Banking 101

Investing in your financial future is one of the wisest decisions you can make. However, having a sound financial foundation entails more than merely stashing excess cash in your piggy bank. Whether you’re creating your first American Bank account or have had one for years, you may not have considered why it’s a good idea to have one. You recently opened one.

That subject has become more interesting now that there is a real alternative for collecting cash and paying expenses. Given the potential fees and annoyances, do you need a bank account? Continue reading to find out more about this question.

Why Use a Bank?

Your funds will be safe from robbery and fire. Furthermore, your funds will be federally protected, so if your bank or credit union fails, you will be reimbursed.

The Key Takeaways

Banks are financial institutions that accept deposits as well as make loans.

Given today’s technological breakthroughs, many individuals ask if a traditional banking account is still necessary.

Online payment methods such as PayPal can be used to send Money, whereas prepaid debit cards are frequently used for online shopping and ATM withdrawals.

Security, convenience, and the potential availability of other investment options are all advantages of using bank accounts.

When compared to traditional brick-and-mortar banks, some online-only banks charge lower fees and provide greater interest rates.

Online services such as PayPal and Venmo allow you to send and receive money without the need for a bank account. You can also go all-cash by cashing your paycheck at Walmart or a check-cashing store and paying your bills in person at a Walmart Money Center or a check-cashing store.

However, if you meet the fundamental requirements for opening a bank account, you may appreciate the many benefits of a bank, beginning with the increased security of your money.

•  Bank Security

• Bank Convenience

• Saving and Investing

1. Bank Security

This analysis of security techniques includes methods for bank security and security gadgets. The failure of top management and bank regulatory authorities to attend to security initiatives is identified as a key threat to financial institution safety.

Preventive measures are largely aimed at robbery, extortion, and kidnapping, as well as burglary, check fraud, and theft. Internal bank crimes like as fraud and embezzlement, which are chronically underreported due to banks’ reluctance to harm their reputation, are also serious concerns. Banking is dealing with several unresolved issues dating back to the 1970s, such as U.S. attorneys’ inability to take bank cases swiftly, bank examiners’ lack of knowledge, and the introduction of automated teller machines with inadequate security design.

Furthermore, the Bank Protection Act of 1968 failed to limit bank robberies because security regulatory infractions were tolerated, banks were hesitant to implement voluntary requirements, and certain minimum standards reduced security levels. Full-time security officers with extensive security management experience are required, as are architectural improvements to prevent burglaries, clear guidelines for minimum security training standards for employees, people protection programs, and minimum standards for alarm and mandatory surveillance systems.

Computer security issues, such as personnel appropriateness, system access, and cleaning processes, require special care. Special guidelines are supplied to help internal investigations and emergency procedures. The article advises establishing a crime prevention center for financial institutions to do research on bank security issues and to coordinate information from all law enforcement and insurance organizations. There are numerous charts, graphs, and appendices discussing security techniques and gadgets.

2. Bank Convenience

When you have money in the bank, you can get to it from anywhere—in person at your local branch, at the ATM at your grocery store, online, across town, or even abroad. A checking account also makes paying bills easier and less expensive—you won’t have to visit a store, check-cashing facility, or service provider’s office to make payments, and you won’t have to purchase a cashier’s check or pay a transfer fee to transmit those payments.

Instead, you can use your bank’s free online bill-pay service, or if you prefer the old-fashioned and less secure method, you can write a check and mail it, which is also free except for postage. The advantages of utilizing a bank to protect your money are comparable to those of using a credit union.

3. Saving and Investing

When you earn more money than you need to get by each month, you’ll want to move beyond a checking account and begin saving and investing to provide yourself with more financial security.

You can cover unexpected expenses like auto repairs with money in savings, even if they don’t fit into your monthly budget. A sizable emergency fund can help you get by during a spell of unemployment. Once you have several months’ worth of emergency savings, you should put any extra money into a retirement account.

You simply cannot take advantage of the possibility of gaining money in the stock market or earning interest on deposits if your money is just kept under your mattress or on a prepaid debit card.

