What’s the Difference Between the 4 Types of Bank Accounts?

There are four primary types of FDIC-insured bank accounts where you can store money. But there are really important differences between them. Understanding which one is right for you is important to putting your money in the best spot. Here’s what you need to know.

1. Checking accounts

Checking accounts are meant for money you’re going to be using for everyday living. You’ll most likely have your paycheck deposited into one, and you will be able to access the money whenever you want to by writing checks or using a debit card or taking cash out of an ATM. Depending on your bank, you may incur fees if you use an out-of-network ATM.

There are no limits on withdrawals from a checking account — you can take money out as often as needed as long as you have enough cash in the account. But chances are good you’ll earn little or no interest on the money in your checking account. The national average checking account interest rate is .07%.

These accounts are not a good place for your savings, since you can access the money so easily and likely won’t earn any returns on it.

2. Savings accounts

Savings accounts, not surprisingly, are a place for you to save money. You’ll usually move money from checking into savings when you have a specific reason for doing so, like saving for an emergency fund, a vacation, or a big purchase.

Most savings accounts don’t come with ATM access, and some have limits on how many withdrawals you can make per month (the government used to limit you to six, but this regulation isn’t enforced any more). Still, while your bank may restrict the number of times you can take money out, the funds are accessible when you need them with no penalties for withdrawal.

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Since these accounts are for saving, you will usually earn interest. In a typical savings account, the rate is still pretty low. The national average is just 0.47% — which is still better than a checking account. There are also many high-yield savings accounts where you can earn much more — upwards of 4.00% in some cases in this high-rate environment we’re in now.

If you’re going to need your money accessible in the coming years but want to earn a good return on it and don’t just want it in your checking account since it’s earmarked for a specific purpose, a savings account is a good option.

3. Certificate of deposit

Certificates of deposit (CDs) are another great option to save, but they’re different from the others. You’ll choose a CD term such as one month or three months or five years, and you’ll have to leave your money invested for that duration to avoid penalties. In exchange, though, you’ll usually earn more interest than a savings account offers. And, the rate of return you’ll get is fixed, unlike with a savings account where the rate you’re paid fluctuates as market rates change.

The national average interest rate on a 24-month CD is 1.86% and on a 60-month CD, it’s 1.41%. It’s definitely possible to find CDs with much better yields, though. So, if you have money you’re saving for a specific goal that you’re going to need in the next five years or less but you definitely won’t need before the end of the CD term you select, this is a great option.

4. Money market accounts

Money market accounts are kind of a hybrid between a savings and checking account. They usually provide higher rates of return than either savings or checking accounts do, with a national average rate of 0.65%. And they typically come with check-writing privileges and debit cards, unlike savings accounts. However, banks typically limit the number of withdrawals you can make per month, much as they do with some savings accounts.

If you have short-term savings goals, want to earn a good return, want easy access to your money, but don’t need to make too many withdrawals, money market accounts are a good option.

Now you know the differences between four bank account types and can decide which is right for your money. For most people, having several of these accounts open makes good sense since they serve different purposes but can all work together as part of your broader financial plan.

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