Choosing a new checking account can be an important step toward financial independence. Here’s how to do it right.
You’ve probably had a checking account for most of your life and never gave it much thought. It’s just there to store your everyday cash, right? Not necessarily.
If you’re considering questions about checking accounts as you take a closer look at your current setup and explore opening a new one, it’s important to note that checking accounts are designed with different and unique features. Some may even be more beneficial to you than you realize.
For starters, most checking accounts offer a host of conveniences, providing customers the ability to set up automatic payments for routine bills, schedule electronic transfers and make all deposits and transfers via a smartphone app. Some accounts even allow you to earn cash back on your debit card purchases.
“A checking account can have a long-term impact on your financial well-being, so it’s worth taking the time to figure everything out,” says Jeff Kreisler, money expert and author of the personal finance book “Dollars and Sense.”
At this point, you might be thinking, “What questions should I ask before opening a checking account?” To help you decide which account is right for you, here are four key questions to ask yourself:
1. What types of checking accounts should I consider?
Before you open a new checking account, do a little homework to learn about the different types of checking accounts offered by banks, Kreisler says. There’s the standard personal checking account that allows you to write checks and make payments with your debit card or electronically. But when thinking about questions to ask when opening a checking account, go beyond the basic features to find an account that best fits your lifestyle and financial goals. Here are some examples:
Online checking account: Ready to bypass the teller lines with the benefits of an online bank? Then this is the checking account for you. Doing your banking from any computer or mobile device is sweet—and since online banks don’t have brick-and-mortar locations, they can often pass their savings from overhead down to you. Just verify that the online bank or credit union supplying the checking account is backed by the FDIC or the National Credit Union Administration.
Rewards checking account: One question to ask before choosing a checking account is if you can earn rewards or incentives for certain activity. Discover Cashback Debit, for example, lets you earn 1% cash back on up to $3,000 in debit card purchases each month.1 That means your monthly cashback earnings could yield $360 in total rewards each year (finally, dinner and drinks at that new French bistro in town!). Some banks may also offer a checking account bonus just for opening a new account, while others have a variety of reward options based on certain qualifying purchases. A rewards checking account works for almost anyone looking to maximize their debit spend or a balance they regularly hold in their checking account.
Say hello to cash back on debit card purchases.
No monthly fees. No balance requirements. No, really.
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Joint checking account: Most checking accounts can be opened as a joint checking account, which is an account held by two or more people. This can be a convenient solution for couples, minors and their parents and even seniors and their caregivers who are trying to manage a household budget. It does require good record keeping and communication, so make sure you understand the ins and outs of joint accounts before choosing this option.
The above checking accounts are the most standard and usually have appealing benefits. But if you have more questions about checking accounts, there are options that can cater to more specific needs. However, they often have less flexibility. For instance:
Interest-bearing checking accounts are available for those who want to earn some money while their cash is parked in the account. The rate of return is usually low and minimum balance requirements high.
Student checking accounts are often low-cost, but they could come with limitations. Whether or not a student account is available may be a good question to ask before choosing a checking account if you’re looking for a starter account for yourself or your child.
Second-chance checking accounts could be a fit for those who may not be able to get a standard checking account due to their banking or credit history; however, they often have higher fees.
“A checking account can have a long-term impact on your financial well-being, so it’s worth taking the time to figure everything out.”
2. Are there fees associated with the checking account?
This is one of the most commonly asked questions about checking accounts. Before choosing a checking account, be sure to research its fees, says Marc Bernstein, financial planner and strategist for MWealth Advisors. Types of fees and fee amounts can vary greatly from bank to bank, and even among accounts at the same bank.
A question to ask when opening a checking account is if the account charges fees for ATM use, automatic bill pay, monthly maintenance, ordering checks, replacing a debit card or ordering official bank checks. Banks may charge any combination of these fees—or none. Discover Cashback Debit comes with no fees. Period.2 That means you won’t be charged a fee for any of these services.
