The older you get, the more complex life becomes. The same goes for your money. Just as it has three jobs to do…
- Pay for expenses
- Save for goals
- Pay back debt
…different bank account types serve those same individual needs. Perhaps you’re in the market for a one-account-suits-all solution. Or maybe you need to spread your reserves across several different ones. No matter what your situation is, you’ll need to understand what the five most common account types are, and how to make each work for you.
1. Basic Checking: This account will cover your basics, including daily transactional needs and a safe haven for cash. It should be quickly and easily accessible via debit card or checks. Maintaining one often comes with a monthly fee, which might be waived depending on your banking institution and minimum balance requirements.
2. Basic Savings: Here’s where things get slightly complicated. While a savings account is basically an even safer haven for cash, it pays out interest in a variety of ways: annually, monthly, weekly or even daily. Some charge fees, while others require a minimum opening balance. Finding the right savings account is a balancing act (pun 100% intended) that will require cost-comparative research on your part.
3. Money Market: Money market accounts are like savings accounts, but they typically require a higher balance. Otherwise, you’re opening yourself up to fees. Another distinction is that interest rates are based on money market fluctuations, which are subject to ebbs and flows.
4. Certificate of Deposit (CD): CDs are places you conserve your savings for a pre-determined amount of time (from months to years). They traditionally pay out higher interest rates than regular savings accounts, but they also carry steep penalties for early withdrawal. Before you tie up your savings up in CDs, make sure it’s money you won’t need access to for the entire length of the certificate.
5. Individual Retirement Accounts (IRAs): IRAs are where you park your money for the long haul, as in retirement. There are two subtypes: the traditional IRA and Roth IRA. Both have contribution limits and their own requirements and guidelines. The key difference between them, though, is basic:
- Funds from the Roth can be withdrawn without tax implications
- Traditional IRA contributions are tax-deductible
Chances are you’re already managing your money with one or some of these account types. Maybe you’re already taking advantage of all five. The point is, you have to get out there and play the field. But be smart about where you distribute your cash so the field doesn’t end up playing you.