What type of bank accounts do you need?
Do you still save money under your mattress or bury it underground? If you say yes, you’ve just made it to 6.5% of the Americans who do not have bank accounts. According to Federal Deposit Insurance Corp, 6.5% Americans or 14.1 million American adults do not have a bank account in 2017.
But why is a bank account essential and why are some people do not have at least one? FDIC cites that the main reason why millions of Americans are “unbanked” or do not have bank accounts is that they do not have enough money. The second most popular reason is their distrust to banks.
Meanwhile, some people are “underbanked,” or, they have a primary bank account but don’t still prefer non-traditional financing tools like payday loans and pawnshops. The FDIC also cites that some people have “invisible” which makes them less eligible to tools like personal loans, credit cards, and mortgage.
With these being said, it can’t be stressed enough that you’re missing out on a lot of things without a bank account. Specifically, you need a bank account for the following reasons:
5 Reasons Why You Need Bank Accounts
1. To secure your money. Yes, you can always keep your money hidden under the mattress and find comfort knowing that it’s there, but in case of burglary, fire or flood, your hard-earned money could be gone in an instant. Banks are insured by the FDIC up to $250,000 per depositor. It assures you even if the bank building catches fire or went bankrupt; you know you’ll always get your money back, no matter what.
2. Simplicity and convenience. Having a bank account makes life so much easier. You can tap your savings account when you need to or withdraw cash from your checking account from the ATM. You can even use your debit or credit card to make purchases. Also, enrolling in the bank’s online system allows you to pay bills or make an automatic transfer quickly and seamlessly.
3. Monitor your financial habits. A bank account also lets you see your financial habits, how much you were spending and where. A bank account allows you to better manage your money and budget for your expenses.
4. Build credit. Having a bank count is also crucial in building credit history. It establishes the accounts you have, limits for each account and how you use each account. You need credit history to apply for lines of credit like a credit card, mortgage, personal loans, and home equity line of credit, among others.
5. Interest. Money kept in banks grow with interest over time. The more money you keep in your account and the longer you park it there, the more interest it accrues. Money saved at home don’t earn interest and even loses against inflation.
Bank Accounts Every Person Needs
The checking account is considered as the “main hub” of all your accounts. This is where everything goes in and where you take out specific amounts of money that go to your other accounts. You can either withdraw cash or write a check and connect your debit card with this account.
Every person or household must have a checking account for the following reasons:
- You’ll use this account to pay for recurring expenses, such as bills, loans, debts, insurance, and many others. You may also withdraw money from this account to pay for certain expenses like gas, home repairs, and car maintenance.
- You can see a paper trail when you use the checking account. You’ll be able to effectively balance your finances by looking at your checkbook and bank statement.
- You can set your bills on auto-pay using the checking account. The bank draws money from your checking account and transfers it into a designated account at a pre-determined date every month. This way, you’ll never miss paying your bills again.
- You get to enjoy zero transaction limits. Unlike a regular savings bank account that limits your transactions to at most six each month, you can enjoy limitless transactions with a checking account.
How to choose a checking account:
- Consider the minimum balance requirement. You must park money in your account that’s equivalent or more than minimum balance to avoid owing the bank.
- Consider the fees. Banks typically impose service fees, overdraft fees and transaction fees on checking accounts. Check out numerous banks first and compare their fees before deciding on one.
- Mobile deposits. If you hate queuing in line and spending money on gas to deposit your check at the bank, there are plenty of credit unions and banks that offer a mobile deposit feature. You simply take a photo of your check and the bank deposits the amount into your account.
Short term savings
A short-term savings account is a general account where you park your money for something you want to spend on in the next several months or years. It could be the savings you’ll use for your dream wedding, deposit for your next home or your family’s next year’s vacation.
This is not the money that you’ll spend on emergencies, and it’s also not where you should draw money from for your day-to-day expenses (that’s what the checking account is for). You may have several savings accounts to help you better manage your money and track your financial progress towards individual goals.
It is important to have a savings account because:
- You earn interest on your money. Most savings accounts come to grow with interest. The longer you put the money there, the more it builds over time.
- Easily accessible. You can enroll your savings account in online banking so that you can quickly draw money out from it when you need to. This is especially useful if you’ve earmarked the money for emergencies. But you need to practice discipline and constraint, so you don’t unnecessarily spend your vacation money on a pair of shoes.
- Links to your checking account. You can connect your savings and checking accounts so that you instantly transfer funds from one to the other. When your checking account is running short of money, and you run the risk of incurring late fees and overdraft charges, you can send money from your savings account to cover the shortage.
How to choose a savings account:
- Think of the fees. Every bank is different, and so are their charges. When shopping for the right savings account, take into account how it can be most beneficial while keeping fees as low as possible.
- Interest rate. A high-interest savings account is most helpful if you’re looking into putting your money there for at least a couple of years.
