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.
- Piggy Bank
- Checking Account
- Savings Account
- 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!
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.
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!
Here we go. Checking accounts are the most basic account out there. These days you can do the following with a checking account:
- Write physical checks
- Use a debit card
- Deposit money
- 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:
- Receive my paycheck
- Pay my bills (direct debits)
- Pay other people (checks)
- Transfer money to savings
Just about every dollar I earn goes through my checking account at least once.
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:
- Deposit money in
- Withdraw money out
- 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.
- Choose a credit union to do business with
- Go to the website and find out what you need to do to open accounts
- Open the following accounts: Checking, Savings, Money Market
- Request a debit card for the Checking account
- 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:
- Deposit your paychecks in to the Checking account
- Pay your bills with either your checks or debit card or direct withdrawal (called an ACH)
- 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.