When you open a bank account, you’ll be prompted to choose between a checking or savings account. You might wonder which one is better. If you’re new to personal finance, the language used in banking can seem daunting. Terms like “interest rate” and “loan” may seem confusing at first glance.
But with some guidance, it doesn’t have to be scary! Banking and personal finance can seem challenging for beginners, but it doesn’t have to be that way! With the right information, anyone can become an expert on personal finance. In this blog post, we explore everything you need to know about banking as a beginner.
A deposit is the amount of money you put into a savings account. You may choose to put a certain amount of money in your savings account each month, or you may put the entire amount at once. There are plenty of reasons to start saving early, including the ability to save for retirement, emergency funds, and major purchases. The earlier you start, the more time compound interest has to work in your favor.
Compound interest is the idea that interest is accumulated on top of interest, creating a larger total sum in the end. Compound interest is why it’s so important to save money as early as you can. As your savings account grows, the amount of money you earn in interest grows as well. Eventually, your small monthly contributions could become a substantial amount. Your bank will pay you a specific interest rate in exchange for your deposit. This is called the rate of return.
A loan is a transaction in which you borrow money from a bank, and they get to keep the money until you pay it back. In return, you agree to pay the bank interest. Loans come in many forms. Credit cards allow you to take out a loan with a high interest rate. An auto loan or mortgage are other common types of loans. When you take out a loan, you’ll need to repay the full amount at some point in the future.
Many people use personal loans to pay for things like a car, tuition, or a home renovation. Credit card loans are generally used for short-term expenses, such as travel, medical bills, or gifts. Bank loans are generally used for large purchases, such as financing an education or buying a house. When you take out a loan, the bank agrees to give you the money you need in exchange for interest. You’ll need to pay back the loan plus the amount of interest you owe.
Interest is the amount of money you pay to the bank each year for the privilege of using their money. It’s calculated as a percentage of the total value of your loan or deposit. Interest is different from the amount you actually borrowed. For example, if you open a $10,000 savings account, you don’t owe $10,000 after a year. You owe $10,000 plus the amount of interest the bank has agreed to pay you.
The amount of interest a bank pays is determined by the rate of return. Banks set their interest rates based on economic factors such as inflation and economic growth. For example, if there are more customers taking out loans, it creates more competition for banks. Banks have to offer competitive interest rates to remain competitive. This can be good news for people taking out loans.
It can also be a bad thing for people saving their money in a savings account, because banks have to offset the costs of more loans. It all depends on which side of the transaction you’re on.
- Savings Accounts - Savings accounts generally offer higher interest rates than checking accounts. Basic savings accounts usually earn a very small amount of interest. It’s not uncommon to see rates in the range of 0.01%. But if you open a high-yield savings account, you could earn interest rates as high as 2-3%! The more money you deposit, the more interest you earn. - Checking Accounts - Checking accounts are useful for managing your money on a daily basis. You can write checks, make debit card purchases, and transfer money between accounts.
Many banks will provide free or low-cost checking accounts to people who do not have significant assets. Checking accounts are great for managing short-term financial goals. - Credit Accounts - Credit accounts, also known as loans, allow you to borrow money from a bank and pay it back over a period of time.
While it might seem like a terrible idea, credit accounts are actually a very useful tool for many people. Used correctly, credit accounts can help you achieve your financial goals. Credit cards are one of the most common types of credit accounts. They allow you to borrow money for short-term expenses or emergencies.
- Savings Accounts - These are the best choice for beginners who are looking to save money. The main benefit of a savings account is that the money will be safe. It is almost impossible to lose money in a savings account, as long as you don’t make a mistake like withdrawing it before the account has been open for a certain number of months.
- Regular Checking Account - A regular checking account is one that does not require a certain amount of money to be deposited in order to open an account. All people need to open a checking account is identification and a valid address. Regular checking accounts are very easy to open and close.
- Online Checking Account - Online checking accounts are very similar to regular checking accounts. The only difference is that online checking accounts can be accessed across the world while regular checking accounts are strictly limited to the area in which they are issued.
- Regular Savings Account - A regular savings account is just like a regular checking account. The only difference is that it is used for saving money instead of spending money. - Creditable Savings Account - A creditable savings account is a savings account that earns interest like a regular savings account, but it also has the added benefit of increasing the account holder’s credit.
- When you deposit money into a bank account, the bank pays you interest. You can earn a ton of interest when you deposit a lot of money. If you deposit a small amount of money, you will only earn a small amount of interest. Interest rates are expressed as a percentage, so it would make sense that you receive a percentage of the money you have deposited in your bank account.
If you deposit $1,000 and the bank pays you 1% interest per year, you would earn $10. - Banks set their interest rates based on economic factors such as inflation and economic growth. If there are more customers taking out loans, it creates more competition for banks. Banks have to offer competitive interest rates to remain competitive.
This can be good news for people taking out loans. It can also be a bad thing for people saving their money in a savings account, because banks have to offset the costs of more loans. It all depends on which side of the transaction you’re on.
- When you decide to open a bank account, you’ll want to choose a bank that is right for you. The best way to do this is to compare different banks based on their services and rates. You can start by visiting online review sites such as Bankrate or Penny Hoarder’s bank review pages.
You can also check out many banks’ websites and look through their online FAQs to get an idea of how they operate. - After you’ve narrowed down the list of banks you want to open an account with, you’ll want to compare their accounts.
The best way to do this is to visit each bank’s website and open their checking account information in a new tab for reference. You can also call each bank and ask about their checking accounts. - Choosing the right bank is an important decision. You don’t have to rush, though! Take your time and research different banks to find the one that’s right for you.