Along with including the fee topic on your list of questions to ask before choosing a checking account, you should also consider obtaining “a document outlining the fees you’ll be paying, in case you have any questions, and check the fine print,” Bernstein says. You can also typically find a list of fees (if any) on the bank’s website or in the account agreement.
3. Is there a minimum balance requirement?
According to Bernstein, among the questions to ask when opening a checking account is if it requires an initial minimum balance to open. You’ll also want to know if a minimum balance needs to be maintained to avoid a fee.
Bernstein suggests looking for an account with no minimum balance requirement if you tend to keep less than $1,000 in your account or like to have flexibility when making large withdrawals.
If you’ve asked this question about checking accounts and are still comparing accounts that have a minimum balance requirement, realistically determine how much you can keep in your account per month and what you will be charged if you can’t keep that balance.
Even if your account falls below a minimum requirement, there could be a way to save on fees. If you have multiple accounts at one bank, the bank may allow you to combine the balances to waive checking fees.
The total average cost of withdrawing cash from an out-of-network ATM is $4.68. That’s 36 percent higher than it was 10 years prior, with no signs of decreasing.
4. What ATM fees could I incur?
If you frequent the ATM to take out cash, a good question to ask before choosing a checking account is: Where are the bank’s ATMs located in relation to your home and work?
Availability of ATMs is an important question to ask when opening a checking account that can really affect your wallet. For instance, if you decide to withdraw money from an ATM that’s not in your bank’s network, you can get hit with two separate charges: a surcharge from the ATM owner (since you’re not a customer) and a fee from your own bank.
And those fees can really add up. According to Bankrate’s 2018 checking account and ATM fee study, the total average cost of withdrawing cash from an out-of-network ATM is $4.68. That’s 36 percent higher than it was 10 years prior, with no signs of decreasing.
One way to get cash without paying an ATM fee is to use your own bank’s ATMs. The more ATM locations that your bank offers that are conveniently located, the less likely you are to use one that’s out-of-network and rack up unnecessary charges. If you can’t always use your own bank’s ATM, one of the questions to ask when opening a checking account is whether your bank allows you to use a broader ATM network for no-fee transactions.
Find the best checking account for you
Opening a new checking account is an important step toward establishing, or rebuilding, your financial foundation.
Now that you can ask the right questions about checking accounts, you’re one step closer to choosing an account that fits your individual needs. And that feels like money in the bank.
1 ATM transactions, the purchase of money orders or other cash equivalents, cash over portions of point-of-sale transactions, Peer-to-Peer (P2P) payments (such as Apple Pay Cash), and loan payments or account funding made with your debit card are not eligible for cash back rewards. In addition, purchases made using third-party payment accounts (services such as Venmo® and PayPal™, which also provide P2P payments) may not be eligible for cash back rewards. Apple, the Apple logo and Apple Pay are trademarks of Apple Inc., registered in the U.S. and other countries.
2 Outgoing wire transfers are subject to a service charge. You may be charged a fee by a non-Discover ATM if it is not part of the 60,000+ ATMs in our no-fee network.
If youâve got savings goals on your mind, then you know they come in all sizes and time horizons.
As you consider all of your options for hitting those goalsâfrom savings accounts to stocks and bonds to stuffing your cash under the mattressâcertificates of deposit stand out among the pack thanks to their competitive rates and safety.
âThe reason that people are really drawn to CDs is that you can get a higher return than you would get in either a traditional checking account or traditional savings account,â says Kimberly Palmer, personal finance expert at NerdWallet.
Steady returns, in fact, are among the top benefits of CDs. Plus, Palmer adds that CDs are usually FDIC-insured, typically up to $250,000 for each depositor (or the maximum allowed by law).
With all those benefits in mind, you might still be wondering if a CD is the right fit for your savings strategy. So, what is a certificate of deposit and how does it work?
What is a certificate of deposit?
