To understand what you should do with your money once you start earning it, it’s important to understand the different types of bank accounts there are out there for you to save your money in. Choosing one of these five accounts can help you to diversify and wisely save your money in a way that will be most profitable for you in the long-run.
Let’s start with the simple debit card versus credit card. Where do they come from? What do they connect to? Debit cards are used to pull money directly from your checking account, which I will explain later. Credit cards are not connected to an account that you store money in like your checking or savings accounts. However, what it does is create a line of credit for you to pull from. A line of credit, in essence, is a continual stream of credit (or, essentially, small loans) from a bank. Different credit cards allow you to use a certain amount of money each month given to you by the bank that you borrow. One great way to pay off your credit card is to have your credit and debit cards connected to accounts at the same bank. That way, you can simply transfer money into your credit card account to pay off the loan, or credit, you took from the bank.
1) Checking Accounts
As stated before, debit cards are usually connected to your checking account. Your checking account protects your funds so that you are not carrying around all the money you have in your pocket. Doing so could be highly dangerous for you and you, potentially, could get mugged and lose all the money you have. It also protects your money, should you have tried to hide all your money in your home. There are numerous safety precautions banks take to protect your money, and a checking account is one of them. Checking accounts are secure and easy to reach into for funds at any time.
2) Saving Accounts
Savings accounts are similar to checking accounts, however, they often offer a small interest rate that will earn on your money over time. These interest rates are usually quite low, as you can dip into them often. Sometimes saving accounts have penalties from moving money out of it too many times within a month to encourage you to save the money instead of spend it. For example, some PNC bank accounts only allow you to move money out of your savings accounts six times per month before penalizing you.
3) Money Market Accounts
Money market accounts function similarly to savings accounts. These accounts require that you put greater amounts of funds in them and keep them in there over a lengthy amount of time. Sure, you can withdrawal money from them in the form of checks, but, if you go below a certain balance, the bank may penalize you. The more money in the account, the more you are likely to earn, interest wise. Interest rates on these types of accounts can change on a consistent basis and can be higher or lower depending on the amount of money in your account.
When saving for retirement, some people go the route of using a 401(k) provided by their company. Not all people have this opportunity through their employer, nor any of the other beneficial offerings some companies give, such as matching 401(k)s. So, investing your money in an Individual Retirement Account (IRA) can be a great alternative that can work well for you over time. To break this account type down further, let’s take a look at regular IRAs and the Roth IRAs. Roth accounts allow you to take out money that won’t be taxed upon withdrawal. Regular IRAs are preferable to some, because they let debits into the account be tax deductible.
Last but not least is the Certificate of Deposit, or CD. CDs and Money Market accounts are like saving accounts, because they let you save money in them; however, you have to choose ahead of time (1) how long you are going to save the money in the CD and (2) what interest rate the CD will have. The interest rates on these accounts are typically greater than savings accounts, because you agree right off the bat that you will not take money from this account throughout the duration of the CDs life.
What kinds of accounts do you use to store and save your money? What do you find is most beneficial? Tweet me @Isabell_Agumbah to continue the conversation!