Bank Accounts Explained: Checking, Saving and Money Market

The idea of saving money has been considered a smart one for centuries. Ever since we were children, we have received messages about the wisdom of putting money aside for a “rainy day.” This post shall look at three methods of putting away cash, and explore the benefits and the disadvantages of each.

Checking Accounts

check bookA checking account is a type of deposit account in which you store money in a financial institution, such as a bank or credit union, and are able to use it by writing a check or by setting up electronic debit. You can also access all available monies by use of an automatic teller machine, or ATM. If the companies that require you to pay rent and utility bills allow you to set up automatic debit, the company deducts the funds from your account at the same time each month.

Among the advantages of having a checking account is having an increased paper trail, because you can write checks and better track your spending habits. This also helps if creditors claim that they have no record of you having paid them in a given month.

If long-term investments are your goal, a checking account won’t serve you very well. The money is not likely to gain interest. Very few financial institutions, if any, will offer it. Also, checking accounts are subject to fees for use, especially after you’ve made withdrawals beyond what the bank has allowed you per month.

Savings Accounts

savings bankA savings account is another type of account offered by financial institutions that allows you to deposit a given amount of money that you store away. This is money you don’t use for everyday purposes, but rather, it’s part of your rainy day fund.

One major benefit of owning a savings account is that as long as your money stays in, it can earn interest. This is especially true as you add to the account. Also, such accounts are inexpensive to open and maintain, depending on whether you establish the account at a bank or credit union.

One major disadvantage is that you can’t write checks on savings account money. Also, you cannot use the funds in an automatic debit transaction—you must always go to the bank or use an ATM. Moreover, it is not as easy to keep track of the bills you pay using the cash from a savings account, because it doesn’t leave a written record of your bill payments.

Money Market Accounts

cashA money market account is a special type of savings account in which you invest a certain amount of money with your financial institution. When you invest a given amount of money with a bank it, in turn, makes money off your investment. You will receive a portion of the institution’s earnings as interest.

A key advantage to owning this type of account is that the more money you invest, the larger your return is likely to be. Another benefit is that a money market account, or MMA, is more liquid (meaning the funds are more easily accessible) than a certificate of deposit, for example.

One important disadvantage is that you can only take out so much money per month. Beyond six such transactions, you’ll have to pay a fee. As these costs accrue, they’ll eat up any dividends you may have earned from the interest. In most cases a money market account requires a greater minimum deposit than a checking or savings account. The specific amount varies among financial institutions, so you should check with your bank or credit union. Also, you can gain a profit or take a loss, depending on what the market interest rates happen to be at a given time.

Closely examine your financial needs. If you are an investor with extra money, a money market account may fit your needs. If not, a regular checking or savings account should suffice. Want to learn more about bank accounts? Check out our article, How to Choose the Best Bank for You.

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