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An Overview of Financial Accounts

Jun 05, 2019

There are many types of bank accounts that students will find useful in the coming years. We’ve already discussed savings plans specifically for college in another article, so this is an overview of some other basic financial accounts. Keep in mind, most of these accounts are Government-insured, meaning the first $250,000 of an individual’s total deposits are protected against a bank/credit union failure through the FDIC (Federal Deposit Insurance Corporation) for banks or NCUA (National Credit Union Administration) for credit unions.

What is a checking account?

  • A credit union of bank account in to which you deposit money with the intention of using it to pay bills or for expenses in the short-term
  • Can be interest-bearing, which means you earn interest on the balance. Interest paid on checking accounts is often lower than interest paid on a savings account. Be sure to read the fine print because sometimes checking accounts do not pay interest at all.
  • Used to pay bills or obtain cash
    • By check — a form instructing the bank/credit union whom to pay, and how much
    • By online payment — basically an electronic check
    • By ATM — Automated Teller Machines allow you to withdraw from or deposit money to your account
  • Often come with a debit card, which can be used to pay for purchases or to withdraw cash from ATMs, in either use, the money immediately is withdrawn from your account
  • It’s important to know that fees are charged if checks are written for amounts larger than the available balance in a checking account.

What is a savings account?

  • An account offered by a credit union or bank into which you deposit money usually with the intention of not using it in the very near future.
  • Compound interest allows you to earn interest on interest and increase your savings
    • Compound interest is calculated daily (or sometimes monthly or quarterly), so you earn interest on your interest. Compound interest is more favorable than simple interest.
    • Simple interest pays one interest payment based on the amount you invest and usually ends up being less than compound interest.
  • Many credit unions and banks permit their customers to link their savings and checking accounts for “overdraft” protection. This means if you write a check for an amount in excess of the amount in your checking account, the credit union or bank will automatically transfer the amount necessary to pay the check.

What is a money market account?

  • A bank or credit union account into which you deposit money
  • Similar to a savings account, but usually pay a higher interest rate
    • Some offer limited check-writing ability
    • Some offer debit-card access to your money
  • Usually requires a large minimum balance at all times, often thousands of dollars
  • Limited number of withdrawals per month, including check and debit-card transactions (a maximum of six per federal rules, but some banks/credit unions allow even fewer)

What is a CD?

  • CDs (certificates of deposit) are issued by credit union or a bank in exchange for money deposited
  • Pays you a certain amount of interest until a specific date, known as the maturity date
    • Typical maturity dates are three months, six months, one year, or five years
  • Generally, pay interest rates greater than savings accounts, usually with more interest paid for longer-term maturities
  • The credit union or bank will charge a penalty if you must redeem a CD before maturity
  • May be government-insured: Some higher-yielding CD’s may be offered without insurance

What is a U.S. savings bond?

  • U.S. government-issued investment, Series EE savings bonds are somewhat like a CD
    • Issued electronically, held in a U.S. Treasury account for you
    • Formerly issued on paper (paper bond sales ended Dec. 31, 2011, but such bonds are still redeemable, so don’t worry if someone bought one for you as a child)
  • New savings bonds can be purchased at any value (to the penny) from $25 to $10,000
  • Earn interest for up to 30 years, and may be cashed in after one year (but if held for less than five years, three months’ interest is lost)
  • Interest for Series EE bonds purchased since May 2005 is added monthly and compounded semiannually
    • Different rules apply for Series EE bonds issued in April 2005 and earlier
  • Interest from Series EE bonds is exempt from state and local income taxes
  • May have federal income tax benefits if redeemed to pay for higher education

Important considerations when choosing the type of account that will work best for you include:

  • What you will likely use the account for: short-term spending or investing
  • Your investment time horizon
  • The interest rate you will receive for your deposit
  • Any penalties or fee for early withdrawal or not having enough cash in the account to cover a check