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banking

Bank Accounts 101: Which One is Best for You?

In this day and age, pretty much everyone over the age of 18 should have some type of bank account. Bank accounts are essential if you want to get direct deposit from your job or if you want to pay for your everyday purchases with a debit card. However, with so many different types of accounts out there to choose from, it can be confusing to know which type is best for you. Here is a brief overview of the different types of accounts available and the basic features of each one.

Savings Accounts

Savings accounts provide an incentive for customers to save money. Savings accounts with banks and credit unions will usually come with an interest rate that is higher than a traditional checking account, but lower than CDs or money market accounts. Savings accounts will allow you to make deposits and withdrawals, but there is usually a cap on the amount that you can make in a monthly period. Some banks will even charge you a fee if the balance on your account falls below a specified minimum amount. You should not use your savings account to pay for your everyday expenses. This is what your checking account is for. Most banks will let you open a savings account for free, so customers can easily open both a savings and a checking account.

Checking Accounts

A checking account is the most basic type of bank account. You will usually get checks and a debit card for free when you open an account. You will use these items to pay for your everyday expenses. Most people will also set up direct deposit with their employer so that their pay check will automatically be credited to their account. Because you will have a lot of money going in and out of your account on a monthly basis, you will want to choose a bank or credit union that does not place any stipulations on this.

Money Market Accounts

A money market account is an interest-bearing account that invests your money in short-term debt including CDs, Treasury Bills and commercial paper. Money market accounts usually offer rates that are higher than other types of accounts, providing you with more money-making potential. However, these accounts usually require you to deposit a large amount of money initially to even open an account. Additionally, these accounts do not typically come with debit cards or checks and some banks will charge a service fee if your account balance falls below a specified minimum.

Certificate of Deposits (CDs)

CDs are also known as ‘time deposits’ because you have to agree to keep your initial deposit in the account for a specific amount of time. For this amount of time, typically lasting from three months to several years, the money will be virtually inaccessible. Because of the stringent terms of this type of account, the rewards are greater and you will be paid a much higher rate of interest. If you do end up taking take the money out for any reason, you will usually be charged a substantial early withdrawal fee. Therefore, do not open up this type of account if you expect that you will need the money before the maturity date.

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banking

Money Markets versus Savings Accounts

It’s typical for people to want to invest their money or just save it; sometimes investing in CDs and Bonds seems a little scary and savings accounts may seem like the safe way to go. If you just want to start a savings account and have a chunk of money to put away, it’s a good idea to think about interest rates and your options when saving.

Simply Saving

A standard savings account requires little to no minimum balance but the interest rate, depending on the economy, is  typically less than 1%. So even though you’re usually not paying or at least not paying much to invest your money, you’re not making much money in a standard savings account. Financial institutions pay you interest rates to keep your money in their  accounts to they can lend it to other people but mainly, standard savings account rates are so low that the money you‘re putting away is literally just sitting there while the financial institutions are making a higher interest rate lending your money out and meanwhile, giving you a lower interest rate in return. Sounds kind of crazy when you think about it, huh?

Simply Money

Money Markets Accounts (MMAs) are becoming the trendy way to save, especially now when interest rates are at an all-time low. There are a few standard stipulations to MMAs, but the perk can be two to three times the interest rate than a standard savings account. Banks and credit unions are the easiest places to start a MMA account and the minimum, depending on the interest rate, is usually around $1,000. The higher the minimum, the higher the interest rate – so if you’re minimum account balance is $2,500, you’re interest rate, depending on the bank and economy can be as high as 3%. It really depends on how much money you’re willing to put away and not have access to. If you think about it, it’s an even better way to save than a savings account because you can take as much money out of a standard savings; an MMA discourages you from being able to drain your account for an impulse purchase because you have to keep that minimum balance.

For example: If you have $7,000 you do not want to spend and $3,000 of it you’re adamant about not touching for a long period of time, than find a bank that has a minimum of $3,000 and deposit your entire savings. This way, you’re making  interest on all of your money at a much higher rate with a minimum deposit you have no intention of touching in the first place. Additionally, the restrictions and higher minimum on MMAs discourage your from making regular transactions on your account like you would do with a typical checking account.

How is this possible?

MMAs are slightly different than a standard savings where banks and credit unions are lending money to approved borrowers. An MMA is money that is invested in government and corporate markets, which means as a MMA investor, you’re getting paid the current interest rate in the money market and not from current bank interest rates. Being able to invest money with higher rates has a slight downfall because banks have to restrict how much money is being taken out of the market. Financial institutions can sneak around the legal restrictions of these accounts by structuring it like a savings (so you get interest)  instead of a checking (where you get low to no interest). Because of these restrictions, money markets are structure like savings account regulations – with withdrawal limits (usually 6) and total transaction restrictions per month.

Where to go to find a Money Markets or Savings Account

Many times and depending on the financial institution, MMA and savings accounts have the same or comparable interest rates; in some cases it can be just as profitable to put your money in a standard savings. But for the most part, a MMA will have higher interest rates if you know where to look. Bankrate.com and Consumerismcommentary.com give you current information on which banks and financial institutions are giving the highest rates on MMAs and Savings Accounts. If you’re going to put your money in a bank, do a little research and see what bank will give you “more bang for your buck.” Now that’s money in the bank!

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banking

Consolidating Bank and Investment Accounts

There are so many aspects to managing your personal finances that it can sometimes be a challenge keeping everything together.  In order to realize financial security in your life you must be able to juggle several tasks simultaneously.  You will have to know how to make money, save money, invest money and pay bills on a regular basis to ensure all of your financial goals can be reached.  With so many balls in the air at the same time, many people find it beneficial to consolidate their accounts to keep all of their finances in order.  Here we look at how you can consolidate your financial accounts and the benefits that can be realized by doing so.

Benefits of consolidating financial accounts

Consolidating bank accounts

It is not uncommon for individuals to have several accounts at different banks.  This could be due to several factors.  For example, you might use a bank with a convenient location for day-to-day transactions, or you might use an online savings account for lower fees and higher interest rates.  The problem with having your money spread all around is the difficulty in keeping track of your finances.  Managing multiple accounts increases the likelihood of making mistakes or noticing errors that could end up costing you more money in the long run.

By consolidating your bank accounts into one bank you can often save money across the board with reduced fees or other rewards such as favorable terms and interest rates as a result of having multiple accounts with one bank.  When you keep all of your accounts in one place you can receive consolidated statements which make it easier to see all of your finances in one easy place as well as providing convenient documentation that may be needed for tax season.

Consolidating investment accounts

When you have your investments spread out and managed by different brokerage firms or mutual fund companies, it is often difficult to know exactly what is going on with your money.  Consolidating investment accounts with one firm can offer the following benefits.

  • Keep track of investments. When all of your accounts are managed and located at the same place it is more convenient to track your assets. You can see in one place how your investments are performing.
  • Keep track of changes. Fees, commissions and policies are subject to change with each company.  These changes can be hard to follow if you have your accounts spread out, however by having your accounts in one place you can easily keep track of changes that can impact your money.
  • Special perks. The bigger your account, the bigger the perks you may receive. Some companies will reward bigger account holders with free services or reduced fees and commissions.

Making an informed decision.

There are many benefits associated with consolidated financial accounts, however this step may not be right for everyone.  It is important to consider both the advantages and disadvantages of any moves you make in regards to your personal finances.  What works for one situation may not work for another making it all the more important to make an informed decision.