Category: 1. Banking 101

Federal deposit insurance protects consumers’ bank account balances up to a certain amount as long as they’re at a legitimate bank that is a member of the Federal Deposit Insurance Corporation (FDIC). According to the FDIC, since its creation in 1933, “no depositor has ever lost even one penny of FDIC-insured funds.”

Under legislation passed during the financial crisis of 2008, FDIC insurance protection was expanded from $100,000 to $250,000 per depositor across all accounts of the same category.²² If the amount of money you keep in bank accounts exceeds current federal deposit insurance limits, you’ll need to do some planning so that if a bank fails, all of your money will be protected, not just the first $250,000.

There’s nothing wrong with doing this—it’s perfectly legal. If your account balance exceeds FDIC-insured limits and you want to make sure all your money will be safe, visit the FDIC’s website for more information. Ally Bank also has a helpful page explaining how you could achieve $2 million in FDIC coverage at the same bank by using a variety of accounts. You can also, of course, keep your money in more than one bank to spread your risk.

Spreading your money across several accounts isn’t the only way to protect it. Whether or not you are banking online, you want to prevent unscrupulous individuals from stealing your identity and your funds. There are steps you can take, such as shredding bank statements and being on the lookout for card skimmers.

The Bottom Line

Banks provide security and convenience for managing your money and sometimes allow you to make money by earning interest. Convenience and fees are two of the most important things to consider when choosing a bank, whether you are opening a checking, savings or money market account or putting funds into a certificate of deposit. Be sure to develop methods to stay on top of your account balances in order to avoid fees, declined transactions, and bounced payments.

To protect your money from electronic theft, identity theft, and other forms of fraud, it’s important to implement basic precautions such as having complex passwords, safeguarding your PIN, and only conducting online and mobile banking through secure internet connections.

A certificate of deposit (CD) is a savings certificate entitling the bearer to receive interest. In many ways, it is similar to a bond, except that instead of paying interest periodically over the life of the investment, it pays all its interest at once when it matures. Also, because CDs are a bank product, they come with FDIC insurance.²

A CD has a maturity date and a specified fixed interest rate and can be issued in any denomination. The term of a CD generally ranges from one month to five years. The amount of interest a CD pays depends on its term, with longer terms generally paying higher rates. CDs, like savings accounts, will pay more or less depending on market conditions.

In the low-interest rate environment, the United States has experienced since 2008, CDs have paid little, but they often pay more than an online savings account does, depending on which banks you’re comparing. The average 60-month (5-year) CD rate in June 2021 is 0.27%, significantly higher than the average jumbo savings account rate of 0.06%.¹⁶

Along with the higher interest rate you’ll earn with a CD come restrictions on withdrawing your money before the CD matures. Do so and it will usually cost you money in the form of an early withdrawal penalty.

The money market is a segment of the financial market where financial instruments with high liquidity and very short maturities are traded. It is considered a safe place to put money due to the highly liquid nature of the securities and their short maturities. While money market investment accounts are not without risk, money market deposit accounts are virtually risk-free because they are FDIC insured, just like checking and savings accounts. Money market deposit accounts should not be confused with money market mutual funds, which are offered by investment companies and are not FDIC insured.

5,116

The number of FDIC-insured financial institutions in June 2021, according to the FDIC.

Money market deposit accounts tend to have higher minimum balance requirements than regular or online savings accounts. This minimum usually ranges from $100 to $2,500. There may be a monthly fee associated with this type of savings account. The interest paid will be higher than that on a regular savings account balance, but possibly less than an online savings account would pay. For example, as of June 28, 2021, 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. From a functional standpoint, you may not notice much, if any, the difference between a money market deposit account and a regular or online savings account.

Many banks offer automatic savings plans, and these can be a great way to develop a regular habit of saving money. At some banks, establishing such a plan is also a way to obtain lower banking fees.

An automatic savings plan is something you need to set up. It simply involves choosing a specific dollar amount that you’re willing to have automatically transferred from your checking account to your savings account, usually once a month and on the same day every month (except when that day falls on a weekend or holiday).

If you have an idea of how much money you generally have remaining after meeting your expenses each month, you can use this as the amount that you transfer automatically to your savings account. On the other hand, you may want to allocate your extra funds to several different places each month, such as a retirement account, investment account, and savings account. In this case, you’ll want to choose a smaller amount. If you don’t know how much money you can safely contribute to a savings account each month, creating a budget will help you figure it out. You can always start with a modest amount, such as $20, and increase it later.

Although some people are nervous about the idea of committing to saving a certain amount automatically each month, most investment gurus say that paying yourself first is a key component of building wealth. The other major benefit of establishing an automatic savings plan is that you don’t have to remember to set aside money for savings each month—your bank will do it for you.

An online savings account differs from a regular savings account in that you deal with it exclusively through the internet (sometimes also by phone, but not in person) and it pays a higher interest rate. As of June 2021, for example, one of the highest interest rates available for a savings account was 0.70% for a Sallie Mae SmartyPig account. Meantime, Chase, the largest bank in the United States, was paying 0.01% on its savings accounts.

Some online savings accounts are offered by the same banks that provide regular checking and savings accounts, while others are offered by banks that don’t have physical branches and exclusively offer online products. If you’re comfortable with online banking, an online savings account may be a better choice than regular savings account because of its greater earning potential. Many online savings accounts also do not have a minimum deposit to open an account, minimum daily balance requirements, or a monthly maintenance fee, unlike many savings accounts associated with brick-and-mortar banks.