How to Choose a Bank

A bank should be tailored to your specific financial condition. Each bank has different capabilities, so finding the ideal bank to help you achieve your needs — whether it’s higher savings rates or access to a vast ATM network — is critical.

Take these steps before opening a bank account to help you make the best decision possible.

Identify the right account

Look for banks that charge low or no fees

Consider the convenience of a local branch

Take a look at credit unions

Find a bank that supports your lifestyle

Examine digital features

Understand the terms and conditions

Read reviews for banks you’re considering

1. Identify the right account

Banks provide a wide range of products and services, and comparing them all at once can be overwhelming. Matching the correct sorts of accounts to your financial goals and priorities is an excellent place to start.

The most common accounts are as follows:

• Checking accounts
• Savings accounts
• Money market accounts
• Certificates of deposit (CDs)

If you wish to replace your checking account, you should consider a larger, traditional bank that offers a variety of checking accounts. Alternatively, you may choose a high-yield checking account, such as those offered by several credit unions and online banks.

Consider opening a high-yield savings account if you want to receive the highest rate of return. Online banks often pay greater interest rates than traditional banks. As of this writing, the average savings account APY is 0.25 percent, however the top banks give around 5% APY. Online banks are equally as safe as traditional banks as long as they are guaranteed by the Federal Deposit Insurance Corporation or, in the case of credit unions, the National Credit Union Administration.

Money market accounts, which are similar to savings accounts but may allow you to write checks, are another alternative. A debit or ATM card, usually with a monthly transaction restriction, was included by several institutions. These accounts have the potential to earn a high APY, but they may have large minimum balance requirements, so select a bank that has a minimum you can meet.

CDs are an additional way to generate interest. When you put money in a CD for a fixed time — from a few months to several years — you’ll get a guaranteed rate of return. You can withdraw your funds before the CD expires, but you will most likely have to pay costs or forfeit some interest or principal. Rates and periods vary from bank to bank, so assess your financial goals and if the CDs available meet your needs.

You may also want to look for a bank that offers debit and credit cards, as well as lending products like mortgages and personal loans.

2. Look for banks that charge low or no fees

There’s no reason to continue with a bank that charges avoidable fees when many others do.

Online banks are well-known for charging low costs. Because they have fewer (if any) branches, they have reduced operational costs and so do not charge as many fees as traditional banks. Some ATMs charge free fees for some online bank cardholders.

Keep an eye out for monthly fees, ATM fees, and overdraft costs. According to Bankrate, the average overdraft cost is $29.80. Even enrolling in an overdraft protection program (in which the bank pays an unaffordable purchase) might be costly.

Many banks, even large ones like Citibank and Bank of America, are taking steps to eliminate or minimize overdraft costs. Consider whether the banks you’re comparing have capitalized on this trend by implementing more liberal overdraft policies.

Take the following measures to avoid fees once you’ve identified the appropriate account for your needs:

• Connect your checking account to another account at your financial institution so that if you overdraw one, the bank will take money from the other account to cover the transaction. This service may have a price, but it is usually cheaper than an overdraft fee.
• Set up low balance alerts on your bank’s or credit union’s website or app. These notifications, which may include SMS messages, notify you when your account is about to be overdrawn.
• See if you can get the monthly maintenance price waived. To waive the fee, banks frequently require a minimum daily balance or direct deposits.

3. Consider the convenience of a local branch

Another important issue in banking is accessibility.

According to Paul McAdam, senior director of regional banking at J.D. Power, ATM location convenience, branch location convenience, and the availability of online and mobile banking are all essential concerns.

What conveniences you value may differ based on your background. Consumers who are accustomed to performing the majority of their chores online may prioritize digital banking tools over the convenience of branch locations. For people who are more acclimated to branch banking, the opposite may be true.

Nonetheless, according to J.D. Power, branches continue to play an important part in the lives of most consumers, with 78 percent reporting they opened their most recent account or product in person at a branch. Its data also shows that handy branch offices are the most prevalent reason consumers choose their major banking institutions.

