Monday, March 7, 2011

Different Types of Deposit Accounts

This is the 2nd post in the Bank Deposit Account 101 series. 

I explained how to open a deposit account in an earlier post but didn't get to mention in detail about what sort of accounts are available. To make it up to y'all, the following is a list of the 4 most common bank deposit account types. Don't blindly pick something to throw your money into. Understanding how each one functions will hopefully help you maximize profit and minimize fees and inconvenience. This information should also be factored into the bank you ultimately decide to open your account at.

Checking Account is the most common deposit account. Like its name suggests, this type of account allows you to write checks and withdraw money easily. It is usually tied to a debit card. Because of these features, a checking account is the most liquid form of deposit accounts and, in general, does not bare interest. In the past year or so, in order to make up for loss profits from government regulations, many checking accounts require a minimum balance to avoid maintenance fee or to receive certain services.

Savings Account pays a modest amount of interest but is a less liquid way to store your money. You will most likely not be able to write checks, but you can still transfer and withdraw money with more restrictions and fees than a checking account. This type of account is suitable if you don't intend to use the funds for daily expenses but still want to be able to access it quickly when needed.

Money Market Deposit (Savings) Account is used similarly as a regular savings account. However, it is subject to more government regulations such as the number of times transfers can be made and the amount transferred each time. It will most likely require a higher minimum balance, too. That said, a money market deposit account is supposed to earn even higher interest rates than a savings account. Rates are so low nowadays though, that the difference between the two types of account is insignificant.

Note: A money market deposit account shouldn't be confused with a money market mutual fund.

Certificate of Deposite (CD) is the least liquid out of these 4. In fact, it is an agreement to a fixed term to leave your money with the bank for a set amount of time in exchange for a higher fixed interest rate. If you withdraw the fund before the CD matures, you'll incur a penalty. At the end of the term, you'll have a choice of withdrawing the principal and interest or to roll over the money for another term.

Of course, the exact definition and requirements for each account varies from bank to bank. Financial institutions, for better or for worse, have gotten more creative with the products they offer as well as the rules attached to them. So you might see variable interest rate CDs or interest baring checking accounts. Sometimes banks will require you to open both a checking and savings account at the same time and link them. As I mentioned in the last deposit account post, make sure you do your own research and make the representatives explain their products thoroughly before agreeing to open an account.


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