If you’re not a financial pro, trying to decide how and where to manage your money can make your mind feel like it’s spinning. Why are there so many different types of banking accounts, and for that matter, why are there so many different types of banks? Each type of bank and account has its pros and cons, so let’s break down each of them to help you start finding the right path for your money.
Types of Banks and Financial Institutions
First, let’s tackle the question of where to store your money. There are four types of financial institutions you’ll want to consider.
When you think of a bank, the traditional bank is what comes to mind. It usually has brick-and-mortar branches as well as online banking services. Bank of America and Wells Fargo, for example, fall under this category. These banks are generally rather secure because your accounts will be insured by the Federal Deposit Insurance Corporation or FDIC. The downside, though, is that these banks tend to nickel-and-dime you with fees like monthly service fees, overdraft fees, and more.
Credit unions tend to offer all or most of the services traditional banks do: savings accounts, checking accounts, loans, and so on. But banks are for-profit businesses while credit unions are not-for-profit organizations. The credit union members all have a hand in the leadership by voting on board members to make decisions. While the money you store with a credit union isn’t FDIC-insured, these organizations do usually charge minimal fees.
True to the name, online banks are banks that operate only online; they don’t have brick-and-mortar locations. These banks tend to have all the same services as traditional banks but with lower fees because they have fewer overhead costs. The downside is that there is no banking office to go to if you have something you’d rather handle in person.
Technology-Based Companies in Banking
Along with the types of financial institutions above, there are companies that are actually technology providers who pair with other types of banks to offer banking services. Chime is a prime example. These platforms generally have low fees, but they may have limitations on some services like cash deposits.
Top Types of Financial Accounts to Know
To put your money to the best use, you don’t just need to choose the right bank; you need to choose the right type of account. Get familiar with these common types of accounts to consider.
A savings account is as straightforward as it gets: it’s meant for frequent deposits and few withdrawals, so it’s a place where you can save up for a rainy day or save money for specific purposes like a house down payment. You typically receive a small amount of interest for the money you keep in your account.
A checking account is the type of account most people have for day-to-day use because it’s the account linked to your debit card for daily purchases. Some checking accounts charge service fees while others don’t. While money in your checking account is easy to access, these accounts don’t typically pay interest.
Money Market Accounts
A money market account is primarily a savings account but it may have a debit card and check-writing capabilities too. However, these accounts usually allow for a limited number of purchases or transfers out of the account: often six per month. While these accounts often have higher minimum balance or minimum deposit requirements, they frequently pay higher interest rates too.
Certificates of Deposit or CDs
A CD, or certificate of deposit, is an account where you agree to keep your money for a specified period of time, usually a few years, in exchange for a higher interest rate than you would get from your savings account. The bank pays you more interest because they have the assurance that you won’t access the money so they can use it for loans and make more profit from it.
A brokerage account is an account where you place your money in order to take advantage of several types of investments like mutual funds, stocks, bonds, and so on. The money you make or lose off of this type of account depends on how well your investments perform, so there is risk involved but there is also a potential for high returns.
A retirement account is a type of brokerage account that is specifically meant for saving money for your retirement. You invest your money with the condition that you won’t withdraw it until after you retire, and if you withdraw it early, you face steep penalty fees. The upside, though, is that you get tax breaks on this money.
Planning Your Money Management
Learning to manage your finances is more practical than you might expect. It starts with educating yourself about the basics like the types of banks and accounts, growing your knowledge little by little so you can make informed and hopefully profitable decisions.
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