Bank accounts offer the advantages of convenience, security, and protection for your funds
Bank accounts offer the advantages of convenience, security, and protection for your funds. There are various account options to choose from, whether you favor online banking, traditional banks, or credit unions.
Different bank accounts serve different purposes and can be utilized as required. Some accounts may be used for paying bills and expenses, while others are ideal for short-term or long-term savings. The four most common types of bank accounts include:
- Checking accounts
- Savings accounts
- Money market accounts (MMAs)
- Certificate of deposit accounts (CDs)
A checking account is considered the most basic type of bank account, serving as a central hub for many people’s financial transactions. Typically, individuals use checking accounts to receive their paychecks, pay their bills, and keep funds for day-to-day expenses.
Checking accounts are available at both traditional and online banks and usually come with a debit card. This card allows account holders to make purchases just like cash, without carrying physical money. Whenever you make a purchase with your debit card, the amount is usually instantly deducted from your checking account. However, depending on the bank, some transactions may take a few days to process. It’s important to be mindful of this to avoid spending more than the available balance in your account.
Moreover, checking accounts simplify budgeting and bill payment. By setting up automatic bill payment, your bills will be paid directly from your checking account, ensuring that you never miss a payment. Additionally, many budgeting apps allow you to connect your checking account to your monthly budget, making it easy to track expenses and achieve your financial goals.
A savings account is a place where you can deposit money you wish to save. Savings accounts usually offer several features that incentivize individuals to keep their funds in the account for an extended period. For instance, many savings accounts earn interest, which means the value of the deposit grows over time. The interest rate offered by a financial institution can vary based on market conditions and the bank’s policies. Some banks may offer higher interest rates than others.
Unlike checking accounts, savings accounts are slightly less liquid because they do not provide checks. However, funds in a savings account can be withdrawn easily via an ATM card or electronic transfer. Many savings accounts do not have fees, but some may charge a monthly maintenance or transfer fee, and others may have a minimum balance requirement, which, if not met, can lead to additional charges. At Mid-Penn Bank, there are no minimum balance fees, monthly administrative fees or transfer fees to other Mid-Penn Bank accounts.
Savings accounts are an excellent option for storing money that you may need in the future, such as funds for emergency expenses or vacations. If you plan to save for long-term goals, such as retirement or education, you may want to consider opening an account that generates higher returns, such as a certificate of deposit or investment account.
Money Market Account
A money market account (MMA) is a type of savings account that offers the flexibility of a checking account. MMAs generally provide higher interest rates than traditional savings accounts, but they also offer check-writing privileges and debit cards. However, like savings accounts, MMAs are usually limited to six convenient withdrawals per month, although this may vary depending on the bank. Additionally, MMAs often require a higher minimum balance to open, typically around $2,500.
Money market accounts are an ideal option for individuals who want to save a significant amount of money but do not want to invest in the stock market or CDs. They are particularly useful for emergency funds, college registration fees, planned tax payments, vacations, down payments on homes, and making debit card purchases.
Overall, an MMA is a practical savings option that offers the best of both worlds, combining the liquidity of a checking account with the interest-earning potential of a savings account.
Basics of a savings account certificate
A Certificate of Deposit (CD) is a type of savings account where you deposit a fixed amount of money for a specific period of time, known as the redemption period, in exchange for earning interest on the balance. Once the CD reaches maturity, you can either withdraw your initial deposit along with the earned interest or roll it over to a new CD. CDs can range in terms from as little as 28 days to over 10 years, with longer terms generally offering higher Annual Percentage Yield (APY). CDs are a good option for funds that you do not need to access immediately but may not be suitable for emergency savings.
It is essential to note that if you withdraw funds from a CD before the redemption period expires, you may incur an early withdrawal fee. This fee can be a percentage of interest earned, all interest earned, or a flat fee, depending on the CD’s terms and the bank’s policies. Thus, it is crucial to familiarize yourself with the details of your CD account before opening it. There are also no penalty CDs available, which allow for penalty-free withdrawals.
Individual Retirement Accounts (IRAs) are savings accounts that allow you to save for retirement on your own, even if your employer does not offer a qualified employer-sponsored retirement plan (QRP) like a 401(k), 403(b), or government 457(b). There are two types of IRAs: traditional and Roth. Roth IRAs offer tax-free growth potential, with investment income accumulating tax-free and distributed tax-free after five years, provided you are over 59 years old or qualify for specific exemptions. Traditional IRAs offer tax-deferred growth potential, with taxes paid on investment gains when you withdraw the money in retirement. Both types of IRAs have investment flexibility, tax benefits, and the same contribution limits. It is crucial to speak to a tax advisor to determine which account is best suited for your financial situation.