There are many types of bank accounts available today that you can open for various purposes. Mainly, an account is opened to deposit money that you entrust the bank or after borrowing a loan. At the end of a certain duration or when you need it, the bank provides you with a bank statement. This is a detailed record of all the activities that have taken place in regard to the account.
Depending on where you reside, there are different laws governing bank accounts. The banks must adhere to them to the letter failure to which can have damaging consequences. The regulations stipulate how an account is opened, run, and closed. As per the law, you must be at or above the age of 18 to open a bank account. The age, however, varies from one country to another.
Every account has certain requirements that you must meet to open it. If even one requirement is missing, high chances are that the bank will reject your application. Ensure you have everything needed to open the type of account you want. Identification is first and foremost in any bank or financial institution.
Opening a Bank Account
Take the time to research the type of account before you apply for one. When you have all the facts, open the one that suits you. It’s crucial to do this especially if this is your first bank account ever. Being prepared helps smoothen the process. Bank accounts are also essential in building your credit score.
Only eligible applicants get a bank account. As mentioned earlier, every type of account has certain requirements that you must meet in full. There are certain special accounts that underage applicants can hold, but mostly it’s a joint account with a parent. The standard age is 18 to apply for an account. A good credit history rating is another factor to consider as the bank will do its homework.
There are basic requirements when opening a bank account. Be ready to fill out all the paperwork presented by the bank and provide personal information in detail. The most necessary forms of identification to have with you are ID, birth certificate, social security, and in some instances, a valid passport. Proof of address is often requested in the form of a utility bill.
In the age of the internet, online banking is something to keep in mind. There are banks that permit clients to open accounts online. Here, you get a virtual application form to fill out with all the requested details in full. To complete it, you provide an electronic signature and provide a deposit if required. Some banks might drop off more forms to fill out but not all.
Types of Bank Accounts
There are different types of accounts but they mostly fall in several categories. These categories are Savings Account, Checking Account, Certificate of Deposit, Money Market Deposit Account, Dividends Account, and Retirement Accounts.
|Type of Account||Min. Deposit||Min. Balance||Withdrawal Limit|
|Savings Account||N/A||Applies||Number of times varies|
|Checking Account||N/A||Applies depending on bank||N/A|
|Certificate of Deposit||Applies||Applies||Applies|
|Money Market Account||Applies||Applies||Applies|
|Individual Retirement Account||Applies||Applies||Applies|
a) Savings Accounts
A Savings account is the one you open in a financial institution or a bank and deposit money. You leave the money for some time to earn interest as set by the bank or institution. The interest rate earned is not that much but can be a good return on the money you don’t want to spend. By using a savings account, you deposit money for a set purpose or an emergency.
The good thing with a savings account is that you are limited on the number of times you can withdraw. You retain the funds in the account for the goal or purpose you have in mind. By using a savings account, you develop a discipline to meet the set goal or for emergency cases.
Many banks and financial institutions encourage clients to open a savings account with them. The money you keep is what they use to give secured or unsecured loans to other clients who pay back with an interest. Now you understand why your local bank is always advertising a new type of savings account with benefits.
Most of them offer a variable interest rate but some, on a promotional basis, have a fixed one. The fixed-rate is not indefinite and only lasts for a certain duration. After the time elapses, the account reverts to a variable rate. The one commonality most banks and financial institutions share is higher rates for those who save the larger amount for longer.
Some savings accounts don’t have a minimum balance, to earn interest deposit money first. Read through the Terms and Conditions to understand how the interest rates work. Some monthly fees may apply to the account as well, which is important to know from the start. Deposits are easy to make as most provide an ATM card for faster transactions and online banking as well.
There are certain federal laws in regard to saving accounts that are important to note. One of the rules is that withdrawals are permitted but limited to 6 in a month. If you exceed this number then the bank is permitted to charge you a fee. They may even go further and convert the account to checking.
Pros of Savings Accounts
- Ideal for saving money that you don’t want to use on daily necessities. In case you want to make a large purchase or have an emergency fund, this is the best account to open.
- A savings account is a safer option than keeping large amounts of cash at home.
- The funds earn variable interest. Some institutions even have fixed rate offers for set period where money earns extra.
