Types of Bank Accounts

Okay, let’s take a few minutes and get you the foundational knowledge you need about money. This post is all about the different types of bank accounts you might have and how to use them. I give you a step by step plan in this post so don’t bug out early. If you want to establish your financial foundation then this post is for you. Follow these steps and then plow on in to the next topic!

So, you made it to this page. Since you’re here I know something about you: Money is an absolutely critical subject for you! You’re not just here visiting this website because you want to blow some time while you’re between classes or on the bus or chilling at home. You’re hear because you want to set yourself up for something more. Let me get this out early and get you going. Here are the types of bank accounts you need to worry about at this stage.

1. Piggy Bank
2. Checking Account
3. Savings Account
4. Money Market Account

First I’ll cover each account type, how it works, and what it is used for. Then I’ll give you a very simple and specific plan for establishing the accounts you need to run your whole life. Parents, you can follow this exact plan for your young adults… it is what I’ve done for mine. Teens, College Students, Young Adults if you are here then you can get this done too, in fact, take control of your financial destiny right after you read this post and get going on the plan!

Terminology

Before we get started on the details here are some terms you need to know:

• Bank Account: A specific register of money with a bank or credit union. There are deposits and withdrawals… it is that simple. If you want to learn a little more, check out this post on wikipedia.
• Interest Rate: Represented by a percentage, this is the amount of money a bank or credit union pays you each month based on the amount of money you keep in your account. Here’s some more information if you want to go deeper: investopedia.com
• Check: This is a piece of paper that is used as an I-Owe-You that is backed by a bank account. It has your contact information, the amount, a signature, a number that identifies your bank, and the bank account number. Here is a more detailed description from ehow.com.

Piggy Bank

Alright, you caught me. This is not a bank account. The reason I list it is because this is probably what you are using right now. Yeah, maybe your family setup something for you at a bank earlier but you probably aren’t really using it. If you are, cheers to you. If not, I’ve called it out so we can move past this.

Let me be clear. A Piggy Bank is not the way to establish your financial foundation!

Checking Account

Here we go. Checking accounts are the most basic account out there. These days you can do the following with a checking account:

1. Write physical checks
2. Use a debit card
3. Deposit money
4. Withdraw money

This account is the absolute base foundation for everything you will do with money in your life. This is the account that you use to pay stuff for. This is the account where your paycheck is deposited in to. This is the account where you manage your budget from. This is an exceptionally important account.

I use my checking account to:

1. Receive my paycheck
2. Pay my bills (direct debits)
3. Pay other people (checks)
4. Transfer money to savings

Just about every dollar I earn goes through my checking account at least once.

Savings Account

Savings accounts are the most common accounts out there. Most parents setup a savings account for their young adults because it earns some money each month based on the balance and whatever rate the bank or credit union has decided to offer. Savings account give you an incentive to keep your money in them because of that monthly payment. With a savings account you can:

1. Deposit money in
2. Withdraw money out
3. Transfer money to another account

Savings accounts are a good temporary storage account for the money you are setting aside for a specific purchase or goal in the next 6 months.

I use savings accounts (I have multiple) to hold on to money dedicated for a specific purpose that I’m planning to use in the next 6 months. If the financial goal is farther off than that then I use the next type of account, the “Money Market” account.

I also use a savings account as the first account that I open for my children.

Generally with a savings account there is a limit to the number of deposits and withdrawals that a bank or credit union will allow in a month. This is to keep you from paying all your standard bills from this account. Bills and payments should come from the Checking account, remember?

Money Market Account

Money Market accounts are simply savings accounts that earn a better rate of return the more money you keep in them. So, think of these exactly like a savings account except that the bank or credit union provides a higher rate of return if you have, say, $10,000 in the account for the month. There are generally tiers all the way up to $100,000.

I use Money Market accounts to hold money that I want to use in the next 12 to 24 months. You can earn better rates of return on certificates of deposit (the next account type) but you are locked in to that type of account. That, and sometimes, the interest rate on a Money Market account is as good as or better than a CD account.

Certificate of Deposit (aka CD)

The CD is an account where you deposit an amount of money for a specific amount of time, generally 6 months or more, and in return you get a set interest rate of return for that entire time on that money. Here’s the catch: during that time, you cannot make a withdraw or deposit.

So, CD’s are great for holding money that you don’t need access to in the next 6, 12, 24 months but you cannot get at it.

Your Plan of Action

Okay, now that you know what these accounts are. It is really, really important that you follow the financial advice I am about to give you. I earned this and I want to give it to you. This is the specific action plan you need to execute on to establish your financial foundation. I’m going to assume that from here on out, you have done this.