- Convenience. You want to be able to deposit and withdraw money from your savings account seamlessly. Get a savings account from a bank within your area, or one that has lots of affiliated ATMs around you.
Long term savings (IRAs)
Apart from dealing with your daily and monthly expenses, you also need to look down the road, several decades from now when you’re happily retired from the workforce. How do you sustain your retirement apart from family’s help and social security? This is where a retirement account comes in.
You need a long-term savings account or an IRA (individual retirement account), so you can steadily contribute towards your nest egg paycheck after paycheck. Ideally, you should be able to set aside 10% to 15% of your income and transfer it into your long-term savings account. This should be a dedicated account that you aim to grow over the years, so it’s best to keep moving money into this account and then pretend it’s not even there.
Every person needs a long-term savings account or an IRA for these reasons:
- It is tax-advantaged. When you decide to take your funds out after reaching the age of 59 ½, you don’t need to pay taxes on the interest your money earns. This will end you up with more substantial retirement money.
- You can contribute as much as $5,500 per year if you’re less than 50 years old. You can then rack up your contributions to as much as $6,500 per year if you are more than 50. You should aim to contribute the maximum amount to your IRA account to enjoy higher tax-favored gains on your account.
- It is hands-off until later. An IRA account is illiquid; meaning, you can’t just take out money from it on a whim. You may be able to withdraw money from it, but early withdrawals can sting a lot. This should keep you from touching this money unnecessarily until you retire.
How to choose an IRA account:
- Get one from a reputable company. IRAs are offered by various institutions, from banks, brokerage companies, robo-advisors to insurance firms. Each of them has their pros and cons, and it’s important to do research on them individually to find a provider that would best suit your needs.
- Consultation with an investment/retirement advisor. Some institutions can arrange a meeting with you and an investment or retirement advisor. This expert can shed light on your questions and concerns, and help you determine your best options. You need to be careful though as some of them may pressure you into buying their products. You need an advisor with an honest and genuine concern about your retirement plans.
- Compare the fees. Investing is never free, so make sure to ask around and compare the fees. You’ll likely encounter transfer fees, management fees, and advisor fees, among others and you want to work with a company or institution that offers the most reasonable charges.
You may not consider a credit card as a bank account, but it’s actually one of the accounts every person should have. A credit card allows for cashless shopping (even abroad), helps build your credit history and offers better protection against frauds that debit cards do. On top of that, using your credit card regularly allows you to build up points and rewards which you can redeem as cash back, travel miles and other perks.
Here’s what you need to consider when shopping for a credit card:
- APR (annual percentage rate). The interest in credit cards are expressed as APR, or the amount that your credit card debt grows until you’ve paid off the balance. Basically, this is what you pay for being able to use the credit account. Opt for a credit card that offers the lowest APR.
- Points and rewards. Credit issuers issue rewards and points to keep your loyalty further. These perks come in many forms, and it’s essential to find one that you can maximize. If you travel a lot, get a credit card that lets you earn miles which in the long run could turn into free flights and accommodations. There are also cards that allow you to rack points which convert into discounts in your favorite stores and establishment.
- Compare the terms. Every credit card is different, and it’s wise to study the terms before signing up. For instance, a balance transfer credit card with 0% introductory rate is a great option when you’re trying to aggressively pay off debts or making a large purchase, while others may give you substantial bonuses.
An emergency fund is also not a typical bank account, but you do need an account that’s solely dedicated for emergencies. An emergency can strike you anytime, regardless of how healthy you think you are, how huge your savings is or how stable you feel you are with your job. A significant emergency can easily whip out everything you’ve worked hard for.
An emergency fund should be kept at a liquid savings account so that you can tap into it any time the unexpected strikes. You also want to keep at least 3 months’ worth of living expenses there, and build it up over time until you’re comfortable with what you have. As your life circumstances change (you get married, have kids, buy a home, move out or switch profession, for instance), you need to re-evaluate your emergency fund to make sure you’re adequately covered at all times.
If you think having thousands of dollars in an emergency fund that you wish you never have to use is such a struggle when you’re also paying down debt or trying to achieve other financial goals, consider:
- Setting aside a small percentage of your paycheck each month. You can start with as little as 5% of your income. What matters is that you keep contributing to it no matter what it takes. As you eliminate debts or your income increases, you should also increase your emergency fund contribution.
- Pretend it’s not there. You have a checking account for most of your bills and routine transactions, and you have a savings account for your financial goals. You shouldn’t touch your emergency fund just because you got invited to an exotic wedding out of town.
- Track your progress. Sometimes all it takes is to look at your progress to get you motivated.
Your financial life can get complicated, but having these basic types of account can help you sort it out and re-organize. You could even have a couple more accounts if you desire. For instance, you can have a dedicated college fund for your kids or a separate savings account for your discretionary spending.
What’s important is to look at your financial goals and see which accounts work best for you. Having these accounts is just one step towards a better, more organized and stable financial life.
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