- Easy transfers are arranged in case you have a savings and checking account in the same bank. The process is less stressful as opposed to when dealing with two different institutions or banks.
- Multiple savings accounts are a reality and can help you plan for multiple projects. For example, you can have an emergency fund, a car fund, and a college fund all in the same institution or in multiple ones.
Cons of Savings Accounts
- Limited access might be an issue when you need the money. With only 6 withdrawals permitted per month, this limits you the 7th time when it’s an emergency.
- Lower interest rates are a reality of many savings accounts. When you compare with other savings instruments, you realize the difference is staggering.
- Withdrawal is possible up to 6 times in a month as per the law. This makes it hard to save when you know you can’t access the money at any time.
b) Checking Accounts
The best way to understand a checking account is to know it permits as many deposits and withdrawals as you want. Unlike the savings account, the checking account has no set limit. You open it in a bank or at a financial institution and it’s the most common type of account. Many people have one due to the necessity of everyday transactions. Once you open one, accessing it is easy and you can use multiple platforms. Most accounts come with an ATM card, checkbook or debit card.
You can easily deposit money at the ATM rather than waiting in a long line inside the bank. There is a fee that you must pay charged by many checking accounts. Get to learn of this and other Terms and Conditions before applying for one. Know what the minimum balance is as you might get charged a fee for going below. However, it differs from one bank to another.
There are multiple types of checking accounts depending on the purpose.
Common Checking Accounts
- Business account
- Individual account
- Student account
- Joint account
Specify on your application form the kind of account you intend to open. Most checking accounts don’t offer any type of interest rate, variable or fixed. For added benefits, inquire from the application officer whether any offers interest as you state the account you want to open. The process usually takes a few hours to complete and you get an account activated immediately.
Quite literally every bank offers a checking account to clients. Some require a minimum deposit to open one and some don’t. There is a maintenance fee charged for it by the bank or financial institution. The fee is competitive from one to the other and some offer no fees charged to attract clients. Some go to the extent of extending certain types of loans with lower rates to long term clients.
Opening a checking account is quite easy. You can do it at the financial institution or online. Some have apps that you can use for the same purpose with minimal paperwork. After you open the account all that is required is to deposit funds that can be accessed daily for various uses. Gone are the days of tedious processes to open such a simple account. The whole process can be done in under an hour and you have an active account.
The best function for a checking account is direct deposit. Your employer can deposit your salary into the checking account. For many companies, an employee must have a checking account to be paid as not many offer cash payments. The bank also remains liquid with an ever-flowing supply of cash through your account. Each bank uses the money to lend to others as loans that they service every month.
Not all checking accounts are void of interest as you can opt to open one that has an interest-bearing feature. The only downside is the high fees charged by the bank or financial institution. There is a minimum balance that you must maintain at all times.
Pros of Checking Accounts
- Most checking accounts are quite easy to open. You only present the necessary documents and the process is completed in less than an hour. You can opt to open the account online or via the official app.
- There is no set limit to the number of times you can access the account; unlike the savings account that limits withdrawal to 6 times per month. You can deposit and withdraw as many times as you want.
- Some banks don’t require a minimum balance on the account for it to remain active. You can withdraw all the money from the account and it remains active.
- Online banking has enabled easy and quick transactions that don’t require physical presence. You can make easy payments from your account with the click of a button at the comfort of your home.
- Direct deposit makes it easier for employers to pay their employees timely.
Cons of Checking Accounts
- Maintenance fees is charged on checking accounts by the financial institution or bank. Be sure to read the terms and conditions to know how much it is.
- Extra fees apply especially when using ATM cards that charge extra to withdraw money at ATM machines.
- Not all institutions and banks offer accounts without a minimum balance. You must maintain a certain amount in the account for some.
c) Certificate of Deposit (CD)
When you want to keep a large amount of money in a bank or financial institution for some time, CD is the best account for you. It’s offered by many financial institutions with the intention of having clients deposit huge sums of money for an agreed period. You get an enticing premium rate that reflects on your account. You can access the money once the time has elapsed or keep it for longer by signing a new agreement.
