Banking Basics - A Guide to Account Types

As someone working in the world of banking, I hear the names of different account types mentioned very often. While you are likely familiar with the standard checking and savings accounts, many other types seek to cater to different interests and goals.

As I've been learning about banking, one of the things that makes the industry interesting is unraveling the subtle nuances that set things like different account types apart. Every topic I dig into within this industry exposes more things I want to learn about. So without further delay, let's get started.

Types of Bank Accounts

Checking Account

You can think of a checking account as an extension of your own wallet that you can use for whatever you want. The money inside can be spent by writing checks, swiping a debit card, transferring it to others, or withdrawing it from an ATM as cash. It is common for people to have their paychecks directly deposited into this type of account for quicker and easier access. Due to their constantly fluctuating balances, checking accounts typically have a very low-interest rate.

Savings Account

Much like the piggy bank you might have had as a kid, a savings account is intended to have money taken out less often. You may deposit money to save for a vacation, plan a party, buy a new television, or anything else you want. To encourage less frequent use, the Federal Reserve limits withdrawals to six per month, and the bank typically provides limited access to the account. One perk, though, is that because they see less activity, banks usually offer higher interest rates for savings accounts.

Certificate of Deposit (CD)

A Certificate of Deposit Account is like a time-locked box. You put money in and agree to keep it there for a set duration of time (e.g., a year, five years, etc.). As a result, the bank typically offers a higher interest rate than a standard savings account, so you earn more money. However, if you need to take the money out early, there are penalties to pay as a result.

Money Market Account (MMA)

These types of accounts are sometimes thought of as a hybrid between a checking and savings account. You typically earn a higher interest like a savings account, but you may also use checks or a debit card.

With money market accounts, though, there are typically some restrictions in place, like minimum balance requirements or transfer limits. These restrictions may be federally regulated or put in place by the bank itself. If these restrictions are violated, the account holder will usually have to pay a maintenance fee as a result.

Retirement Accounts (IRA/Roth IRA)

As the name implies, these are accounts you put money into throughout your life, with the intent being that you only withdraw it once you retire. They typically have higher interest rates that compound over time, meaning you can earn a good amount of money from them.

It is important to note, though, that there are several types of retirement accounts, and each one has its share of traits that make it unique. Some varieties include IRA, Roth IRA, 401(k), Roth 401(k), and Pension Plans. But despite their differences, the approach is still the same. Put money in, and leave it there.

Business Account

While there are personal checking, savings, and money market accounts, there are also business-oriented versions of them. They operate much the same but may have a few areas of difference. Some of these may include higher transaction limits, merchant services, payroll services, multiple cardholders, dedicated advisers, and more.

Joint Account

Again, just like you can have personal checking, savings, and money market accounts, you can have the same as what is called a joint account. The descriptions remain the same, but as the name implies, they allow you to share access between two or more people. As a result, most accounts have a "right of survivorship" feature, which states that in the event of one holder's death, the balance is transferred to the remaining account holder(s).

Student Account

A student account is typically a checking or savings style of account. They are geared more towards younger individuals in college or who are too young to have a credit history or regular income. As a result, they may have little or no fees, lower minimum balance requirements, and different overdraft features. In addition, some banks even off perks like discounts, cash reimbursements, or other freebies to account holders.

Trust Account

This is a legal arrangement between three different people. In this case, the trustor appoints a trustee for the role of holding and managing assets for the benefit of a beneficiary. An example would be when Henry puts money into an account and appoints his daughter Sarah to save or invest it responsibly. However, the money in the account is only to be spent on Henry's grandson, David.

Custodial Account

With a custodial account, there are two parties involved. First, a custodian, usually a parent, creates and manages an account until a predetermined time, when it will then be handed over to a benefactor, such as a child. During that time, the custodian is responsible for depositing and investing the funds as they see fit. But at the set time, like when the benefactor turns eighteen, the account is entirely handed over to the individual, and the custodian no longer has any control over it.

Conclusion

The financial world is definitely not a one-size-fits-all industry. From saving for a dream vacation with a high-yield savings account to securing your child's future with a custodial account or planning for a comfortable retirement, each type of account is just a small piece of a giant puzzle.

Understanding these various tools is about more than just parsing banking lingo in our next meeting; it's about empowering ourselves to make informed decisions that will shape our financial future. I genuinely hope you've learned something helpful from this article and that it moves you forward in learning some basics about the banking industry.