Your success with personal finance includes understanding banking basics. Sure, you can keep your money in your wallet or a jar, but the most effective way is to use a banking service.
Banking is a form of money management using products and services related to savings and loans. Banks take deposits from people like you, and you may receive interest in your savings account in exchange. They then use that money to offer loans to other customers. For example, a bank may provide a personal loan at 8% and pay a 1% interest on your savings.
Different Types of Financial Institutions
Banks are what we typically associate with banking. They come in different sizes, from local banks to online banks to national banks charted by a state or a federal agency. The FDIC insures deposits of participating financial institutions.
Credit unions are not-for-profit financial institutions and charted with a state or federal agency. They offer similar products and services as banks with a focus on member service. Credit unions are a great alternative to traditional banking services. Because of their not-for-profit structure, credit unions tend to offer better savings rates and lower loan interest rates. The NCUA insures deposits from participating credit unions.
Alternative Financial Services
Neo-banks are non-chartered financial services companies that offer banking services. You might think of them as an app that offers checking accounts and debit cards. These services often use financial technology and primarily use apps to service customers. Many of these neo-banks partner with charted financial institutions such as banks and credit unions for your deposits.
Types of Banking Accounts
Banking accounts are a necessity for living in our society. They help make financial transactions convenient, trackable and protected. Find the best banking products or services in the financial marketplace.
Here are the basic types of banking accounts:
A savings account helps you save your money. You’re storing your money for future use and hopefully earning a reasonable interest rate. Interest is the money you earn for letting the bank keep your money. Some financial institutions may require a minimum deposit in your savings accounts and account limits or fees.
A checking account is a transactional account allowing you to make deposits and withdrawals of your money anytime. Checking accounts are not the best place to store your money as the goal of the account is for use, not saving. Most checking accounts come with a checkbook, but you might be required to ask for it. Learn how to write a check for any amount.
Most checking accounts do not pay interest, but some do. Be mindful of transaction limits, minimum balance requirements, and fees. It’s good to shop around for the best checking accounts.
Checking accounts come with a debit card enabling you to spend your money conveniently. A debit card allows for making purchases at stores and online shopping. You can only spend the money that’s in your checking account. Additionally, you can use your debit card at ATMs to make deposits, withdrawals, check balances, and transfer between accounts.
Money Market Account
A money market account is a type of hybrid savings and checking account. It tends to have higher limits but often pays more interest than a savings account. MMAs offered by a financial institution may have a stated interest rate like a savings account or an interest rate tied to financial markets.
Certificate of Deposit (CD)
A certificate of deposit, also known as a CD, helps you save money with a set interest rate for a specific amount of time. Your cash is term locked. In exchange, you get a higher interest rate compared to a traditional savings account. Certificate terms can start at 30 days to 5 or more years.
Individual Retirement Accounts (IRA)
An IRA is a retirement-focused savings account. They come in two types: a traditional IRA and a Roth IRA. These retirement accounts have tax advantages that need further understanding, but you’ll encounter them at banking institutions. Learn more about individual retirement accounts.
Banking Basics: How Accounts are Used
Routing Number and Accounts Numbers
Each financial institution is issued a routing number or an ABA number. It helps identify the banks using a numerical system. You’ll need the routing number for electronic deposits and withdrawals. Each deposit accounts with a financial institution are assigned an account number. For example, when direct depositing your paycheck, you’ll be required to provide the routing number and account number.
Interest is the money you earn for your deposits expressed as a percentage called the interest rate. Essentially, it’s the money you charge a financial institution for storing your money. If you put $100 in a savings account that pays an interest rate of 1%, at the end of the year, your savings account would have $101. You earned interest!
As a customer, you’ll receive monthly statements that help you review and track your savings and spending. These statements include account balances and a detailed list of deposits and withdrawals. It’s important to review these statements and store electronic versions.
Review your statements to verify the deposits and withdrawals are balanced.
To spot potential issues early, set alerts for account activity like deposits and withdrawals. Many financial institutions offer customers alerts sent via in-app notification, text message, and email.
Many banks offer auto-transfer features. You can transfer between your connected accounts and set automation rules that help you reach your savings goals.
How to Choose the Right Banking Service
We often don’t make consideration on whom we bank. But, banking is the foundation of money management. Make a more conscious effort in choosing your banking provider.
You have choices on the type of account to use and the variety of financial institutions available. So, shop around. Ask the following questions to help you narrow down your choices:
- What are the products and services offered?
- What are the fees?
- Are there minimum balance requirements?
- Do I need a physical location (like a branch) or prefer better mobile app services?
- Does local banking matter or national big bank convenience?
- Are deposits FDIC or NCUA insured?
- How to access your money?
- Debit card? ATM network?
- Can I set auto-transfers, auto-payments, and alerts?
You want to determine how the banking provider aligns with your needs, the cost of the services, safety and security, and the overall convenience.
Banking Basics: Loans and Credit
Many banks offer credit and loan products. In exchange for your deposits, banks can extend loans to other customers.
A credit card is a flexible access to borrowed money from financial institutions. Getting a credit card requires approval that considers your income, current debt, and credit history. With credit cards, you can use the available credit at any time and are required to pay the amount due each month. You’ll also have the option to make the minimum monthly payment due. Credit cards can be helpful financial tools.
Line of Credit
A line of credit is similar to a credit card but doesn’t come with a card number or plastic card. A line of credit is a flexible loan that consists of a defined amount of money. You can access the funds as needed and repay immediately or over time.
Loans and Mortgages
Other types of loans offered may include car loans, personal loans, student loans, and mortgages.
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