With some types of savings accounts, both regular and online, the rate of interest the bank will pay you depends on how much money is in your account. These accounts are called tiered-rate accounts. Customers with higher balances will earn interest at a higher rate.

Almost all banks offer regular, basic savings account that you can sign up for in person, by phone, or online. This is the type of savings account you might get by default from a traditional brick-and-mortar bank. The difference between this account and a checking account is that it generally doesn’t have check-writing privileges and it may have a higher opening deposit requirement and, possibly, a higher daily minimum balance requirement. This type of account may be called “Statement Savings,” “Goal Savings,” “Day-to-Day Savings,” “Way2Save,” “Savings Plus,” or something else that the bank’s marketing department thought was clever.

A regular savings account is easy to set up and maintain. You can link it directly to your checking account at the same bank and quickly and easily move money between the two accounts. Having these two accounts linked can sometimes help you avoid overdraft charges and minimum balance fees from your checking account.

The main disadvantage of this type of account is its often-pitiful interest rate. The national average savings account rate as of June 2021 is just 0.06%, according to the FDIC. If you’re serious about making your money work for you, you’ll probably want to minimize the amount of money you keep in a regular savings account—if you use one at all—and opt for a more powerful savings vehicle instead.

After checking accounts, savings accounts are the next offering most people think about when they think about banking. Having a savings account where you can securely store extra cash that you can access easily in an emergency—but not so easily that you’ll spend the money on things you didn’t intend to—is a key component of any good personal financial plan. While a checking account helps safeguard your money and facilitate bill paying, simple savings account helps you set aside money for near-term goals like going on a vacation, paying a large upcoming bill, or establishing an emergency fund.

There are a number of different types of savings products that banks offer; ahead are the pros and cons of each. First, we will cover the two types of savings accounts. 

As a general policy, banks place holds on customers’ deposits to protect themselves from banking fraud. When you look up your bank account balance at the ATM or online after making a deposit, you may see a difference between your account balance and your available balance. This lets you know that a deposit you’ve made hasn’t cleared yet. It’s extremely important to be aware of how your bank’s deposit hold policy works so that you aren’t penalized for trying to make a payment with money you don’t yet have access to. The bank’s hold policy will always apply to business days, not calendar days. A business day is any day that is not a Saturday, Sunday, or federal holiday.

How long you’ll have to wait to access deposited funds varies. According to the U.S. Treasury’s Office of the Comptroller of the Currency, a bank has some flexibility in the hold times it imposes on deposits: It can make them available immediately, or it can delay deposit availability up to the maximum length of time prescribed by law under federal regulation.

There may also be cutoff times, which vary by bank, that affect when your deposited funds will become available. A bank might state, for example, that deposits must be received by 9:00 p.m. ET for same-day credit and funds will generally be available the next business day. The account agreement you receive when you open a checking account will explain your bank’s rules on deposit holds, but here are some general guidelines.

• When you are a new customer who has had an account with the bank for 30 or fewer calendar days, the bank is allowed to hold your deposits longer under the Expedited Funds Availability Act.
• Larger deposits, especially those over $5,525, usually take longer to credit to your account than smaller deposits. Banks can hold deposits in excess of $5,525 (as of 2021) for up to nine business days.
• Cash deposits are generally available by the next business day. Cash may not be available immediately even if deposited with a teller.¹³
• Government checks deposited via teller will be available no later than the next business day.
• Direct deposits become fully available to you the next business day following the deposit. (That’s why you might see your paycheck in your account late on Thursday night—so you can access the money on payday, Friday, instead of having to wait until Monday.)

ACH transfers can also be used to transfer money between financial institutions. If you have a checking account with a particular bank and a brokerage account with a particular investment company, for example, you can use ACH transfer to send money from your checking account to your investment account (or vice versa).

Here’s another example of how you might deposit money to your account electronically: Suppose you have a PayPal account connected to an eBay seller account, which you use to earn money by selling toys, clothes, and other items from your home that you no longer want. You might prefer to conduct all your banking activities from your primary checking account, so you first need to transfer the money you’ve earned from your PayPal account to your bank. You can do this online through the PayPal website or through the PayPal mobile app by providing your banking information.

You can also deposit money to your bank account after receiving money from friends, family, or people you work for through an online payment service like Venmo, PayPal, or Popmoney. Once the money is in that account, you can then transfer the money to your checking account. Sometimes there is a fee associated with these transactions.

You can also add money to your account via direct deposit of your paycheck if your employer offers this payment method. This arrangement can make life easier for both you and your employer. 

If you are paid by direct deposit, the funds should be available to you on payday. You won’t experience the lag time that you would if you had to deposit a paper check. Some banks will waive monthly fees or offer other incentives if you have your paycheck deposited directly. Other types of payments that you can receive by direct deposit include annuity payments, dividend and interest payments, pensions, bonuses and commissions, Social Security benefits, child support payments, and Veterans Administration benefits.

Direct deposits are conducted via automated clearing house transfer, more commonly known as an ACH transfer. This type of transaction is a way of sending money electronically. It often takes several days for the transaction to complete, but there are generally no fees involved. The sender can decide the date on which the payment will be available to the recipient—this is how you can get your money on payday without delay via direct deposit. To conduct an ACH transfer, you’ll need to give your name, bank account routing number, and account number to the company or institution you want to receive money from.