There has never been a time when more financial products have been available than now. Mutual funds, money market accounts, IRAs, CDs– the list goes on, but bank accounts remain the cornerstone of financial life for most people.
Bank accounts are a financial must-have, because they offer an easy way to receive, hold, and manage cash. They can facilitate everything from a fast-food purchase to a down payment on a home.
This article will provide an overview of three of the most common types of modern bank accounts. Each of these three account types has a specific purpose – accumulation, liquidity, and investing. You don't have to pick only one account type; many people have complex financial needs and maintain two or three of these account types. Let's take a look at these account types, starting with the savings account.
As the name suggests, savings accounts are intended for the accumulation and safe-keeping of savings. Most people use these accounts as a vehicle for medium and long-term savings. In the low-interest rate environment of the United States over the past few years, savings accounts have offered very low – even negligible – interest rates, but recent increases in interest rates are causing savings account rates to increase. This is an incentive for people to save more of their paychecks.
Most savings accounts are available at no charge, but restrictions on transfers are commonly imposed. For example, a bank might limit transfers out of a savings account to three per month, charging a penalty for any transactions that exceed the three-pre-month limit. This sort of restriction is in the interest of encouraging people to use savings accounts for their intended purpose.
Deposits in savings accounts are protected by the Federal Deposit Insurance Corporation (FDIC). In the event of bank failure, depositors are covered for losses up to $250,000 per depositor, per bank.
For liquidity and everyday purchases, a checking account is usually the best option. People commonly have their paychecks deposited into a checking account and distribute the money from there. Funds in a checking account may be accessed using checks, a debit card, or cash from an automatic teller machine (ATM). Many checking accounts offer online bill payment services, allowing the account owner to pay bills directly from the bank's website.
Checking accounts usually pay a very low interest rate – if they pay anything at all. Most checking accounts are available free of charge, however, there may be requirements such as a minimum average daily balance or a minimum amount of monthly deposits. Checking accounts are by far the most flexible bank account type, and as a result, the most common. Like savings accounts, checking deposits are protected by FDIC insurance.
The third type of account we will discuss is the brokerage account. These accounts are intended for investment purposes, and are held by broker-dealers, which are financial institutions that sell securities. Typically, brokerage accounts are funded by transferring money from a checking or savings account. Then, that money can be used to buy securities such as stocks, bonds, and mutual funds.
Brokerage accounts are not covered by FDIC insurance, so, out of the three account types discussed in this article, the brokerage account is the only account type in which it is possible to lose money. Many brokerage accounts can be opened and maintained at no cost, but the purchase of securities within the account will usually incur a sales commission. Investments in mutual funds or exchange-traded funds (ETFs) may also be subject to fees charged by the investment managers.