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Types of bank accounts | Banking | Financial Literacy | Khan Academy


3m read
·Nov 10, 2024

Let's say that you've saved some money, or so you just found some, luckily, and you go to a bank, and you want to put it with that bank. But then the bank starts giving you some options. It says, "Do you want to start a checking account? Do you want to start a money market account? Do you want a savings account? Perhaps a CD, a certificate of deposit?"

What do you do? Well, the simple answer is it depends on how much you care about the flexibility, the accessibility of that money versus things like how much interest you're getting on it. If you really care about having easy access to the money, at one extreme, you have checking accounts. Checking accounts are where you will put your money. You can get an ATM card where you can access that money very easily, and you can write checks against it. There's no penalty for withdrawing that money.

Now, you might say, "Well, what's the downside then?" Well, typically checking accounts offer less interest; in some cases, they offer no interest. But let's say you're like, "Well, okay, I'm willing to give up a little bit of flexibility in order to get more interest." Then you might think about a money market account. Money market accounts, as I said, will still allow you to sometimes withdraw, and you have to look at the detail of what your bank is offering you.

But they might limit the number of transactions. They might have certain minimum balances that you might have to keep with the bank in order to open up a money market account. If you want even a little bit more interest and are willing to maybe sacrifice some of the accessibility, you have a savings account. Once again, it really depends on how your bank works, how much flexibility they give you.

Now, with online banking, you can often transfer money from one account to another, and often, in many cases, you have a checking account and a savings account, and you can transfer between them. But even that might take a couple of days to do. If you want to lean a little bit more on getting more interest and less flexibility, the savings account might make sense.

At the extreme, at least of the extremes that we're talking about right now, you have certificates of deposit (CDs). These will typically give you the most interest, but you are essentially agreeing to lock up your money for some period of time. It might be six months, it might be a year, it might be two years, where you're getting a higher interest rate. But if you, for whatever reason, need to access that money before that, let's say, year is up, you might have to pay a penalty on it, which you don’t want to do. That will not make it worth the extra interest you're getting; that penalty will more than offset that.

So when you have this money, you think, "Okay, how frequently am I going to access it? How on demand does it need to be versus how much interest do I need to get on it?" Now, in many cases, you don't have to pick just one of these. You can put your money in different accounts depending on how much you need it.

You might say, "Okay, I need this $5,000 to pay my bills. I need to write checks against it; I need to pay, uh, I use my ATM card." But then this other $10,000 that I'm using to save towards a house that I might buy in three years, I'm not going to touch that for at least a year. Why don't I put that in a CD and I can get more interest on it?

So once again, it depends on your circumstances. But it's good to know the general trade-offs between these things. Now, banks have started to introduce things that blend some of these ideas. So once again, don’t just index on, "Oh, it's called a checking account, a money market account, a savings account." There's even things like flexible CD accounts now.

So look into the exact details. But what I just told you is a high-level description of what these accounts and the trade-offs tend to be.

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