Even if you want to conduct practically everything online, you may wish to choose a bank with some physical branches.

4. Take a look at credit unions

Many consumers are familiar with the largest banks, but credit unions should also be considered.

Credit unions are non-profit, member-owned organizations. Members often see profits returned to them in the form of decreased fees, higher savings rates, and cheaper borrowing rates.

It is no longer as difficult to join a credit union as it formerly was. Many are available around the country, and many allow you to qualify for membership just by joining an organization or making a charity donation.

5. Find a bank that supports your lifestyle

The bank you select should meet your requirements. If you’re self-employed, for example, you’ll need a bank that can help you build your business.

If you want to save more money, seek a bank that has tools that can assist you in achieving your goals, such as:

• Savings accounts with high yields.
• A wide range of CD terminology, allowing you to pick a term for your individual aims or construct a CD ladder.
• The capacity to create and name individual savings accounts. For example, you could create a savings account for your emergency fund, a travel fund, and a present fund.
• Features for tracking expenses. Many banks’ websites or apps have budgeting features that make it simple to manage your costs and understand where your money is going.

6. Examine digital features

Most banks provide basic services, such as the ability to transfer funds, pay bills, check balances, and make mobile check deposits, via an app or a website.

However, not all banks provide services that consumers are increasingly seeking, such as the option to lock a debit card (and prevent someone else from using it) or set mobile banking alerts. Furthermore, not all online banks provide a smartphone app, so you may have to access your account via a mobile browser. Having sophisticated banking software can help you keep track of your accounts and save money.

7. Understand the terms and conditions

Important information concerning a bank account can normally be found in the account agreement, which may not be visible on the account’s home page but is usually available elsewhere on the bank’s website. Examining the disclosure might help you avoid missing any hidden fees.

If there are monthly service fees, the account agreement will include information on how to waive them. If there are out-of-network ATM fees, the fee disclosure may include whether the bank provides refunds.

Check to see if your savings are federally guaranteed by the National Credit Union Administration or the Federal Deposit Insurance Corporation (in case your bank fails).

Also, while you compare products, keep an eye out for promotional prices that are about to expire. Some banks may provide enticing teaser rates that subsequently fall to considerably lower rates.

8. Read reviews for banks you’re considering

After you’ve begun comparing a few banks, reading expert evaluations about them can help you understand what to expect from the financial institution, including customer service and goods. Customer reviews can also be beneficial, especially because many customers continue with their banks for a long time.

If you can’t decide on a single bank, managing accounts at numerous banks or credit unions may be the best option.

6 Ways to Receive Deposits to Your Account

The simple ways are Electronic transfers, wire transfers, checks, and money orders are all ways to deposit money into someone else’s bank account.

Traditional methods such as cheques and money orders are often slower and less convenient than electronic transfers and wire transfers.

To avoid money laundering and fraud, several banks place limits on putting cash into accounts that are not in your name.

It is worthwhile to browse around for the most convenient and cost-effective methods of depositing funds into another person’s account.

• Make an electronic transfer

• Make a wire transfer

• Write a check

• Deposit cash at the bank

• Use a cashier’s check

• Use a money order

1. Make an electronic transfer

You can simply transfer money into the account of a friend or relative using a service like Venmo, PayPal, or Cash App. You can also send money to others via Zelle, and because most banks already include this service in their offerings, you won’t need to join up for it individually.

When conducting electronic transfers, always proceed with caution. When you send money to someone else via these platforms, the payments are frequently irreversible. To avoid becoming a victim of a scam, never send money to someone you don’t know and trust.

Another alternative is to make an electronic transfer from your bank account to that of a friend or family member. You will need to supply the other person’s bank account information and routing number for this. Unlike Zelle and other digital payment networks, which transfer funds in minutes, this type of bank-to-bank transfer can take many days.

2. Make a wire transfer

A wire transfer is another method of sending money to another person’s bank account. Wire transfers can be completed at banks, credit unions, or service providers like Western Union or Wise.

