People use banks for different purposes. Some have extra money to save; others need
to borrow. Some need to manage their household finances; others need to manage a
business. Banks help their customers meet those needs by offering a variety of
accounts. Savings accounts are for people who want to keep their money in a safe
place and earn interest at the same time. You don’t need a lot of money to open a
savings account, and you can withdraw your money easily.
Certificates of deposit (CDs) are savings deposits that require you to keep a
certain amount of money in the bank for a fixed period of time (example: $1,000 for
two years). As a rule, you earn a higher rate of interest if you agree to keep your
money on deposit longer, and there is usually a penalty if you withdraw your money
early.
Individual retirement accounts (IRAs) are savings deposits that offer an excellent
way to save for your later years. You don’t have to pay tax on the money you deposit
in your IRA until you withdraw it. But there is often a significant penalty if you
withdraw your funds before you reach a specified age (usually 59 or older).
Checking accounts offer safety and convenience. You keep your money in the account
and write a check when you want to pay a bill or transfer some of your money to
someone else.
If your checkbook is lost or stolen, all you need to do is close your account and
open a new one so that nobody can use your old checks. (When cash is lost or stolen,
you rarely see it again.) Another attractive feature of a checking account is that
your bank sends you a monthly record of the checks you have written, and you can use
that record if ever need to prove that you’ve made a payment. Banks sometimes charge
a fee for checking accounts, because check processing is costly.
Many banks also offer no-fee checking and checking accounts that earn interest if
you agree to keep a certain amount of money—a minimum balance—in the account. But
these accounts are limited to non-business customers. Banking laws almost always
require businesses to use regular checking accounts that do not pay interest.
Money market deposit accounts are similar to checking accounts that earn interest,
except that they usually pay a higher rate of interest and require a higher minimum
balance (often $2,500 or more). They also limit the number of checks you can write
per month.
Finally, banks do not always call their accounts by the same names. Often, they
choose distinctive names in hopes of attracting customers. But there can be a real
difference between one bank’s accounts and another’s, so shop around.
