Types of Bank Accounts: Which One Is Right for You?

Checking and savings accounts are the two most popular types of accounts, with certificates of deposits (CDs) and money market accounts also available for people who want higher APYs. Each account serves a distinct goal and has strengths and weaknesses to consider. Some people spread their funds across multiple types of accounts, but some are better for your goals than others.

Key Takeaways

• Four main account types cover most needs. The core types of bank accounts are checking, savings, money market and CDs — each built for a different job, from daily spending to locking in a rate.

• Checking is for spending, savings is for growing. Checking accounts offer easy access with little to no interest, while savings accounts typically pay more but may cap convenient withdrawals depending on your bank's policy.

• Money market accounts and CDs can pay more for less flexibility. Money market accounts often require higher minimum balances, and CDs lock your money until maturity — pulling out early usually triggers a penalty.

• FDIC insurance covers $250,000 per depositor, per bank, per ownership category. You can insure more by using different ownership categories or spreading funds across insured banks.

Summary generated by AI, verified by MoneyLion editors

MoneyLion offers a service to help you find personal loan offers. Based on the information you provide, you can get matched with offers for up to $100,000 from our top providers. You can compare rates, terms and fees from different lenders and choose the best offer for you.

The Main Types of Bank Accounts

There are four major types of bank accounts that you can use to save money, earn interest or both:

• Checking account: This account lets you cover everyday expenses and doesn't usually limit your routine transactions. Checking accounts tend to have the lowest APY. You can use a debit card linked to your checking account for purchases.

• Savings account: This account has a variable-rate APY that is higher than most checking accounts, but many bank accounts limit you to six withdrawals per month if it's part of their account policy.

• Money market account: This account has a higher variable-rate APY than a traditional savings account, but it also comes with a higher minimum balance requirement to avoid monthly maintenance fees. Check writing is often included.

• CD: This account lets you lock in an APY for a predetermined term, but withdrawing any amount of money before the CD matures often results in a penalty fee.

Most banks are FDIC-insured, which insures up to $250,000 per insured bank for each ownership category. Single, joint and retirement accounts are three popular categories. You can insure more than $250,000 under the same ownership category by spreading your funds across multiple financial institutions. 

While all of these accounts are FDIC-insured and let you store money, they each have a different purpose. Here’s how they compare.

How To Choose the Right Bank Account for You

The right account for you depends on your financial goals and how you will use your money over the next year.

Checking accounts have no limits when it comes to transactions, while many banks may still limit withdrawal or transfers from savings or money market accounts to six per month, if it's part of their policies.

CDs are only good for money that you will not need until the account matures. Withdrawing from a CD early will trigger a penalty fee that may match or exceed the amount of interest you have received.

Most people start with a checking account and a savings account, but as their needs change, some people also put some of their cash into money market accounts and CDs.

What Specialty Bank Accounts Are Worth Knowing About?

While most people only need a checking and a savings account, there are some specialty bank accounts that provide noteworthy perks for consumers.

• Joint accounts: These accounts let spouses combine their finances and manage budgeting together. They provide full access and liability.

• Student/teen accounts: These checking accounts are specifically for students and teens who want to get started with banking. They are basic accounts that tend to have low APYs and very few features.

• Business accounts: These accounts help people separate their personal finances from their business finances, which also helps when business liabilities occur.

• Online-only accounts: Some fintech companies create online accounts that have higher APYs and fewer fees, but they have no physical branches. Mobile-first accounts are another version of online-only accounts.

As your financial goals change, these specialty bank accounts may align with your goals. The side hustle you started under your name may have to turn into a separate business entity as it becomes a larger portion of your total earnings. 

It's also good to consider an online-only or a mobile-first bank account if you don't visit your physical branch often. Physical proximity is the one advantage traditional banks have over digital banks, and if you aren’t using it, you can secure higher APYs and lower fees with an online banking alternative.

When a bank is FDIC-insured, eligible deposits are covered up to $250,000 per depositor, per FDIC-insured bank, and for each account ownership category. Fintech companies aren't banks and don't directly have FDIC insurance, though many work with FDIC-insured partner banks, so eligible deposits could have that same coverage.

How Many Bank Accounts Should You Have?

Most people do well with two to four accounts. Having more than one account lets you secure higher APYs for the money that you won’t need right away. 

You can also allocate money into a savings account, a money market account and CDs based on how soon you will need the funds. Some people use CD ladders to spread money across different maturity dates so some of it becomes accessible sooner.

Keeping all of your money in a single account can blur the lines between spending and saving and make it more difficult to achieve long-term financial goals. You can also create savings accounts for different goals, such as paying for a vacation or buying a new car. 

FDIC coverage offers up to $250,000 per depositor, per bank, per ownership category. You may have to split large balances across multiple banks so that every dollar is insured.

More accounts help you stay organized, but the optimal number of accounts depends on your financial situation.

FAQ

Is it free to open a bank account?

Yes. It's free to open most checking and savings accounts. However, these same accounts may charge monthly maintenance fees that you can usually waive. Be sure to check the fee schedule before opening an account.

What documents do you need to open a bank account?

You usually need a government-issued ID, Social Security number and an initial deposit. Requirements vary slightly by bank. Most banks list their requirements on their websites, but you can also contact a representative for verification.

Can one person on a joint account withdraw all the money?

Yes. Joint account holders usually have equal access, which gives either spouse the ability to withdraw everything without notifying the other. That risk explains why it is essential to discuss expectations before opening a joint account together. 

What happens to your money if a bank fails?

Most everyday balances are covered since the FDIC insures up to $250,000 per depositor, per bank, per ownership category. The money will either be moved to a new bank under your name, or you will receive a check in the mail equal to your balance's value.

Key Terms

• Checking account: A deposit account built for everyday spending and bill pay, usually with unlimited transactions and little to no interest.

• Savings account: A deposit account meant for storing money you don't need right away, typically paying a variable rate that's higher than checking.

• Money market account: A deposit account that often pays a higher variable rate than basic savings and may include check-writing, usually in exchange for a higher minimum balance.

• Certificate of deposit (CD): A time deposit that locks in a fixed rate for a set term; withdrawing early usually triggers a penalty.

• APY (annual percentage yield): The yearly rate of return on a deposit account, including compound interest — useful for comparing accounts on equal footing.

• FDIC insurance: Federal coverage that protects deposits up to $250,000 per depositor, per insured bank, for each ownership category if a bank fails.

• Ownership category: How the FDIC groups accounts (single, joint, certain retirement, trust and others) to determine coverage; different categories are insured separately.

• CD ladder: A strategy of splitting money across CDs with staggered maturity dates so some funds come available sooner while others earn longer-term rates.

Sources

• FDIC. Account Ownership Categories.

• Board of Governors of the Federal Reserve System. Savings Deposits Frequently Asked Questions.

• FDIC. Understanding Deposit Insurance.

Summary generated by AI, verified by MoneyLion editors

Photo credit: kate_sept2004/iStock