To make a wire transfer, you’ll normally need the recipient’s account number, routing number, and name.

When sending a large sum of money, a wire transfer may be the best alternative because they typically have no restrictions. Domestic wire transfers are typically processed within a few hours, making these easy.

Wire transfers, on the other hand, might be costly when compared to fee-free alternatives like Zelle. Domestic outgoing wire transfers can cost up to $35, while international outgoing wire transfers typically cost between $35 and $50.

3. Write a check

Even though paper checks are becoming less popular, you can still deposit a personal check into someone else’s bank account. Banks may prefer checks to cash for security concerns since checks, unlike cash, may be traced.

“The key question is always: ‘Where did you get that money?'” says Marc Trepanier, senior principal fraud expert at software supplier ACI Worldwide. “We know where it came from with a check.” It came from a different account.”

When you present a check to the teller, along with the recipient’s name and account number, it can be deposited into another person’s account at a branch.

One disadvantage of depositing a check is that, unlike cash, the bank does not always make the funds available right away.

“Depending on the circumstances,” says Bob Meara, chief analyst at Celente, a financial services research and consulting organization, “the check can clear and settle in hours.” “But most banks wait a business day for funds availability for most customers simply so they can see if the check clears.”

4. Deposit cash at the bank

You can deposit cash into someone else’s account by visiting a bank where the person has an account and providing the teller with the person’s name and account number.

Some banks, however, would not allow you to deposit funds into an account that is not in your name. Wells Fargo, for example, notes in its deposit account agreement that non-account owners are not permitted to deposit cash into client accounts.

Cash deposits are prohibited by banks to help prevent money laundering and fraud. It is also costly for the bank to process cash.

Though you may be inconvenienced, there are options, some of which are faster than transferring cash into someone else’s account at a bank.

5. Use a cashier’s check

You can deposit a cashier’s check into someone else’s bank account instead of writing a personal check. You pay the bank in advance for a cashier’s check, and the bank produces the check for that amount and makes it payable to the specified recipient.

A cashier’s check has the advantage of not bouncing because it is backed by the money of the issuing bank, and it normally clears faster than a personal check.

6. Use a money order

If you don’t want to deposit money into someone else’s account with a personal or cashier’s check, a money order is an old-fashioned alternative.

A money order can be obtained via banks and credit unions, post offices, chain drug and grocery stores, and some big-box retailers. Sending a money order is a low-cost option. For example, the United States Postal Service charges a service fee of $2 for domestic orders of up to $500.

The money order arrives with a receipt, and money orders can usually be replaced if they are lost or stolen. A money order, like a cashier’s check, is paid for in advance, so there is no possibility of it bouncing.

Funds Availability

When you can access money that you’ve placed with your bank to pay bills, make purchases, and handle ordinary expenses, this is referred to as fund availability. With a few exceptions, money added to a checking or savings account isn’t generally immediately available for use.

Federal regulations allow banks to retain deposited monies for a defined length of time, which means you can’t access the funds until the hold is released. However, the bank cannot keep your funds on hold permanently.

Federal law specifies the regulations for funds availability and the length of time a bank can hold deposited funds. Banks can also exercise discretion when establishing standards for making funds available to consumers.

Here’s everything you need to know about fund availability and how it affects bank deposits.

• What Is Funds Availability?

• Why Do Banks Hold Funds?

• Why Do Banks Hold Checks

• How Long Can a Bank Hold Funds?

• How Long Can a Bank Hold a Check by Law?

• Extended Funds Availability

• Expedited Funds Availability Act

• Check Your Bank’s Funds Availability Policy

1. What Is Funds Availability?

When you can access the money you deposit into a bank account is referred to as fund availability. Federal Regulation CC (Reg CC) provides a framework for banks to follow when developing funds availability policies. Regulation CC specifically addresses two issues:

When deposits will be made available to customers

Guidelines for informing clients about fund availability policies

The timeframe for when deposited monies will be available under Regulation CC is mainly determined by the type of deposit when it was made during the business day, and, in some situations, the quantity placed.