1. Choose a credit union to do business with
2. Go to the website and find out what you need to do to open accounts
3. Open the following accounts: Checking, Savings, Money Market
4. Request a debit card for the Checking account
5. Request (pay for) checks for the Checking account

I realize you might have accounts with a bank already but there is something you need to know about banks… they are in the game for PROFIT. That means they are not acting in your interest, they’re trying to make money off you… primarily with fees and poor interest rates. You want to do business with a credit union, end of discussion.

Once you have these accounts you want to:

1. Deposit your paychecks in to the Checking account
2. Pay your bills with either your checks or debit card or direct withdrawal (called an ACH)
3. Log on to your credit union’s website regularly to see what has come in and gone out

This will take a little time but trust me… this is worth it.

Jeff, What Do You Have?

I personally use BECU which is based out of the Seattle, Washington area where I live. They are connected into the worldwide credit union ATM exchange program which allows me to use ATMs all across the world for free, so the fact that they are not a national credit union or bank is not a limiting factor. I have one checking account, one savings account, and multiple money market accounts. If you want help getting started reach out to me at jeffreykelly.info.

Building Your Credit

An intern working for me recently asked how she could build her credit score. Happy to help I asked her what she knew about how credit scores work and what they are for. She shared that she knew a little and opened a credit card with a $500 limit about 6 months ago that she was paying off every month. Other than that, she didn’t really know much. Here’s my guide to building early-career credit scores.

Credit Score (Jeff’s definition) – A number in a range that is an indication to lenders of how likely someone is to pay back a loan on time. Some also consider it an indication of financial decision making.

Okay, let’s start with what a credit score is then move on to what it is for and how you build one. You can just read this post for an overview or you can follow the links to go more in depth. If you want to improve your score, I suggest you take the time to learn about this.

What is a Credit Score

A credit score is a number that provides an indication to a lender of how likely you are to pay back a loan on time. That’s it! Now, these days many types of businesses use your credit score, for example landlords, potential employers, credit card companies, and the banks extending you a loan. That list includes a couple that might be new to you: employers and landlords. This is because more and more businesses are finding that the credit score is a good indication of how you make financial decisions, not just whether you will pay back a loan or credit account on time.

Many things go in to the credit score, including:

• Number of bank accounts, credit cards, and loans
• Age of accounts
• Types of accounts
• Payment history of credit cards, loans, and bills
• Credit limits on credit cards and store cards
• Amount due and monthly payment on credit cards, store cards, and loans

Here are things that do not go in to credit scores:

• The amount of money in your bank account
• Whether you have a job
• How much money you make
• Accounts or history outside your home country (generally)

Learn more about what is in and not in your score here (USA specific):

• How Credit Scores Are Calculated – MyFICO
• What is not in a score – MyFICO

In the USA Credit Scores are created by private businesses and the scores are sold to businesses, banks, and others. So, there are actually many companies that have score information and it can vary from company to company.

Why Do I Want A Good Credit Score?

Here are some things that are easier when you have a higher credit score:

• Buying a house with a loan
• Rending or leasing an apartment
• Buying a car with a loan
• Buying an engagement ring with a loan
• Opening a credit card account
• Increasing the credit limit on your credit card account
• Getting a job

The reason all these things are easier is that businesses providing these things to you all use your credit score to help make the decision on doing business with you. They also use it to help decide the terms they offer you for loans or payment.

For example a landlord may require more money up front and a higher security deposit if your credit score is lower. A bank or car dealer may offer a lower interest rate if your score is higher because it suggests you are more likely to pay on time every time, and so lower risk for them.

Okay, let’s get to how to build (increase a credit score).

How Do I Build Credit (Get a Better Score)?

Building credit is about doing a variety of things and making good decisions with money. A credit score is based on information about your situation and behavior so you want to have the right behaviors consistently. Everyone’s situation is different so feel free to drop comments below (but be smart about what you share, don’t give out bank names account numbers, etc) and from time to time I’ll drop in to give you specific guidance. You can also use the contact form.

The basic accounts everyone should have:

• Checking
• Savings
• Credit Card

The behaviors everyone should use every month:

• Pay your utility bills on time, every single month
• Pay your rent or lease on time, every single month
• Use your credit card every month but don’t go over 50% of the credit limit
• Pay the full balance on your credit card on time, every single month
• Take any notices that you are late on payments seriously and resolve the problem

Here are behaviors you should show every year:

• Ask your credit card company for an increase in the limit on your card
• Get your credit report (not your score) from all three credit reporting agencies (USA specific) and review the information. If anything is inaccurate, get it fixed.

Here are some other ideas on improving a credit score:

• 7 Ways to Improve – Bankrate.com
• Improve Credit Score – MyFICO

That’s it. Having these accounts and using these behaviors will build up your credit score over time. This isn’t something that happens over night, particularly if you need to open accounts now or change your behavior. This is something that you set yourself up for and then make a difference with good decisions every month and year.

As I said before, feel free to drop questions in the comments or use the Contact form. I’m happy to give you guidance on your situation if you want it.

Jeff