Choosing From The 4 Common Types of Consumer Bank Accounts
When I opened my first personal bank account for myself without the supervision of my dad or mum, I was pretty pleased with myself. It was such an adult thing to do. It’s like the moment you received your driver’s license. You have made it.
It was only years later when I’ve become more of a grown man that I realize what a bad decision I’ve made on that first account I opened. And I’m ashamed to admit that I still hold that account because I’m too lazy to step into a bank, queue for an hour, just to close it. Even today, that account is charging a monthly “maintenance” fee to “take care” of my money.
If you are clueless on your options when opening a new or first personal bank account, you’re in luck. Here is a breakdown of what you are up against.
There are typically 4 types of basic account meant for consumers.
- Time deposits
- Structured deposits
1) Current account
A current account is often described as a checking account as well. It is meant to operate like a personal petty cash box. They are often integrated with payment services so that you can pay your utility bills and whatever using it. To aid the ease of transactions on such an account, you are usually given free check books so that you can write checks to your heart’s content.
Bankers operating them also often include a monthly free check book for your personal use. And a small fee is charge on every additional check you write should you exceed the quota of free check each month.
The main drawback is that they are more of than not, non-interest bearing. Meaning you money will not earn any interest at all should you leave them in it. They also often include a monthly flat service fee. This is why it is the worst type of account you can open if you are not someone who run into a lot of transactions on your routine lifestyle.
A lot of stock traders who trade frequently use current accounts to settle their positions. If you don’t run into a lot of cash flow transactions, you are much better off putting your money into the next type of account. The one for your savings.
2) Savings account
This is the most basic bank facility that helps consumers make an interest on their free cash. In fact, if your parents opened an account for you while you were still a kid, you would probably end up with a savings account.
With the way money is flowing these days in the digitally-connected global market, many transactional services are now integrated into savings account as well, just like a current checking account. You can still move your funds all over the place with little restrictions. Internet banking has advanced by leaps and bounds in the last decade. And most savings account come with internet access these days.
The main difference is that you don’t get any checking services. And that actually get to earn an interest on the money you keep inside. They can be minute in value given the rate of inflation in recent years. But getting something is better than getting nothing.
If you want a better interest, you should look at the next type of account.
3) Time deposits aka fixed deposits
In the past, consumers avoid time deposits because funds are locked up until the specified deposit period expires. Breaking the agreement can take projected interest earned down to zero. This causes tight cash flow should someone need access to money because they are not willing to sacrifice their interest and draw out their money.
Another factor that repels consumers is that they often require a minimum deposit amount.
But now, time deposits are no longer so restrictive. These days, most lenders offer a pro-rated interest should you withdraw your money prematurely from a time deposit account. And minimum deposits are almost non-existent for a working adult.
Many banks even integrate ATM and checking facilities into time deposit accounts. It is as if they are daring you to withdraw your money. Because of the way the monetary system works now, banks no longer fear withdrawals as much as they fear a lack of deposits.
The most attractive proposition for time deposits is that you can often look forward to interest rates that are at least 10 times that of a typical savings account. The structure of such deposit arrangements make it pretty safe and stable with less risk.
What?! You are prepared to take on more risks for higher interest gains? Then read on.
4) Structured deposits aka money market accounts
Structured deposits are like time deposits. The critical difference is that the safety of your funds are pegged somewhat to certain elements of the money markets. The details depends from bank to bank and account to account.
They could be pegged to mutual funds, unit trusts, REITs, market indexes, etc.
Remember the mortgage crisis of 2008? Many structured deposits had high exposure to mortgage backed securities and CDOs. And when the market came crashing down, a lot of consumers who hold structured deposits lost a lot of money. So there is truly a higher element of risk associated with such accounts.
The advantage is that you can expect a considerable extra interest compared to a time deposit.
So how to choose an account?
As you can see, the 4 accounts are actually similar in many ways. But their differences are also pretty significant. Which type is most suitable for you depends 4 factors you should ask yourself.
What are you using it for?
Are you using it to save your money for the long term while letting it do it’s bit to keep up with inflation? Are you using it for cash flow requirements to operate a business? Are you using it to make bill payments more easy?
How much money are you putting into the account?
Some accounts offer a much better interest when you have the capacity to throw down a high initial deposit. If you are starting with a low sum deposit, take note that many account facilities have a monthly fee when you don’t have a minimum average balance in it.
How likely are you to use the money?
If the money is a lump sum that you know you will not touch at all unless an extraordinary emergency event occurs, the obvious choice is to go for a time or structured deposit. If you are going to be using your money like petty cash, you are better off with a current or savings account.
How accessible you need your funds to be?
The 4 main features that provide accessibility are ATM cards, credit and debit cards, online banking platform, check book. Weight out what you need and what you want to choose an account that meets your requirements.