It is mainly a deposit account and frowns on withdrawals. To dissuade clients from early withdrawal, there is a heavy penalty. Each bank has a different offer, so when in need of one, shop around to see what is available. You can lock down the best offer with higher interest rates and better terms. Keep an ear on promotions that carries special offers for the Certificate of deposit account. That might be the best time to open one.
There isn’t much needed to open a CD. It resembles setting up a normal savings account and the difference might be the amount and period. You can opt to head to the bank and fill out paperwork. But, the option of online banking is available making it even easier. You can use an e-signature to finalize the whole process. Money can be transferred from one account to a certificate of deposit.
The rates offered by the CD account are fixed. As you shop around for the best offer, you can calculate the expected return once time has elapsed. The one with the highest interest rate will definitely make you more money. Have a preferable term in mind as you plan to open the CD account. Most banks or financial institutions allow you to choose how long you want but have a set period.
Know the kind of CD account you want to open as some require a certain amount to set up. It’s advisable to choose a flexible account. However, it has to be above what the accounts minimum balance is. It functions as any other savings account once established. You can opt to get regular bank statements checking on the progress or just wait until the end.
Pros of a CD Account
- To entice more people to open one, most banks and financial institutions provide higher interest rate. You stand to earn more by depositing the money in this account.
- It resembles a normal savings account. You can open it easily by heading to the bank or online. All the same documents apply the only difference might be the amount of money deposited.
- Instead of using the money for other expenditures that are not a priority, you get to keep it until you find a better purpose. You can even retain it to use for a set goal.
- There is a penalty for withdrawing any amount which dissuades you from dipping into your savings unnecessarily.
Cons of a CD Account
- It’s not easy to access the money once you sign on the dotted line and deposit it. There is a hefty penalty charged on an early withdrawal.
- A minimum balance is required to maintain the Certificate of Deposit account.
d) Money Market Account (MMA)
When you come across the term money market account, you should expect your deposit to earn interest. You open one in either a bank or a financial institution. It’s a special type of account that differs from many others offered in the same place. The one difference is that it has a high interest as compared to what other types of accounts offer. When you decide to open an MMA, know there are some privileges that come with it.
Most of these accounts come with insurance protection on the money you deposit in them. This way you feel more at ease when it’s a large amount. The banks are quite specific about how much is required to open the MMA. A minimum balance is required to keep it active at all times. You might be charged extra in case your balance falls elow this set limit. The account comes with federal insurance protection.
Pros of MMAs
- They have a higher interest rate as compared to other types of accounts.
- You get special privileges only accorded to certain account holders.
- Funds are protected by the federal insurance protection.
- Comes with a special debit card
Cons of MMAs
- Deposit a set amount of money
- There is a minimum balance to maintain at all times
- A penalty is applied if you fall below the minimum balance
e) Individual Retirement Account (IRA)
Start saving for your retirement as soon as possible, if you’re not already. The best tool to use is an IRA account that comes with tax benefits. It’s a form of investment that secures your future. Through the account you can have enough to sustain you after retirement. There are various types of IRAs differentiated by the tax liabilities each has.
The best thing about this account is you are easily discouraged from withdrawing. The bank accomplishes this by charging a hefty penalty of 10% every time you withdraw. The age to access the Individual Retirement Accounts is 59.5 years. Anything earlier than that result in penalty charged of up to 10%.
The most basic IRA account is the one that you manage on your own. It’s the Roth Account that is self-directed and you get to make all the necessary decisions about it. Make sure when opening an IRA you do so in a recognized institution or bank. The recognition is by the IRS because not all are permitted to offer clients IRA account. You can opt to open it at a brokerage firm or a savings and loan institution.
For those who are self-employed, there is the SEP IRA for them. SEP means Simplified Employee Pension. It resembles the traditional IRA and follows most of the rules.
Pros of IRAs
- Savings for retirement which ensures you have enough money to live on in your golden years.
- There is little to no taxation on this account and the assets involved.
- It’s possible to get good tax deductions on it.
Cons of IRAs
- The account has strict limits for the contribution which locks out many people. Know what the rules are for this type of account and adhere to them.
Know the purpose of an account in advance before you open one. It’s the best way to select the right one. There are many types of accounts all with rules and requirements to note.