These principles can then be used by banks to develop and implement funds availability policies. These policies are typically disclosed to you when you open your account. Many banks also publish their money availability policies online.

2. Why Do Banks Hold Funds?

Banks can retain deposited monies for a variety of reasons, the most common of which is to avoid any returned payments from your account. In other words, the bank wants to ensure that the deposit is valid before releasing the funds to you.

Depending on the type of deposit, the money you deposit may take several days to be transferred from the payer’s bank to your bank. In the meantime, putting a hold on the deposited money allows the payment to clear your account.

Without a hold, you might use your debit card to write cheques, pay bills, or make transactions against your balance. If the check you placed is returned due to insufficient funds, your bank is required to cover those payments. In addition, you may be charged returned checks or overdraft fees for any transactions that the bank must cover.

Holds on funds safeguard both you and the bank from the consequences of returned payments. Allowing your bank to hold a check can work in your favor if it allows you to avoid overdraft fees.

3. Why Do Banks Hold Checks

Banks hold checks to ensure that they will be reimbursed. Anyone can write you a check, but if they don’t have enough money in their account, the check will bounce. As previously stated, this might cause problems for both you and the bank, particularly if you’ve utilized funds from a rejected check to pay payments or make purchases.

Checks are treated differently than other sorts of funds since they are subject to uncertainty. When it comes to checks, institutions don’t know if the check is receivable until it is paid by the institution from which it was drawn. This is in contrast to certain other deposit methods. For example, if you deposit $5,000 in cash, the bank has funds available to credit to your account. And, because wire transfers are often irreversible—the person who sent the transfer typically cannot recover the funds—your bank can credit those funds to your account without risk of reversal later.

4. How Long Can a Bank Hold Funds?

When creating a funds availability policy, banks must adhere to specific standards. Banks are permitted by Regulation CC to keep certain sorts of deposits for a “reasonable time,” which normally means:

• On-us checks (checks made against the same bank’s account) can take up to two business days.
• Local checks may take up to five additional business days (for a total of seven).
• Longer hold periods, if the financial institution can demonstrate that a longer hold is reasonable.

5. How Long Can a Bank Hold a Check by Law?

Banks must follow the Federal Reserve rules for calculating how long to keep checks under Regulation CC. As previously stated, banks are only permitted to store checks for a “reasonable period,” as specified by Regulation CC.

The time it takes for a check you deposit to clear typically ranges from two to five business days. If you plan to write checks to pay bills, schedule electronic payments, or make transactions with your debit card, keep the timing in mind. Extended funds availability regulations may allow for longer hold times in particular cases, depending on your bank’s funds availability policy.

It’s also critical to understand your bank’s daily cutoff time for depositing funds into your account. The deposit will be processed with the next day’s batch of deposits after the cutoff time.

The cutoff time for depositing at a branch may differ from the cutoff time for depositing at an ATM or via mobile check deposit. Again, the bank should provide you with this information as part of your account agreement, and you may also be able to locate it on your bank’s website.

5. Extended Funds Availability

Banks have some latitude in establishing cash availability hold times for certain types of deposits under Regulation CC. According to the regulation, your bank must tell you that the money is being held and when it will be made accessible to you.

6. Expedited Funds Availability Act

The Expedited Funds Availability Act (EFAA) was enacted in 1987 in response to concerns about the length of time banks held client deposits. The EFAA specified maximum acceptable hold durations for checks and other deposits, which were enforced by Regulation CC. The EFAA expects the following when it comes to checks:

• Between the day funds are deposited and the day they are made available for local checks, no more than one business day passes.
• Between the day funds are deposited and the day they are made available for nonlocal checks, no more than four business days may elapse.
• Not more than $400 (or the maximum amount authorized in the case of an automated teller machine withdrawal, but not more than $400) of monies deposited by one or more checks should be available for cash withdrawal no later than 5 p.m. of the business day on which funds become available. The Expedited Funds Availability Act attempts to prevent customers from having to wait endlessly for access to their deposits. The Act also compels banks and other financial institutions to provide customers with information about their funds availability rules and how they work. A funds availability disclosure provides this information.

