Week 3: Banking and managing accounts
We’ve covered the main bank accounts (checking, savings, HYSA, etc.), but now it’s time to get into different accounts WITHIN these broad categories. That way you have a good understanding of every account before you choose which one’s right for you.
Now, let’s discuss our different checking accounts.
We know checking accounts are accounts used to make day to day transactions and are often tied to a debit card. These accounts are also used to write checks, deposit them using a mobile app, make purchases with a debit card, make withdrawals and deposits with an ATM card, transfer funds from other accounts, etc. The possibilities are endless as you can see!
Best checking accounts for teenagers: Axos bank first checking account
-tends to have no fees, debit cards, lower spending limits, and parental controls
-designed for ages 13-17
-earn 0.10% APY
-zero overdraft (won't have to worry about teens making too many purchases)
Best for teens and college savings: Capital One money
-lets teens set aside money towards their own saving goals
-adults can keep tabs on teens financial activity
-can switch to a no-fee Capital One account saving them money while in college
-no monthly maintenance fee, no overdraft charge, can earn 0.10% APY
-can allocate money as “spendable” and “set aside” so they can decide what to do with their money beforehand and use their “set aside” money for big saving goals like college or a new car
Best to earn high APY: Alliant credit union
-can earn up to 0.25% APY
-no maintenance fee
-ATM fee reimbursements ($20 per month)
We know a savings account is designed to hold money that you don’t plan to spend immediately. It doesn’t allow you to write checks or make purchases and ATM withdrawals using a debit card.
Let’s go back to those savings accounts that let you get a higher return on your money, as discussed earlier.
A CD (certificate of deposit) is a type of savings account with a fixed period of time and interest rate. It has higher rates than regular savings accounts but doesn’t let you access your money until a term ends. Before opening a CD, you must lock into 4 things.
The interest rate: this will be your fixed interest rate, which can be positive, as you’ll know the amount of money you’ll get in return on your deposit over a certain time period. The interest rate is determined by the federal funds rate (target interest rate set by the FOMC). Their decision influences a bank’s prime rate (the rate banks charge their most creditworthy customers). This prime rate is essentially the feds fund rate + 3% points.
The term: This will be the length of time you agree to leave your funds in to avoid a penalty (can be 6 months, a year, 18 months, etc.) This term will end on a maturity date seeing as your CD has fully matured and is now available to withdraw your funds from
The principal: the amount you’re agreeing to deposit when you open the CD
The institution: the bank where you open your CD will determine fixed aspects of the agreement before the term begin
A CD will be beneficial for you… if you’re someone who wants to store their money for a longer period of time. Its fixed rates offer safety and security as there’s no risk of inflation in the market involved. CDs also pay a higher return than money market accounts, but will only let you make one initial deposit, and then you won’t have access to that money till the maturity date is reached.
If you don’t know if a CD is write for you, don’t fret!
Well, the way i think about it is, say, you have money that you know you won’t use now but might want to save for a bigger investment in the future (new home, car, luxury vacation, etc.). Instead of just letting your money sit around in a regular checking or savings account (where you might get tempted to spend it), you could consider opening a CD, as you’ll keep the money away for a certain amount of time, but when you get it back at the end of your chosen term, you’ll have earned more!
This being said, you will want to have an extra emergency fund, as if you try to withdraw money from your CD early, you will face penalties.
A money market account… is another account offered by banks and credit unions. They tend to pay higher interest rates than other types of savings accounts; only advantageous if you need a SHORT-TERM safe place to park cash.
Provides features of both a checking account and savings account including…
Interest (like savings accounts): Interest rates will typically be higher than your traditional savings accounts, but they do tend to be variable, meaning it fluctuates as market conditions rise and fall (not a fixed rate unlike CD)
Debit cards (like checking accounts): allows you to make deposits, withdrawals, and transfers
Check writing (like checking accounts)
When is it a good idea to have open a money market account?
You will need a minimum balance requirement to open your MMA, but it’s a good idea if you’re trying to save up for a short-term purpose such as a vacation, down payment on your car, or just setting aside money for a rainy day. But do keep in mind, you will have to keep your balance above a certain level and will have to pay monthly fees if you cannot keep your money above that certain level.
A high-yield savings account… is a savings account that you open through a bank that pays a higher interest rate on deposits than regular savings accounts. You want to use it if you’re building an emergency fund or saving up for something big in the future.
It works as a traditional savings account EXCEPT you’re able to earn a 10-12 times higher return.
Holding your money in a traditional savings account gives you a 0.4% APY, whereas an HYSA offers up to 4.5% APY!
Ex. if you’re holding $7,500 in a traditional savings account, you’d earn $30 in interest over the course of a year. If you’re holding that same $7,500 in an HYSA, you’ll be earning $337.50 over the course of a year. You can see how much of a difference that could add up to in a span of say, 30 years, especially as more and more money keeps getting added to your savings account. (Though checking accounts and ATM cards aren’t offered with HYSAs, you can still make withdrawals and deposits via electronic bank transfer or mobile check deposit).
