SECTION THREE : Types of Bank Accounts and the best strategy to handle each

This section explains the 4 type of accounts that banks offer. Each account type serves a specific need.

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1. Checking

This is the most liquid type of bank accounts.  The account usually comes with a check book and an ATM Debit card, for which you can use to pay for goods and services where accepted.  The down side is that this account type usually comes with more strict requirements: number of checks per month, minimum balance, monthly service fees, etc.  This account type is often the lowest in the interest rate.

If you have never had a checking account before, we advice that you read our article to learn about the differerent types of checking accounts.

Interested in seeing more?  Here is a list of the best Checking Accounts.

Tip: Keep only what you need in that Checking Account. The interest rate on the money is usually at least 1% lower than other account types. Plus, you can always transfer money from your other accounts to your checking when you need it.

2. Savings

Savings Accounts usually come with an ATM card and free of monthly fees.  The money in the account can be withdrawn at any time without penalty and interest rate is higher than checking.  There is usually no minimum balance although some savings plans will require that you keep a certain balance to qualify for their “special rate.”  This type of account is best served as an “Emergency Fund Account” for events that might have a need for unexpected amount of money.  (Just imagine a neighbor selling a $15,000 car for $5,000 and you want it.)

Interested in seeing more?  Here is a list of the best Savings Account Banks.

Tip: Keep the amount you have in your Savings account to less than 3 months worth of expenses. Anything over that is in excess and should be kept in a Money Market, CD, or other investment accounts to better grow the money.

3. Money Market

A Money Market account can be view as hybrid between a savings and checking account.  The account typically comes with an ATM Debit card as well as checks.  However, you are limited to 6 withdrawal transactions to third parties per month, only three of which may be paid by check.  ATM withdraws might or might not count, depending on the bank.  These account types usually have a fairly high minimum balance requirement and banks will impose fees if this is not met or the number of transactions exceeds the limit.  The up side, they pay interest rates as good as or better than savings accounts and are fairly liquid.

Interested in seeing more?  Here is a list of the best Money Market Accounts.

Tip: It might be very tempting to skip the Checking accounts and simply go with a Money Market account. While the higher interest makes good sense, you need to double check on the number of your monthly transactions. Remember that excessive use will result in additional fees, sometimes can be hefty. Another option is to have multiple Money Market accounts.

4. Certificate of Deposit (CD)

A Certificate of Deposit is an agreement you have with the bank.  This is just like a savings account except that you agree to keep your money untouched for a certain length of time (6 month, 12 month, 24 month, etc.).  In return, you will earn interest at a rate that is higher than checking, savings, and money market accounts.  The trick is that you MUST keep the money there for the entire time.  If you ever want to withdraw before the date is up, you will forfeit your interest earnings and often subject to fines imposed by the bank. 

Interested in seeing more?  Here is a list of the best CD Accounts available.

Tip: CD's are especially useful if you want a definite withdraw date on your money. For example, if you are planning on spending $20,000 on a honeymoon next Christmas, it makes perfect sense that you keep $20,000 in a CD that you can cash out when you need the money next Christmas. It collects the best of the interest rates from the bank and immune to interest rate fluctuations.

Don't be fooled by banks offering you the special rate!
Some banks will actually have associates introduce special rate plans for customers. The customers (usually ones with > $5,000 in balance) are chosen for the offer. Last time I waited in line for a deposit at Bank of America, an associate came to me and offered me a 2% APY premium savings plan! The inflation rate in the U.S. has been around 3.2%. So if I keep my money with that special 2% APY plan, I will actually lose money every year! I was not the only person they approached that day.