When it comes to bank accounts, there’s no “one size fits all” approach. Everyone has different needs and financial goals, which means we’re all bound to have different combinations of checking, savings, and other types of accounts.
Different accounts serve different purposes. Retirement accounts like a 401(k) or IRA offer tax benefits to encourage people to invest toward their retirement. Traditional banking accounts like checking and savings offer easy access to cash and are generally for spending or short-term goals, respectively.
7 Types of Financial Accounts Explained
Here’s a rundown of the different types of banking accounts, how they’re different, and how they could make achieving financial goals simpler.
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1. Checking Account
Checking accounts are available through traditional banks, credit unions, and online financial institutions. These accounts allow deposits and withdrawals. Some accounts may charge fees, while others checking accounts can be opened at no cost, but may have some restrictions. It may be possible to have fees waived on a checking account by meeting certain minimum account balances or setting up direct deposits from your employer.
Checking accounts got their name from one of their prominent features — writing checks. While writing checks may be less common these days, traditional checking accounts still offer the ability to make deposits and withdrawals, write checks, and in some cases, the account balance may earn interest. For the most part, they’re meant for daily expenses, not intended for savings.
The checking account interest rate offered on many checking accounts is lower than the rate of inflation. If a person chooses to park all their money in this account, their money wouldn’t keep pace with inflation and would end up losing value year over year. That’s why, while most Americans have a checking account, it’s not their only bank account.
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2. Savings Account
Unlike a checking account, the cash stored in savings accounts is typically less accessible — that’s why they call it a saving not spending account. A savings account may not have an ATM or debit card and it is most likely not possible to write a check from it either. Some savings accounts may require a minimum balance. If an account holder goes below the minimum required balance, some banks will charge a fee. Savings accounts may also have limits on how many withdrawals can be made from the account each month.
Additionally, some banks may charge maintenance fees for keeping a savings account open. Fees and policies will vary bank to bank, so it can be beneficial to account holders to shop around to different banks instead of settling with the first one they find.
To access their account, an account holder could go to the bank’s location or may be able to make deposits through an app or online platform.
Regulation D may also limit the number of withdrawals on your savings account that can be made each month. In the past, Regulation D limited the number of withdrawals from savings accounts to six per month. This limitation was removed in April 2020, though financial institutions are not required to implement any changes to their policies. In general, it’s not recommended to use a savings account for day-to-day spending. Instead, it’s better suited for short-term savings goals.
Savings accounts may offer more competitive interest rates than checking accounts.
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3. Cash Management Account
A cash management account allows account holders to save and spend from one account. Financial institutions that offer cash management accounts may also partner with a bank to store funds. Cash management accounts allow the account holders to make withdrawals and deposits, but may also offer competitive interest rates.
While there’s no one “perfect” bank account, people can mix and match, opening a few to meet both their daily needs and may be suitable for some short to mid-term goals, depending on the APY or investments available from the account.
4. Certificate of Deposit
A CD, or certificate of deposit, is sort of like a savings account, but more hands-off. Both types of accounts are meant for saving, but while an account holder can withdraw money from a savings account within the limits set by Regulation D, outlined above, money deposited in a CD is untouchable for a predetermined amount of time.
Length of CDs can range from a few months, to a few decades. The benefit of a longer CD term is generally a higher interest rate. According to the FDIC , the adjusted rate cap for a one month CD is 0.77% and for a 24-month CD is 0.92%.
For example, a year-long CD might earn 1% to 2% interest, whereas a CD that’s five years long earns 2% to 3%.
But, with that boost in interest rates comes a few caveats. In addition to its “no touch” policy (no early withdrawal) some CDs also have a minimum deposit, typically starting at $500 and up.
There is the option of no-penalty/early withdrawal CDs. However, be wary when signing up for these, as they often include specifics on how and when an account holder can withdraw early without fees and penalties.
Another alternative is CD-laddering. That means buying CDs at specific intervals, meaning access to savings will be staggered as CDs expire.
