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Basics of Banking: What You Need to Know

Learn the basics to manage your money with banking products and services.

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Your success with money includes an understanding of the basics of banking. Today, we’ll go over the most important aspects of banking to master your money. Sure, you can keep your money in your wallet or in a jar but the most effective way is to use a banking service.

Banking is associated with products and services related to savings and loans. In exchange for your deposit, you may receive interest on your savings account. Banks take deposits from people like you and then use that money to offer loans to other customers. For example, a bank may offer a personal loan at 8% and pay a 1% interest on your savings.

Different Types of Banking Institutions

Banks are what we typically associate with banking. There are online banks, local banks, and big national banks charted by a state or a federal agency. Most banks are insured by the FDIC protecting your deposits.

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. With credit unions, your deposits are insured by the NCUA.

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 uses apps to service customers. Many of these neo-banks partners 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:

Savings Account

A savings account helps you save your money. Basically, you’re storing your money for future use and hopefully earning a good interest rate. Interest is the money you earn for letting the bank store your money. Some financial institutions may require a minimum deposit in your savings accounts as well as account limits or fees.

Checking Account

A checking account is a transactional account that enables you to make consistent deposits and withdrawals of your money. They are used for daily spending. 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 checks, but you might be required to ask for them. Typically, checking accounts come with a debit card that helps you spend more conveniently.

Most checking accounts do not pay interest, but some do and may come with transactional limits, minimum balance requirements, and fees. It’s good to shop around for the best checking accounts.

Money Market Account

A money market account is a type of hybrid savings and checking account. It tends to have more requirements and 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 that fluctuates 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. Money is locked in a CD for a term. 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 accounts have tax-advantages that need further understanding but you’ll come across them at banking institutions.

Basics of Banking: How Accounts are Used

Routing Number and Accounts Numbers

Each financial institution is issued a routing number or an ABA number. This 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.

Earning Interest on Accounts

Interest is the money you earn for your deposits. It’s 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!

Banking Statements

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.

Balancing Your Accounts

Understand how you using your accounts by reviewing your statements to ensure the numbers are balanced.

Set Alerts and Automation

Get a handle on your money by setting alerts for deposits and withdrawals to spot potential issues early. Additionally, set automation rules that help you reach your savings goals.

How to Choose the Right Banking Service

Make a more conscious effort in choosing your banking service.

Understanding the basics of banking, I hope you understand that you have choices on the type of account to use and the variety of financial institutions available. The key is to shop around and find the best product that meets your needs and a company that aligns with your values.

There are some things you want to consider when choosing the banking service that’s right for you.

Here are questions to ask:

  • What are the products and services offered?
  • What are the fees?
  • Are there minimum balance requirements?
  • Do you 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 you set auto-transfers, auto-payments, and alerts?

Basically, you want to determine how the banking provider aligns with your needs, how expensive are the services, are they safe and secure, and overall convenient.

Other Banking Products

Many banks offer credit and loan products. In exchange for your deposits, banks are able to extend loans to other customers.

Credit Cards

A credit card is flexible access to borrowed money from financial institutions. Getting a credit card requires approval that takes into account your income, current debt, and credit history. With credit cards, you can use the available credit at any time and required to pay the amount due each month. You’ll also have the option to make the minimum monthly payment due. However, only paying the minimum amount can cost you more money due to interest. Credit cards can be useful financial tools. Left unchecked, credit can lead to long-term debt and less money in your savings accounts.

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 money as needed and repay either immediately or over time. As soon as money is borrowed, interest is charged on the amount used.

Loans and Mortgages

Other types of loans offered may include automobile loans, personal loans, student loans, and mortgages.

Jason Vitug

Jason is the founder of phroogal, creator of the award winning project Road to Financial Wellness, and author of the bestseller and New York Times reviewed book, You Only Live Once: The Roadmap to Financial Wellness and a Purposeful Life.

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