Understanding the Different Types of Bank Accounts and Their Advantages

Opening a bank account is probably one of the most important steps in achieving your financial goals. But before you get all too excited with the thought of having your bank account, did you know that there are several types you can choose from?

Yes, you’ve read that right. This article aims to help you understand the different types of bank accounts and their advantages so you can determine the right one that suits your needs.

Certificate of Deposit (CD)

Opening a certificate of deposit with a particular financial institution means that you give your consent to leaving your money there for a particular term.

Terms for certificates of deposit, or simply CD, can range between 6 months and 5 years. However, this can still be longer or shorter, depending on the term of your choice.

Banks typically offer higher interest rates compared to those of savings accounts in exchange for leaving your money with them for a few months or years. The interest rate is often higher for longer CD terms.

After the CD term, you can choose to transfer your money on top of your earned interest to a different account. The CD can also be renewed for another term. If the CD is renewed, the interest rate typically adjusts to the present market rate.

It means that you may be able to get a lower or higher rate during renewal compared to what the original CD had.

Although CDs are not as liquid as money market or savings accounts, the money in your account is still accessible if you ever need it before the end of the term.

Most banks only charge a penalty for early withdrawal to discourage their clients from withdrawing their funds before the maturity or end of the CD term.

This penalty might be worth the interest of several months. It can be substantial based on the current rate or value of the account.

Starting a CD ladder can also help improve the liquidity of CDs. A CD ladder lets you break up your deposit into several smaller chunks.

Checking Account

A checking account is mainly used for expenses. You can use your checking account, for example, when writing personal checks or setting up automatic payments for your bills.

If you own a debit card, your money is typically withdrawn from your checking account when a purchase is made.

Unlike other types of bank accounts, many checking accounts accumulate minimal interest, with some not having any interest at all.

One more thing to remember about a checking account is that sometimes, you are required to pay a maintenance fee every month for your account to remain open.

Several banks have started to offer checking accounts with high interest to let consumers make the most out of their earnings and at the same time, enjoy the functionality and convenience that these accounts have to offer.

As the banking landscape continues to evolve, most financial institutions started to realize the importance of catering to the different needs of different customers.

Aside from conventional checking accounts, banks now have options for specialized accounts that are tailored to particular clients.

For example, students can choose from graduate or college checking accounts that offer distinct benefits suitable for their specific educational needs.

Children are also now allowed to open specialized accounts for debit cards to promote financial literacy even at an early age.

Dedicated checking accounts are also available for businesses to meet their unique needs, with features such as business-oriented perks and merchant services.

There are also joint accounts for shared finances and couples to allow seamless and easy household finance management.

Thanks to this increased personalization, businesses, families, and individuals alike can open a checking account that best suits their lifestyle and financial goals to make banking a more accessible and inclusive experience for everyone.

Current Account

A current account is not used for savings purposes. Businessmen are the ones who typically open this particular type of bank account, including companies, institutions, associations, and the like.

Current accounts are deposit accounts ideal for entrepreneurs, traders, and business owners who need to receive and make payments more often compared to others.

This particular type of bank account holds more liquid deposits without limits on how many transactions are allowed per day.

These current accounts also allow overdraft facility or withdrawing an amount higher than what the account currently holds.

It’s also important to keep in mind that current accounts don’t earn any interest. You also need to maintain a minimum balance so you can continue operating your current account.

Current accounts offer several benefits that make it uniquely beneficial not only to businesses but even to individuals.

One of these is the high security they offer. Your business is exposed to different security risks if it needs extensive handling of cash in currency form.

Depositing this cash in your current account can considerably lower your risk to these security risks.

Since a current account doesn’t put a limit on daily transactions, it is an ideal choice for businesses that deal with large numbers of transactions per day. Banks often recommend their clients to open a current account if their savings accounts record huge number of daily transactions.

Most importantly, current accounts are also easy to operate, giving you several convenient options to monitor and control your account. Some of these are cash, debit or ATM card, check, and digital banking, just to mention a few.

Brokerage or Investment Account

A brokerage or investment account holds the investments and cash of a business that it purchases to help achieve its financial objectives.

These investments can be in the form of mutual funds, exchange-traded funds or ETFs, bonds, and stocks.

Investment accounts make it possible for businesses to invest their earnings once again to allow financial growth to cater to their needs.

Funds can also get transferred to an investment account to maintain, purchase, or sell current and new investments.

Brokers can also engage in more complex investments so that businesses can further grow their investment or brokerage accounts.

A lot of banks around Canada offers investments accounts, like the Scotiabank.

Money Market Accounts

MMAs or money market accounts combine the features of checking accounts and savings accounts into one deposit account.

This particular type of bank account often lets you accrue interest on balances. It can also provide debit card and check-writing access for bill payments or spending.

These money market accounts are also subject to Regulation D. It means that you would only be limited to six withdrawals a month under normal circumstances.

Banks, once again, can also charge an additional withdrawal fee if you make more than six withdrawals even during the indefinite suspension of the rule.

A money market account may also have a higher limit on initial deposits to open as well as higher requirements for a minimum balance to maintain.

For example, opening a money market account may require $1,000 or higher while no minimum deposit may be required to open a savings account.

You can consider opening a money market account if your goal is to earn interest on your money that you won’t be spending any time soon.

At the same time, you can conveniently do so sooner or later using a check or debit card.

You can open a money market account, for instance, where you can put your savings for the down payment for your dream house.

Salary Accounts

Salary accounts are a type of bank account that employers offer to their employees. These accounts are typically checking accounts that provide several special benefits including higher interest rates and waived fees. Employers usually deposit the salaries of their employees into these bank accounts.

The primary benefit of salary accounts is that they provide a great means for employees to save money while making the most out of their earnings. Just remember, however, that there are salary accounts that may require a minimum balance to maintain.

Savings Accounts

Consumers open and use savings accounts to set aside cash for future use. Your money will grow over time because the deposits accrue interest.

Savings accounts are usually the first official bank account that people open in their lifetime.

Even children may open a savings account with their parents to develop a saving habit and pattern.

Teens can open savings accounts to set aside the money they earned from their household chores or their first job. They can also use these accounts to manage their money for college funds.

Opening a savings account is also the start of a relationship with a particular financial institution. Savings accounts are a great place to park money for emergencies or financial goals separately and safely away from the cash you use for your ongoing or regular expenses.

When your money is in a savings account, you will feel less tempted to spend it, especially if you don’t need to.

The Bottom Line

Not all bank accounts are the same. Each type has its benefits that make it an ideal choice for a particular audience and a specific purpose.

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