Banks and credit unions offer savings accounts to their customers as a way to bring in new business to the institution. You put money in, and it accrues an interest rate percentage on a daily, weekly, monthly, or yearly basis. A savings account is a great tool to save for something in the short term like a wedding, furniture for your home, or a down payment for your car.
Pros and Cons
Everything has a positive and negative side. Let's talk about those sides for a savings account. First, we'll talk about some positive aspects:
- Money accrues interest over time . Check the rates because some banks pay more interest than others. Also try to find a bank that compounds interest daily rather than monthly or yearly because your money will grow much faster.
- It's easy to transfer money around and get your money when you need it . Most banks allow you to take your money out online, at an ATM, or at a local branch. According to Investopedia , a savings account is a great tool for the short term, but you should also be using other accounts to save money over the long term.
- Your money is safe . The Federal Deposit Insurance Corporation (FDIC) insures your money, up to a certain amount, so that if the bank goes out of business you get your money back.
On the other side, there are some negative things to think about with savings accounts too:
- Lower interest rates . When compared to Certificates of Deposit and Treasury Bills and other accounts that grow interest more quickly, savings accounts don't earn as much interest.
- Limits on how often you can move money around . It's easy to transfer money in a savings account, but the Federal government limits the number of times you can move money per month.
- Sometimes there are extra fees . Some banks charge a monthly fee for a savings account which makes the interest you earn even less. It's important to be diligent and check into fees before you open a savings account.
Now that you know some of the pros and cons, let's discuss how a savings account works.
The bottom line with a savings account is that it's better to use one than save money in a drawer or under your bed at home. Some interest on your money is better than no interest. http://www.practicalmoneyskills.com/personalfinance/savingspending/saving/howitworks.php shows us how to figure out how fast our money will double in a savings account. Take the amount of money in your account, and divide it by the interest rate. For example, if you have $90 and your interest rate is 6%, and you divide 90 by 6, you get 15. That means it will take 15 years to double your money if you were to leave that $90 in the account and never add anything else to it. If you keep adding money to the account, the money will grow fast
That brings us to the checking account; the folks at NerdWallet explain that it's the most commonly used account at financial institutions. There are several options depending on where you choose to do your banking.
- Online Banks : On-the-go people love online banks because they offer higher interest rates and allow you to access your money anywhere you have Internet access.
- Credit Unions : Credit Unions usually have membership requirements based on where you work or live, but are non-profit financial institutions. They put a high value on the priorities of members over the needs of the Credit Union.
- Banks : There are many types and sizes of bank to use for a checking account. Smaller, hometown banks are great for people who want personalized service at their local branch, but larger corporate banks might offer more perks for having a checking account.
Checking accounts are the most common account used by people who do banking of any kind. That means there are several types of checking account to choose from. What should you look for or ask about when you want to open a checking account?
- Fees . Are there fees associated with going below a certain balance in the checking account? Many banks offer free checking accounts that don't charge a fee for having a low balance.
- Rewards . If you use your checking account frequently, many credit unions and banks will offer accounts with rewards. Higher interest rates, no ATM fees, and rewards points for gift cards are just a few examples of common rewards, so shop around to see what suits your needs the best.
- Teen Accounts . If you have a teenager whom you'd like to teach financial responsibility to, consider opening a teen checking account for them. Typically, an adult will have to co-sign, but it's a great lesson to show your kids how to start managing their own money.
How Checking Accounts Work
You put your money into the bank in the checking account and then you can write checks to withdraw from the money deposited; these are called debits to the account. Many businesses take checks as a form of payment and many don't. Most banks and credit unions also allow the use of a debit card as a way to withdraw money from your checking account too. Your debit card looks like a credit card, but instead of accruing a monthly balance for you to pay off, you're debiting the money you already have in your checking account.
You keep a running total in your checkbook register of all debits made on the account so you can balance your account and know when you don't have any money left to spend. If you go over your checking account balance, most banks charge an extra fee for your account to carry a negative balance. Checking accounts have fewer limits than savings accounts. There is no limit on how many times you can make a deposit into your checking account and very few limits on how much you can withdraw from the account. Check with your bank to be sure of all fees and incentives.
Savings and checking accounts are two important tools for saving money as well as paying for transactions and bills you have throughout the month. Most people need both types of accounts in addition to other accounts to make up their financial portfolio.