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5. Money Market Account
A money market account is another type of FDIC-insured account . Money market accounts generally have a higher interest rate than a traditional savings account, but may have more restrictions. Money in these accounts may be invested in low-risk investments such as government securities, certificates of deposits, and commercial paper.
Additionally, taking funds out of a money market account can be relatively easy — many come with checks, or online electronic transfers. Money market accounts are also restricted under Regulation D and have monthly limits on transactions. That means withdrawals and transfers are limited, not making it a good fit for day-to-day transactions.
Like savings accounts, money market accounts typically have balance minimums. In some cases, these minimums are higher than a savings account. If an account holder doesn’t maintain the balance minimum, it’s likely they’ll be charged a monthly fee.
Money market accounts might be the right choice for people who want high yield savings, but don’t need to access the capital too often and can meet the deposit minimums.
6. Brokerage Accounts
A brokerage account is a type of investment account that allows account holders to trade securities.
Depending on the service level of the brokerage, a brokerage account can come with fees. Typically, the more “full-service” firm, the more the firm does the work for the customer, the more fees. On the other hand, automated investing and DIY brokerages may have fewer fees associated with them.
To open a brokerage account, a person needs cash and an idea of what they’d like to purchase. Some accounts do not have a minimum deposit amount but others require a minimum deposit which may range depending on the account type.
In order to withdraw funds from a brokerage account, securities need to be sold first. After settlement, the money can be withdrawn from the account. Withdrawn investments may be taxable if they are capital gains, and investing is often thought of as a long-term savings strategy. A brokerage account is less liquid than a savings, checking, or money market account.
7. Retirement Accounts
Retirement accounts, like IRAs, 401(k)s, and SEPs, are designed to help individuals save for retirement. Deciding what kind of retirement account to open will depend on a number of factors:
• Employer benefits. Some employers offer a 401(k) and may have a 401k matching program or other perks with their retirement plans. Taking advantage of those benefits can be worthwhile, especially up to the employer match.
• Target retirement date. Working backwards using a retirement calculator, people can determine just how much they need to save each month to retire on time. From there, certain retirement plans might make more sense than others.
Selecting a retirement plan is a personal decision that depends on factors like their personal goals, the target date for retirement, and more. For questions, it can be helpful to consult with a qualified financial professional. With retirement accounts, the money contributed is locked-in until retirement. Withdrawing early can result in fees and penalties that can cut into savings.
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Finding Accounts That Work for You
Since different types of accounts have different purposes, benefits, and uses, it is likely that individuals will have a few different accounts to meet their needs. Some financial institutions may offer a variety of account options, while some individuals may choose to have a savings and checking account with one institution, and investment and retirement accounts with a separate financial institution.
Each financial institution is likely to have its own policies in place so it can be helpful to review the options available with a few different institutions as you build your financial portfolio. If you have questions, consider consulting with a financial professional who can provide personalized financial advice.
If you are looking for an account that allows you to save, spend, and earn interest, all in one place — consider SoFi Money®. With this cash management account, all ATM fees are reimbursed and there are no account fees.
Looking for Something Different
Different financial accounts serve different purposes. Checking accounts make it possible to easily withdraw and deposit money while accounts like 401(k) or IRAs are designed for longer-term goals like investing toward retirement. People will generally have a mix of these accounts. A cash management account offers account holders the ability to easily deposit and withdraw money into the account, while also earning a competitive interest rate. SoFi Money® is a cash management account that makes it easy to see how you are saving and spending money, all in one place.
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SoFi Money is a cash management account, which is a brokerage product, offered by SoFi Securities LLC, member FINRA / SIPC . Neither SoFi nor its affiliates is a bank. SoFi Money Debit Card issued by The Bancorp Bank. SoFi has partnered with Allpoint to provide consumers with ATM access at any of the 55,000+ ATMs within the Allpoint network. Consumers will not be charged a fee when using an in-network ATM, however, third party fees incurred when using out-of-network ATMs are not subject to reimbursement. SoFi’s ATM policies are subject to change at our discretion at any time.
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