As the income gap continues to grow in the U.S., knowing how to choose the right types of bank accounts can have a lasting impact on your ability to build wealth.
We know there are certain strategies and habits people need to build wealth like budgeting, having multiple streams of income, investing, retirement accounts, real estate and entrepreneurship but there are also different types of bank accounts that can assist in wealth building.
The importance of a bank account goes far beyond convenience. Your ability to build wealth starts with basic banking knowledge and choosing the right types of bank accounts.
Types of Bank Accounts
There are several types of bank accounts that can serve your financial needs. Depending on your goals, putting money in the best account will help you to maximize returns on your money, minimize fees and manage personal finances.
You will find the below types of bank accounts at most banks and credit unions:
1. Checking Accounts
Checking accounts are designed for daily transactions like check deposits, withdrawals and bill payment. That's why checking accounts are considered transactional accounts. The basic theory behind a checking account is that money is deposited with the intention to spending it rather than saving money.
A checking account will come with paper checks and a debit card for a more convenient way to spend. Unlike other accounts, most checking accounts don’t pay interest. Monthly free checking accounts are your best option to retain money. There's no reason to pay a monthly fee to use your money.
2. Savings Accounts
A savings account is designed to save your money. They are the safest place to stash emergency cash. Money you put into a savings account will earn interest and grow over time. That's why it's more beneficial to keep your unneeded funds in a savings account rather than a checking account. But make sure it's a high interest savings account. The current national savings interest rate is around 0.05 percent — that's a miniscule amount.
The best place stash your cash is in a high-yield savings account that pays compound interest. Savings accounts that pay compound interest will grow your money faster. Money earns compound interest when the interest earned is added to the original deposit each time it's calculated. Online savings accounts pay the most interest and charge the lowest fees like the CIT Savings Builder Account that earns 0.40% APY compound interest.
3. Money Market Accounts
Money market accounts are a type of mix between a checking and savings account. Money market accounts typically require a minimum balance ranging from $5,000 to $10,000 be maintained to earn interest and avoid monthly fees.
Money market accounts generally earn more interest than either a basic savings or checking account but combines features of both. Most money market accounts come with checks and a debit card but may limit you to a certain amount of withdrawals each month without a fee. CIT Bank Money Market Account currently earns 0.45% APY and only requires a $25 opening deposit.
4. Certificate of Deposit (CD)
A CD account allows you to save money at a set interest rate, for a specific amount of time although it's different than a savings account. With a CD account you don’t have access to the money you’re saving period which may actually work better for some savers.
CDs pay higher often earn higher interest than savings account because you can't touch it without forfeiting the CD and incurring fees and penalties unless you open a No-Penalty CD. The life of the certificate can last a few months to several years.
5. Individual Retirement Accounts (IRAs)
IRAs, or individual retirement accounts come in two types: a traditional IRA and a Roth IRA. Retirement accounts can make it easier save for your future. The Roth IRA is popular because the funds can be withdrawn tax-free in many situations. Others prefer traditional IRAs because these contributions are tax-deductible.
Even if you have a retirement plan at work, like a 401(k), you can manage an IRA independently of where you work.
A 401(k) is a retirement savings plan sponsored by an employer. Employees can save and invest part of their paycheck before taxes are taken out. Employers may also match the funds employees contribute, further enhancing the advantages of a 401(k) plan. Taxes are payable when the money is withdrawn.
Most banks and credit unions offer different types of bank accounts that can help grow your money. Keep in mind you can open more than one account at various banks to meet your various needs. When looking to save money long-term, online savings accounts are beneficial because they typically pay higher interest rates. Choose wisely and build a lasting banking relationship.