Bank Accounts | Financial Literacy F

Bank Accounts

What is a bank?

A bank is a financial institution that looks after people's money and keeps it safe. Depository banks permits customers to store and use the money they have in the bank. Non-depository banks, like the Federal Reserve System, do not allow this.

What types of banks are there?

Central Banks: There are 12 central banks around the United States (Located in Boston, New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis, Minneapolis, Kansas City, Dallas, and San Francisco). These banks control the United States' national money supply/currency. These 12 central banks make up the Federal Reserve System. The Federal Reserve system is not a depository system unlike commercial and retail banks.
Investment Banks: This is a financial intermediary, or link, between companies and the financial markets. Investment Banks guide these companies on how to overcome financial obstacles. This is a non-depository bank, but you can still create your bank accounts with this type of bank. (Ex: Goldman Sachs)
Retail Banks: These types of banks are meant for public use, and operates different actions such as accepting deposits, granting loans, and more; all for the general people. This is a depository bank. (Ex: Bank of America)
Commercial Bank: A commercial bank helps businesses launch, operate, and grow. This is a depository bank. (Ex: Wells Fargo)
Credit Unions (Bonus): Credit unions are similar to a bank when it comes to financial actions like helping customer create bank accounts, and allow for deposits. The difference between credit unions and banks is that credit unions are non-profit institutions. Even more, credit unions require customers to qualify for memberships, but also guarantee more personalized customer service. This is a depository system.

What is a bank account?

A bank account is a financial account preserved by a bank in which a customer can withdraw funds, make payments, transfer money, and more. Essentially, it is an agreement with a bank that allows you to store money in it and withdraw money whenever you want.

What type of bank accounts are there?

Checking account: This bank account allows the customer to easily deposit and withdraw money for transactions, or move money in and out your account. This account allows you to pay for day-to-day expenses like groceries. With a checking account, you can withdraw funds (money saved) through a debit card, ATM, or checks. One small disadvantage to using a checking account is that you will will have to pay interest (typically very little).
Savings account: This bank account is meant for you to save money. There are restrictions to how much money you can withdraw a month. However, savings accounts allow you to earn interest from the money you deposit. This is because it borrows a small percentage of your money, and provides it to borrowers. In return, they pay you a small percentage of interest.
Money market account: This bank account (also known as an MMA) is dedicated towards short-term goals, and normally pay a higher interest rate than a normal savings account, but oftentimes changes depending on how the market is doing. This account gives the customer little check-writing abilities. Essentially, MMAs combine the ideas of a checking account and savings account, but pays higher interest with a trade-off of giving the customer a lack of ability to write checks and pay bills.
Certificate of deposit: A certificate of deposit is a type of savings account that holds a fixed amount of money over a fixed amount of time. When you cash in your certificate of deposit, the bank pays you the amount you put in initially plus interest, which varies depending on how long you held the certificate of deposit.
Individual retirement arrangement/Roth IRA: An Individual Retirement Arrangement, or an IRA is an account dedicated to long-term retirement saving. An IRA is tax-advantaged, meaning it can reduce your tax bill. A Roth IRA is similar to a traditional IRA in the sense of its purpose and effects. However, any money you put into a Roth IRA cannot be withdrawn whenever you want. You must wait until you retire to do so.
Brokerage account: A brokerage account is an investment account with no restrictions to withdrawal rules (no fees) and the amount of money you can put into the account. A brokerage account can assist in trading and investing in stocks, ETFs and other investments, and can help you especially when saving money long-term, but can also be used for short-term goals.

What are the requirements to set up these bank accounts, and with which banks?

You can set up a bank account with any non-federal bank. Therefore, you can set up a bank account with an investment bank, commercial bank, retail bank, and even credit unions.

Requirements to set up these assets:

Checking Account: One needs a social security number, an ID, such as a driver's license or passport, your birthdate, phone number, email address (contingent) and an initial deposit that is sometimes required from most banks. This fee can be around 25 -100 dollars to essentially activate your account. Checking accounts also require a minimum balance, or the amount required to keep your account, ranging from 100-2500 dollars.
Savings Account: One needs a government issued photo ID/Driver's license, a social security number or an Individual Taxpayer Identification Number, another form of documentation, such as a birth certificate or passport, a phone number, email address (contingent) and a proof of address. Savings accounts also require a minimum balance ranging from around 300-500 dollars.
Money Market Account: Requirements include a phone number, proof of address, email address (contingent) birth certificate, and a driver's license or a state ID. The minimum balance for a MMA can range from 1000-10000 dollars, or even more.
Certificate of Deposit: Once again, there is basic information that you need to set up this account, including your email address (contingent), phone number, date of birth, documentation, etc. Some issues do not require a minimum balance, while others can require a minimum balance ranging from 500 to 25000 dollars. Once again, you need to be 18 years old to create this account.
IRA: You need to be at least 21 years old to create an IRA account. An IRA is completely free, and typically does not require a minimum amount of money, but it is important that you still invest money in this. The requirements to create an IRA account are your address, date of birth, social security number, your phone number, etc.
Brokerage Account: Requirements to create a brokerage account are your social security number, address, phone number, date of birth, driver's license, etc. Some brokerage firms will allow you to set your initial payment relatively small, or range it higher from 1000 to 2000 dollars.

Key Takeaways

Just because you may not be able open up these accounts, doesn't mean you can't have one before being 18 years old. You are permitted to having either a joint or a custodial account. A joint account is an account your parent/guardian sets up that you both use, and a custodial account is a separate account from your parent/guardian that belongs to you, but is still technically supervised by your parent/guardian.
Even if one account has more benefits than another, it's important to understand how much money you want to put into the account and how much to create the account. This may be a reason for someone to activate a savings account rather than a money market account, which costs more money to create, and requires a large minimum balance.