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Course: Financial Literacy Library > Unit 2
Lesson 2: Understanding bank accountsTypes of bank accounts
Bank accounts come in different forms to fit your financial goals, whether it's a checking account for daily transactions, a savings account for stashing away funds, a money market account that offers higher interest rates with some liquidity, or a CD (Certificate of Deposit) for earning interest on money you can set aside for a fixed term. Each account type balances access to your funds with opportunities for growth. Created by Sal Khan.
Video transcript
- Let's say that you've saved some money or you've just found some,
luckily, and you go to a bank and you wanna put it with that bank. But then the bank starts
giving you some options. Says, "Do you wanna
start a checking account? "Do you wanna 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. 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. And then if you want even
a little bit more interest and are willing to maybe sacrifice some of the accessibility, you
have a savings account. And once again, it really
depends on how your bank works, how much flexibility they give you. And now, with online banking,
you can often switch. You can 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. But if you wanna lean a little bit more on getting more interest
and less flexibility, a savings account might make sense. And then at the extreme, at least, at 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, well, you might have
to pay a penalty audit, 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, just 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 use my ATM card, "but then this other $10,000
that I'm saving towards a house "that I might buy in three years, "I'm not gonna 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. And 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 high level description of what these accounts and
the trade-offs tend to be.