Bank accounts are simple, right? It’s not like investing where there’s different asset classes, tax considerations, and market fluctuations. Despite their relative simplicity, I do want to share with you some reasons why you might want to put in a little more thought about where you’re parking your money than just opening an account with the bank you’ve been using since you were 12.
Checking account vs Savings account
The first thing you should consider before you open a bank account is whether you need a checking account or a savings account. Most people actually have both.
A checking account is where you would link all your automated payments and deposits whether that be your direct deposit, credit card payments, or utility bills. Think of it as the train station for your money. It’s where it goes to wait to be redirected elsewhere.
Checking accounts are well suited for this purpose because they generally have high or no monthly transaction limits. The tradeoff for this is that they earn lower interest than savings accounts. This means you don’t want your money sitting in there for too long!
Savings accounts should be where you send your money that you want to keep liquid (accessible), but don’t need to spend anytime soon. They earn higher interest than checking (this means your money makes money, woo!), but there are more restrictions on withdrawal limits, so be careful!
Maintenance Fees
Many accounts have fees associated with holding the account. While these fees range from $5-20, it is generally straightforward to avoid paying them.
First, you could find accounts that don’t charge fees. While this is rare for big banks like Chase or Bank of America, online banks and small regional banks usually are better bets.
Second, you could take advantage of your banks’ fee waiver programs that set out guidelines you need to follow in order to qualify for reduced or no-fees.
The key to minimizing fees is to do your research and read all the information when signing up for a bank account. The more informed you are, the better you can plan to avoid fees.
Interest Rates
Like I mentioned, savings accounts generally have higher interest rates than checking accounts. However, not all savings accounts are created the same. While the average interest rate for a savings account is a measly 0.06%, you could earn up to 15x that rate by simply choosing a different account.
These accounts are called high-yield savings accounts. Just google this term and you’ll be met with a plethora of options! The tradeoff for such a great savings rate is that some of these accounts are housed in online banks that generally don’t offer as robust of customer service options as brick-and-mortar banks.
Two Cents Tip: As of the publishing of this post, a good interest rate to look for is 1%. Due to the current economy, this is a relatively low interest rate. In good times it can get as high as 2%.
FDIC Insurance
FDIC Insurance is a very important facet to the modern economy. It is the reason that we don’t go running to the bank every time the stock market dips.
Basically, the FDIC (Federal Deposit Insurance Corporation) will pay you back all the money in your account plus interest up to $250,000 in the event that your bank fails.
Although it’s very commonplace and almost every account is backed by it, I found it worth mentioning that you should ALWAYS double check that the account you are signing up for is FDIC insured.
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