A certificate of deposit provides a guaranteed rate of return (the interest rate) on your money as long as you agree not to withdraw the funds you deposited (the principal) until after a specified amount of time (the term).
âItâs best for someone who doesnât need their money immediately,â Palmer says. âIn exchange for that longer period of time where your money is inaccessible, you earn a higher return.â
How does a certificate of deposit work?
Before you can start using certificates of deposit to keep your savings growing at a fixed rate, it helps to know how CDs work. Itâs time to familiarize yourself with this one-of-a-kind savings product.
âThe reason that people are really drawn to CDs is that you can get a higher return than you would get in either a traditional checking account or traditional savings account.â
CD minimum deposit
While you can find savings accounts with no minimum deposit requirement, most banks require a minimum deposit to open a certificate of deposit. As you learn how certificates of deposit work, note that minimum deposits can vary depending on the financial institution, but at Discover itâs $2,500.
CD terms
Once you open a CD, your money grows until it matures at the end of its term. Discover CD terms start at three months, and the longest term available is 10 years.
CD rates
In addition to getting a higher rate than you can on many savings accounts, CD rates are fixed, which means thereâs no risk of the rate going down during the term. (Keep in mind they canât go up, either.) Generally, the longer the CD term, the higher the interest rate you can lock in for your money.
CD early withdrawal penalty
Understanding CD early withdrawal penalties is key to answering the âHow does a certificate of deposit work?â question.
You can typically find competitive rates for CDs because your financial institution is counting on having that money for the full term. For that reason, if you pull out any money in your CD before the term ends, you could be hit with a penalty.
The early withdrawal penalty often depends on the length of the CDâs term, and itâs a good idea to check with your bank to understand its specific withdrawal penalties.
Got the gist of what a certificate of deposit is? Now itâs time to put this account to work toward your unique savings goals.
How can you use CDs in your own savings strategy?
Because CDs are offered across a wide range of terms, you have the opportunity to get creative with how you take advantage of them. Whether your savings goals are big or small, long- or short-term, thereâs a CD savings strategy that will work for you.
Using CDs for short-term goals (less than three years)
âCDs are good for short-term or near-term liquidity needs,â says Philip Gibson, an associate professor of finance.
Letâs say you want to have money ready to spend on an engagement ring a year from now. Putting that money into the stock market could be risky, because if there were a market dip, youâd be out of luckâand you wouldnât be the only one disappointed!
Instead, Gibson says, you can put that money into a 12-month CD and ensure that it will be there a year from now.
How does a certificate of deposit work out to be a better short-term option than cash, you ask? Money within a CD will have grown thanks to the competitive interest rate. Cash, Gibson points out, typically loses value over time due to inflation.
However, CDs arenât ideal for storing cash that you might need at a momentâs notice. Remember: If you pull out your money from a CD before the end of its term, you could be on the hook for an early withdrawal penalty. If quick access is a priority, youâd be better off using a checking account or savings account.
Using CDs for medium-term goals (3-5 years)
CDs can be an effective way to save for medium-term goals, but you need to choose your CD term wisely.
A simple way to reach your goals.
Watch your savings grow with a CD.
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âYou want to make sure the CD term you choose matches the time horizon of your goal,â Palmer says.
For example, if youâll need that money for a down payment on a home in three years, it would make sense to put your money into a CD with a three-year term. A three-year CD would likely give you a higher return than a one- or two-year CD, and your money will be accessible when you are ready to buy a house.
Palmer adds that because money in CDs is only accessible after they mature at the end of their terms, youâll want to make sure you have three to six months of emergency savings available for unexpected short-term needs before opening a CD with a three- to five-year term.
Using CDs for longer-term goals and retirement
The longer your time horizon for your goals, the more time you have to take advantage of the power of compounding in a CD. Plus, given how certificates of deposit work, longer terms usually have higher interest rates.
If youâre looking even further ahead to retirement, you can open an IRA CD. IRA CDs give you the same reliable growth of regular CDs with the tax advantages of IRAs.
