Financial literacy is the ability to understand and make use of a variety of financial skills, including personal financial management, budgeting, and investing. It also means comprehending certain financial principles and concepts, such as the time value of money, compound interest, managing debt, and financial planning.
Achieving financial literacy can help individuals avoid making poor financial decisions and help them become self-sufficient and achieve financial stability. Key steps to attaining financial literacy include learning how to create a budget, tracking spending, paying off debt, and planning for retirement. Educating yourself on these topics also involves learning how money works, setting and achieving financial goals, becoming aware of unethical/discriminatory financial practices, and managing financial challenges that life throws your way.
Introduction to Bank Accounts
Bank accounts are typically the first financial account you’ll open and are necessary for major purchases and life events. Here is a breakdown of which bank accounts you should consider and why they are step one in creating a stable financial future.
Why Do I Need a Bank Account?
Though the majority of Americans do have bank accounts, 6% of households in the United States still don’t have one. Why is it so important to open a bank account? Because it is safer than holding cash. Assets held in a bank are harder to steal, and in the United States, they’re generally insured by the Federal Deposit Insurance Corporation (FDIC). That means you’ll always have access to your cash, even if every customer decided to withdraw their money at the same time.
Many financial transactions require you to have a bank account in order to:
- Use a debit or credit card
- Use payment apps like Venmo or PayPal
- Write a check
- Use an ATM
- Buy or rent a home
- Receive your paycheck from your employer
- Earn interest on your money
Online vs. Brick-and-Mortar Banks
When you think of a bank, you probably picture a building. This is called a “brick-and-mortar” bank. Many brick-and-mortar banks also allow you to open accounts and manage your money online.
Some banks are only online and have no physical buildings. These banks typically offer the same services as brick-and-mortar banks, aside from the ability to visit them in person.
Which Type of Bank Can I Use?
Retail banks: This is the most common type of bank at which people have accounts. Retail banks are for-profit companies that offer checking and savings accounts, loans, credit cards, and insurance. Retail banks can have physical, in-person buildings that you can visit or be online only. Most have both. Banks’ online technology tends to be advanced, and they often have more locations and ATMs nationwide than credit unions do.
Credit unions: Credit unions provide savings and checking accounts, issue loans, and offer other financial products, just like banks do. However, they are not-for-profit organizations owned by their members. Credit unions tend to have lower fees and better interest rates on savings accounts and loans. Credit unions are sometimes known for providing more personalized customer service, though they usually have far fewer branches and ATMs.
Assets held in a credit union are insured by the National Credit Union Administration (NCUA), which is equivalent to the FDIC for banks.
Which Types of Bank Accounts Can I Open?
There are three main types of bank accounts the average person may want to open:
- Savings account: A savings account is an interest-bearing deposit account held at a bank or other financial institution. Savings accounts typically pay a low-interest rate, but their safety and reliability make them a sensible option for saving available cash for short-term needs. They usually have some legal limitations on how often you can withdraw money, but they’re generally very flexible, so they’re ideal for building an emergency fund, saving for a short-term goal like buying a car or going on vacation, or simply storing extra cash you don’t need in your checking account.
- Checking account: A checking account is also a deposit account at a bank or other financial institution that allows you to make deposits and withdrawals. Checking accounts are very liquid, meaning they allow numerous withdrawals per month, as opposed to less-liquid savings or investment accounts, though they earn little to no interest. Money can be deposited at banks and ATMs, through direct deposit, or another type of electronic transfer. Account-holders can withdraw funds via banks and ATMs, by writing checks, or using debit cards linked to their accounts.
You may be able to find a checking account with no fees. Others have monthly and other charges (such as for overdrafts or using an out-of-network ATM) based on, for example, how much you keep in the account or whether there’s a direct deposit paycheck or automatic-withdrawal mortgage payment connected to the account. Lifeline and second-chance accounts, available at some banks, can help those who have difficulty qualifying for a traditional checking account.
- High-yield savings account: A high-yield savings account is another type of savings account that usually pays a much higher rate of interest than a standard savings account. The trade-off for earning more interest on your money is that high-yield accounts tend to require bigger initial deposits, larger minimum balances, and higher fees. You might be able to open a high-yield savings account at your current bank, but online banks tend to have the highest interest rates.
What is an Emergency Fund?
An emergency fund is not a specific type of bank account but can be any source of cash you have saved to help you handle financial hardships like job losses, medical bills, or car repairs. How they work:
- Most people use a separate savings account.
- The account should total enough to cover three to six months’ worth of expenses.
- Emergency-fund money should be off-limits for paying regular expenses.