6. Check Your Bank’s Funds Availability Policy

Whether you’re new to your bank or have been a customer for years, it’s important to understand the funds availability policy.

Begin with the deposits you make the most frequently. For example, if you use a mobile check deposit to deposit checks, you should know how long cash will be stored. The same is true of electronic deposits.

Accounts for Your Savings

Savings accounts are the next option that most individuals consider when thinking about banking after checking accounts. Having a savings account where you can securely put excess cash that you can easily access in an emergency—but not so easily that you spend the money on things you didn’t mean to spend the money on—is a critical component of any solid personal financial plan. While a checking account protects your money and makes bill payment easier, a simple savings account allows you to place money aside for short-term goals such as going on vacation, paying a significant upcoming expense, or establishing an emergency fund.

Banks provide a variety of savings options; the benefits and drawbacks of each are discussed here. First, we’ll look at the two kinds of savings accounts.

Regular Savings Accounts 

Almost all banks have normal, basic savings accounts that can be opened in person, over the phone, or online. This is the kind of savings account you’d obtain if you went to a typical brick-and-mortar bank. The main distinction between this account and a checking account is that it normally does not have check-writing privileges and may have a higher opening deposit requirement as well as a higher daily minimum balance requirement. This account may be referred to as “Statement Savings,” “Goal Savings,” “Day-to-Day Savings,” “Way2Save,” “Savings Plus,” or something else that the bank’s marketing department thought was creative.

A regular savings account is simple to establish and maintain. You can link it directly to your checking account at the same bank and transfer funds between the two accounts quickly and easily. Having these two accounts linked may help you avoid overdraft and minimum balance penalties from your checking account.

The biggest downside of this sort of account is that the interest rate is frequently pathetic. According to the FDIC, the national average savings account interest in February 2022 is merely 0.06%.

If you’re serious about making your money work for you, you should probably reduce the amount of money you maintain in a conventional savings account (if you use one at all) and instead invest in a more powerful savings vehicle.

Online Savings Accounts

An online savings account differs from a traditional savings account in that it is only accessible over the Internet (often via phone, but not in person) and pays a higher interest rate. One of the highest interest rates offered for a savings account in February 2022, for example, was 3% APY for an HM Bradley Savings account (conditions apply). Meanwhile, the largest bank in the United States, Chase, was paying 0.01% on savings accounts.

Some online savings accounts are provided by banks that also provide normal checking and savings accounts, but others are provided by institutions that do not have physical branches and only provide online goods. Because of the higher earning potential, an online savings account may be a better alternative than a traditional savings account if you are comfortable with Internet banking. Unlike many savings accounts linked with brick-and-mortar banks, many online savings accounts do not demand a minimum deposit to create an account, a minimum daily balance requirement, or a monthly maintenance charge.

The rate of interest paid by the bank on several types of savings accounts, both normal and online, is determined by the amount of money in your account. These are known as tiered-rate accounts. Customers with larger balances will receive more interest.

Automatic Savings Plans

Many banks offer automatic savings plans, which can be a fantastic way to get into the habit of saving money regularly. Establishing such a strategy is also a technique to lower banking costs at some banks.

You should establish an automatic savings strategy. It simply entails selecting a certain dollar amount that you’d like to have automatically transferred from your checking account to your savings account once a month on the same day each month (unless when that day falls on a weekend or holiday).

If you know how much money you usually have left over after meeting your monthly expenses, you may use that as the amount you transfer automatically to your savings account. On the other hand, you could wish to put your spare money in multiple areas each month, such as a retirement account, an investment account, and a savings account. In this scenario, a smaller amount is preferable. A budget will help you figure out how much money you can safely deposit to a savings account each month if you don’t know how much you can contribute. You can always begin with a small sum, such as $20, and gradually grow it.