Using a CD ladder to support multiple goals
While the above examples show how CDs work to save for specific financial goals, there is a way to use CDs to continually grow your savings as you reach multiple savings goals with varying time horizons. At the same time, with this strategy you can:
Keep your funds liquid.
Take advantage of interest rates if they go up.
Lock in the higher CD rates associated with longer terms.
Itâs called a CD ladder, and Palmer says this CD strategy is growing in popularity among savvy savers.
With a CD ladder, you donât try to guess exactly when youâll need your funds to be available. Instead, you open multiple CDs with varying maturity dates.
âYou might have one CD that matures in six months, one that matures in a year and then another in 18 months,â Palmer says. âThat means that the terms keep coming due, and you continually have access to your money.â
Every time a new CD matures, you have the option of putting that money toward something you have been saving for, such as a house.
If you arenât ready to use that money when a CD matures, then you simply open a new CD with a longer term than any CDs you currently have. That new CD is added to the âladder,â and your money grows at longer-term rates as older CDs approach maturity.
Once you get into a groove with a CD ladder, you can enjoy all the benefits of CDs without worrying about finding a single CD that perfectly matches up with your financial goals.
Ready to get started with a CD?
Now that you have a handle on what a certificate of deposit is and how CDs can work for you, itâs time to get your savings plan started.
Learn how a Discover Certificate of Deposit can help you reach your savings goals, with flexible terms from three months to 10 years.
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The post This is How CDs Workâand How You Can Use Them to Grow Your Savings appeared first on Discover Bank – Banking Topics Blog.
If you’re looking for a new bank account that allows you to easily store as well as access your cash, you might be thinking about opening a money market account or checking account. But how do you know which to choose? Decisions, decisions. Both types of accounts have unique advantages, depending on your savings and spending goals.
âThink about how you will be using the money within the account,” says Jill Emanuel, lead financial coach at Fiscal Fitness. “Is this money for daily, weekly or monthly use? Or is it money that will not be needed regularly?”
You’ll probably need a little more to go on before answering the question, “How do I decide between a money market account or checking account?” No worries. Our roundup delves into the features of both types of accounts to help you determine which one could be right for your financial plans, or if there’s room for both in your money mix.
Get easy access to your funds with a checking account
In simple terms, a checking account allows you to write checks and make purchases with a debit card from the money you deposit into the account. That debit card can also be used to withdraw cash from the account via an ATM.
When deciding between a money market account or checking account, Emanuel says most people use a checking account for the primary management of their monthly income (i.e., where a portion of your paycheck is deposited) and daily expenses (often small and frequent transactions). âA checking account makes the most sense as the account where the majority of your transactions occur,” she adds. This is because a checking account typically comes with an unlimited number of transactionsâwhether you’re withdrawing cash from an ATM, transferring money to a savings account or swiping your debit card.
While a checking account is a good home base for your finances and a go-to if you need to easily and quickly access your funds, this account type typically earns little to no interest. Spoiler: This is one key difference when you compare a money market account vs. a checking account.
âIf you plan to use your account for monthly bill payments and day-to-day transactions, you would be better suited with a checking account, as these support daily and frequent use.â
Grow your balance with a money market account
When you’re comparing a money market account vs. a checking account, think of a money market account as a savings vehicle that allows you to earn interest on the balance you keep in the account.
“A money market account is an interest-bearing bank account that typically has a higher interest rate than a checking account,” says Bola Sokunbi, certified financial education instructor and founder of Clever Girl Finance.
With some money market accounts, you can even earn more interest with a higher balance. Thanks to its interest-earning potential, a money market account can be the way to go if you’re looking for an account to help you reach your savings goals and priorities.
If you’re deciding between a money market account or checking account, you may think that a money market account seems like a typical savings account with your ability to earn, but it also has some features similar to a checking account. With a money market account, for example, you can withdraw cash from an ATM and use a debit card or checks to access money from the account. There are no limits on ATM withdrawals or official checks mailed to you.
