do not recommend this, but rather you should use a credit card for this purpose.) The debit card should be used when you need to grab cash (again, make sure the ATM is not charging fees), to then pay for things like the just-picked-yesterday veggies you’re getting from the local farmer’s market. (When you pay with a credit card, the farmer has to pay a fee to use it. Bypass that and keep the money local.)
Savings accounts – These should also be no-fee, and are for holding your money that is used a bit less frequently, like for short-term savings (6 to 12 mo). In some cases, you can arrange for your bank or credit union to dip into your savings account when you accidentally overdraft on your checking account. Savings accounts will have a smidgen more interest earned on your money. These will often be the first account you open with a financial institution, followed by a checking account.
Second chance checking – This is an opportunity to utilize banking services following a negative ChexSystem (the credit reporting service for banks) rating due to bank debt. It usually has limited fees and features.
Money Market Accounts – For these, you generally need to put in a larger sum of money (say, $500 or $1,000 minimum), and in return, get a higher interest rate earned on the money. There are restrictions on how frequently you can tap the money each month, so you don’t want to be paying out of this on a daily basis.
CDs – Certificate of Deposit (CD) are at a bank or credit union whereby a sum of money (usually $500 and up) is locked in for a determined period of time, often between 3 to 60 months. In exchange for not touching the money during that period, you get a higher rate of return in interest. Special CDs will have various features that will enable continued payments into the CD, bump-ups in interest rates, and other forms of flexibility.
Special Savings Accounts:
Matched Savings Accounts – See IDAs, some 529 education savings programs, etc. For these savings accounts, you put in some money and then they receive a matched amount from public or private sources to boost the total amount available for the purchase of an asset. Programs will determine what is considered acceptable use of matching funds (i.e. down payment on a house, higher education, investment in small business, car purchase, etc.). These are typically incentives for lower-income families, or will have a progressive design (more match/lower input needed for low-income folks, with less benefit going to those who earn more).
IDAs – Individual Development Accounts are savings accounts that receive matched money to boost the amount available for the purchase of an asset. Programs will determine what is considered acceptable (down payment on a house, higher education, investment in small business, car purchase, etc.). See details and resources at Prosperity Now. These are typically only available for lower-income individuals, intended as a poverty alleviation tool, coupled with financial education.
This book is a work in progress and we’ll all benefit from your input and collaboration. In the “Leave a Reply” below, please post examples, comments, questions, and needed edits. By posting, you grant permission for inclusion of any content to become part of the book, now or in the future, in whatever form it may take. I’ll give attributions to the extent possible. I know sharing about our financial lives can be sensitive, so if you want to share anonymously, please use the contact form instead and I’ll honor your request.