On my first day of college, I chose a checking account because the bank was handing out free Frisbees. This was my only bank account for nearly 20 years.
Eventually I opened a savings account at the local credit union. Then I discovered the benefits of a high-yield savings account. Last autumn I opened my first certificate of deposit. And just a few months ago, I started a money market account.
Why so many accounts? To me, each bank account serves a specific purpose. Not every account is suitable for every need. Though not everyone needs (or wants) as many bank accounts as I now have, it's still a good idea to make sure you're using the right tool for the job.
Here are my four favorite types of bank accounts for personal use — and what they're good for:
Rewards checking accounts
Many small community banks and credit unions around the United States offer a special “rewards” checking account, a product administered by a company called BancVue. These accounts carry restrictions and requirements (you have to make 10-12 debit purchases each month, the rate only applies to the first $30,000 or so in your account, etc.), but if you meet them, it's tough to beat the returns.
I tried to maintain a rewards checking account at a local credit union, but ultimately it didn't work for me. The credit union was too far away, and I wasn't meeting the transaction requirements.
Here's a huge list of rewards checking accounts by state. There are still checking accounts that offer 6%!
A rewards checking account is a great option for your main checking account, provided you have a nearby branch and you have a lot of monthly debit transactions. (ING Direct offers a checking account, but it's not nearly as good as a rewards checking account.)
[Read more: Making the most of your checking account]
Online high-yield savings accounts
Like most personal finance bloggers, I'm a fan of online high-yield savings accounts. While traditional banks and credit unions are offering a pittance on their accounts (my credit union's “high-yield” account is at 0.10%!), you can still find rates above 1.50% through online accounts at CIT Bank, Ally Bank, and others.
I've used my online savings account at ING Direct for two primary purposes:
- Targeted savings — Opening multiple accounts at ING Direct is easy. It's a great way to save for multiple goals at the same time: a vacation, a new car, and Christmas gifts, for example.
- An emergency fund — When I first started my emergency fund, it was important to me that it be a little difficult to access. An online savings account was perfect because I can't just decide on a whim to spend $10,000. If I want the money, I have to wait a couple of days for it to transfer to my main account. Perfect for an emergency fund.
Online high-yield savings accounts are a great way to save. Interest rates are low right now, but as the economy continues to improve, yields will rise.
Money market accounts
As an alternate to an online high-yield savings account, consider a money market account from a brick-and-mortar institution. Until recently, my credit union offered an account with interest rates that were competitive with ING Direct. Now, however, they've dropped to under 1.00%.
Money market accounts require higher minimum balances than savings accounts. My credit union requires a $10,000 minimum deposit on a money market account, for example. Their minimum deposit for a savings account is $5. Some money market accounts allow limited check-writing privileges. They often limit the number of withdrawals per month.
A money market account can be a great choice if you're attempting to consolidate all of your accounts at one bank, or if you're wary of using an online bank.
[Read more: An introduction to money market accounts]
Certificates of deposit
Certificates of deposit (often simply called CDs) are time deposits. You give your money to the bank and then promise not to touch it for a specific length of time. In general, the longer you agree to let the bank keep your money, the higher the interest rate you'll receive.
Unlike a savings account, once you put your money into a CD, the interest rate does not fluctuate. If you open a 6-month CD at 3.50% and interest rates drop, you earn 3.50% the entire six months.
If certificates of deposit offer higher returns than a savings account, then why doesn't everybody use them? The primary drawback to CDs is that they're less liquid than a savings account; you can't just move money in and out of them without penalty. You can take your money out of a CD before it “matures”, but you're docked interest when you do. In fact, many (most?) banks penalize the interest amount, even if it isn't earned (meaning you could lose part of your principal if you close your CD early).
Despite these limitations, CDs are great place to put money you don't expect to need for a while. For most folks, a CD ladder is a good way to maximize returns.
If banks are not the right fit for you, there are other services out there such as peer lending. Peer lending services, such as Lending Club match people looking for a personal loan with people who are willing to fund it. Lending Club isn't FDIC insured, but offers rates between 7%-9%, which are significantly higher than banks.
Choosing an account
Each of these four types of accounts can be put to use to build your wealth. (And, of course, you'll probably want a brokerage account for your Roth IRA and other investments.) As you look to choose an account, be sure to answer the following questions:
- What do you need the account for? Long-term savings? Business? Personal? Every-day use?
- How much will you keep in the account? Some accounts have minimum deposits in order to get the best interest rate. For example, my credit union's money market account requires a $50,000 deposit in order to get the top rate.
- How liquid does the money need to be? If you need quick and easy access, you're best served by local brick-and-mortar banks. If you don't mind a small delay, online banks will work. And if you can let your money go for months (or years) at a time, a certificate of deposit might be your best choice.
- Do you need easy access to the money? Do you need a lot of ATMs? I tend to think that for day-to-day use, it's best to have an account with a local brick-and-mortar bank. But for substantial savings, I've found it useful to create barriers. If I don't have easy access to the money — if I have to jump through a few hoops to get it — then I'm less likely to spend it frivolously.
- How important is online access?
- How important is customer service?
- How important is privacy? All banks should meet certain minimum privacy levels. But you give up a little of that if you have a regular bank you use. At my local credit union, for example, I tend to get the same teller quite often. She remembers a couple of past transactions because they were unusual. This doesn't bother me, but I know it would bother some of my friends. If you need maximum privacy, take this into consideration.
Ten years ago I had a single bank account. Today I have five, including each of the above. (My fifth bank account is a business account.) Each account serves a purpose.
Picking a bank account is like choosing the right tool for a job. Sure, you can beat a nail into the wall with a screwdriver — if that's all you have. But you'll do it a lot faster and with more precision if you use a hammer. The same is true with money. Use the right tool and you'll get better results.
How many bank accounts do you have? Do you try to keep things simple? Or do you spread your money around many accounts? Any tips or tricks to share with other GRS readers?