Before you decide to use this account for your regular bills and your morning caffeine habit, know that federal law limits certain types of withdrawals and transfers from money market accounts to a combined total of six per calendar month per account. If you go over these limitations on more than an occasional basis, your financial institution may choose to close the account.
Don’t need regular access to your funds and want your money to grow until you do need it? Then the benefits of a money market account could be for you.
Deciding between a money market account or checking account
Still debating money market account or checking account? Here are some financial scenarios to help you determine which account may best suit your current needs and goals:
Go with a checking account if…
You want to keep your funds liquid. If you’re thinking money market account or checking account, know that a checking account is built for very regular access to your funds. âIf you plan to use your account for monthly bill payments and day-to-day transactions, you would be better suited with a checking account, as these support daily and frequent use,” Sokunbi says. Think rent, cable, utilities, groceries, gas, maybe that morning caffeine craving. You get the idea.
You want to earn rewards for your spending. When you’re comparing money market account vs. checking account, consider that with some checking accountsâlike Discover Cashback Debitâyou can earn cash back for your debit card purchases. The best part is you are earning cash back as you keep up with your regular expensesâno hoops to jump through or extra account activity needed. Then put that cashback toward fun things like date night, lunch at your favorite spot or a savings fund dedicated to something special.
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You want to deposit and withdraw without the stress of a balance requirement. If you do your research when comparing money market accounts vs. checking accounts, you’ll find that some checking accounts don’t require a minimum balance (or much of one). However, you may be required to maintain a minimum balance (and potentially a higher one) with a money market account in order to avoid a fee. If you’re accessing your money frequently and need to make large withdrawals, a checking account with no minimum balance requirement is a convenient option.
Go with a money market account if…
You want to earn interest. âIf your money is just sitting there, it should be earning money,” Emanuel says of the money market account or checking account question. âI spoke with a woman recently who told me she’d had around $50,000 sitting in her checking account for at least the last 10 years, if not longer. If that money had been in a money market account for the same period of time, she would have earned thousands of dollars on it. Instead she earned nothing,” Emanuel says.
You want to put short-term savings in a different account. If you have some short-term savings goals in mind (way to go!), you may benefit from keeping your savings separate from your more transactional checking account so you don’t dip into them for a different purpose. That whole out of sight, out of mind thing. âA money market account is the perfect place for money that will be accessed less frequently, such as an emergency fund [a.k.a. rainy day fund], a vacation fund or a place to park money after you’ve received an inheritance or proceeds from selling a home,” Emanuel says.
You need an account to fund your overdraft protection. If you’re comparing money market account vs. checking account, consider that a money market account could also cross over to support spending goals. One way is in the form of overdraft protection. If you enroll in overdraft protection for your checking account, for example, you could designate that funds be pulled from your money market account to cover a balance shortfall.
âA money market account is the perfect place for money that will be accessed less frequently, such as an emergency fund [a.k.a. rainy day fund], a vacation fund or a place to park money after you’ve received an inheritance or proceeds from selling a home.â
Using both accounts to achieve your financial goals
Speaking of crossover. Both spending and saving are vying for your attention, right? Consider leveraging both types of accounts if you have needs from the checking and money market account lists above.
“Personally, I use my checking account for bill payments, my day-to-day spending, writing checks and for any automatic debits I have each month,” Sokunbi says. She’s added a money market account to the mix “because of the higher interest rateâto store my savings for short-term goals, for investing or for money I’ll be needing soon,” she explains. Maybe it’s not about deciding between a money market account or a checking account, but getting the best of both worlds.
Before opening a money market account or checking account, do your research and compare your options to see which bank offers the best package of low or no fees and customer service, in addition to what you need from an interest and access to cash perspective.
The post Money Market Account or Checking Account: Which Is Best For You? appeared first on Discover Bank – Banking Topics Blog.