Although some people are concerned about committing to saving a particular amount automatically each month, most investment experts agree that paying yourself first is an important part of growing wealth. Another significant advantage of having an automatic savings plan is that you will not have to remember to set away money for savings each month because your bank will do it for you.

Money Market Deposit Accounts

The money market is a financial market segment in which financial instruments with high liquidity and relatively short maturities are exchanged. Because of the extremely liquid nature of the assets and their short maturities, it is seen as a secure location to invest. While money market investment accounts are not without danger, money market deposit accounts, like checking and savings accounts, are almost risk-free because they are FDIC-guaranteed. Money market deposit accounts are not the same as money market mutual funds, which are sold by investment firms and are not FDIC-guaranteed.

The money market is a financial market segment in which financial instruments with high liquidity and relatively short maturities are exchanged. Because of the extremely liquid nature of the assets and their short maturities, it is seen as a secure location to invest. While money market investment accounts are not without danger, money market deposit accounts, like checking and savings accounts, are almost risk-free because they are FDIC-guaranteed. Money market deposit accounts are not the same as money market mutual funds, which are sold by investment firms and are not FDIC-guaranteed.

Money market deposit accounts typically require a larger minimum amount than ordinary or online savings accounts. This minimum is frequently between $100 and $2,500. This type of savings account may also come with a monthly cost. The interest rate will be higher than that of a traditional savings account balance, but it may be less than that of an online savings account. CIT Bank, an online-only bank, paid 0.45% APY on money market account balances and 0.25% APY on high-yield savings account balances as of February 23rd, 2022.

“Bank Products and Rates.” CIT Bank.

Functionally, there may not be much of a difference between a money market deposit account and a normal or online savings account.

Certificates of Deposit

A certificate of deposit (CD) is a savings instrument that entitles the bearer to interest payments. It is similar to a bond in many ways, except that instead of paying interest regularly during the life of the investment, it pays all of its interest at once when it matures. CDs also come with FDIC insurance because they are a bank product.

A CD has a fixed interest rate and a maturity date, and it can be issued in any denomination. A CD’s length typically spans from one month to five years. The amount of interest paid on a CD is determined by its term, with longer terms typically paying higher rates. CDs, like savings accounts, fluctuate in value based on market conditions.

CDs have earned little in the low-interest rate environment that the United States has seen since 2008, but they often pay more than a conventional savings account, depending on which banks you compare. In February 2022, the average 60-month (5-year) CD rate is 0.28%, which is much higher than the average savings account interest of 0.06% but significantly lower than the 3% rate of some online high-yield savings accounts.

Along with the greater interest rate, there are limits on removing funds before the CD matures. If you do this, you will normally be charged an early withdrawal penalty. A high-yield savings account may be a better alternative if you want to have your money accessible while it gains interest.

Federal Deposit Insurance: Spread Out Your Money to Be Safe

Consumers’ bank account balances are protected up to a specific amount by federal deposit insurance if they are held in a legitimate bank that is a member of the Federal Deposit Insurance Corporation (FDIC). Since its inception in 1933, the FDIC claims that “no depositor has ever lost even one penny of FDIC-insured funds.”

During the 2008 financial crisis, Congress increased FDIC insurance coverage from $100,000 to $250,000 per depositor across all accounts in the same category.

If you store more money in bank accounts than the existing federal deposit insurance limits, you’ll need to plan ahead of time so that if a bank fails, all of your money is covered, not just the first $250,000.

There is nothing improper with doing this; it is completely legal. If your account balance exceeds the FDIC-insured limitations and you want to ensure that all of your money is safe, go to the FDIC’s website. Ally Bank also offers a handy page that explains how you can get $2 million in FDIC coverage at the same bank by opening multiple accounts. You can also maintain your money in multiple banks to spread your risk.

Spreading your money across multiple accounts isn’t the only method to keep it safe. Whether you bank online or in person, you want to keep unscrupulous people from taking your identity and funds. You may protect yourself by destroying bank statements and keeping an eye out for card skimmers.

How Do I Open a Bank Account?

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