For my first installment in the Financial Literacy Month series, I’m going to keep it very pedestrian. There are only two types of basic bank accounts. Checking and Savings accounts. That is it. This post is dedicated to the ins and outs of these two types of accounts.
A savings account is an interest bearing account intended primarily for funds that do not require frequent withdrawals. Since your first account was likely a savings account, I figured why not start here? A “minor” savings account should be established at a young age. In many cases, parents set up a savings account for their children to teach them about money. A minor savings account is established so that the named minor on the account can begin to learn healthy financial habits with help from an adult. Only the adult signer on the account has access to withdraw funds, but the minor can deposit and monitor the balance on the account. A minor savings account (with proper attention) is the best way to teach and instill a good financial footing at a young age. If you ask me, the younger, the better. If you are at this stage with a child, be sure to illustrate to them how and why the money is growing, even without deposits. The earlier that children learn how money works, the better off they will be in the future.
Ok, you are not a child anymore. It is time for you to open a grown up savings account.
I will not go into detail about the more advanced types of savings accounts such as money market accounts. Since this is all about basic accounts, I am going to stick with the plan. Let’s say that you have some money to stash away, and are looking for a simple savings account. Good. There are plenty of banks, and credit unions that offer decent interest rates on savings accounts which you can research and decide upon for yourself based upon limitations (minimum balance, deposit/transfer amount, etc). One note, once you have decided on the best savings account for yourself, review what type of restrictions your institution places on transactions from your savings account. Due to federal regulations, there are usually no rules governing how much you can deposit into your account, but there ARE rules about withdrawals from savings. Some will not allow more than a few withdrawals per month, and some will charge the account holder for transactions above the set limit. This language will be in your account agreement.
Checking accounts are designed for everyday use. Most checking accounts do not earn interest, the most glaring difference between them and savings accounts. To make payments simple, checking accounts make checks and debit cards available. Usually, a majority of your income goes into checking, and checks and debits are taken to pay creditors and businesses for goods and services.
These accounts should be free or have a very low cost for operation. Basic checking at most banks and credit unions are available for no “maintenance fees”. As I have written about before, you should never pay the bank.
Too many young adults learn the hard way that bank fees can ruin your finances. It is very important to learn the basics of balancing your check book. Relying on banking online or by phone is a poor habit that can lead to overdrafts. For tips on how to balance your check book, click HERE.
A checking account is intended for “mature audiences”. If you can not manage money in your wallet (i.e. you are always broke) you are not likely to have a different result once you open a checking account.