Types of Deposit Accounts: Beyond Traditional Checking and Savings Accounts
Most personal bankers own two types of accounts. A checking account tied to a savings account is what most banks offer new customers when introducing them to the bank. But beyond traditional checking and savings accounts, there are other types of deposit accounts to help consumers protect and grow their money.
Recently, we published Structuring Deposits: The 3 Most Important Accounts a Business Needs. This article shares ways for a business to structure deposits to fully protect and earn an optimal return while keeping funds accessible. Since then, we received feedback asking us to explain the different deposit options available to consumers as well.
You asked. We deliver.
There are many types of deposit accounts available, essentially one to fit nearly any need. For simplicity here, we break them into three basic categories – traditional, higher interest and investment.
Traditional Accounts: Checking and Savings Accounts
Most people are familiar with traditional accounts: checking accounts and savings accounts. Consumers can typically find free online checking account with no opening deposit; accounts that earn small amounts of interest; and everything in between.
It’s important to think about how you plan to use the money in the account and then find the one that best meets your needs. For example, if you want 24/7 access to cash, you will want an account that includes ATM use. If you travel frequently or live far from a branch, you may want online and mobile banking. Those who want to view statements any time, day or night could benefit from e-statements. The options are nearly endless.
Be sure to do your research and do not hesitate to call or visit to be sure your questions are answered. Create a spreadsheet of needs — online access, mobile application, e-statements, mobile deposit, online and mobile transfer — then interview potential banks to determine which deliver what you need.
Higher Interest Accounts: Great for People Who Like Earning Money Off Interest
Higher interest accounts are just that – accounts that pay higher interest on the balance in the account. In that way, they might look like traditional accounts. The terms and conditions are normally quite different, however.
Many higher interest accounts have minimum deposit requirements to open, plus monthly or daily requirements and charge a fee if the balance dips below that amount. Some limit the number of transactions you can have over a given period. Others require that you leave the account untouched for a specified length of time.
Let’s look at some representative examples using Altabank accounts. These are not all-inclusive, nor do they reflect what other banks might offer.
Premier Money Market Account
If you will maintain a minimum balance — in this case $5,000 — and do not need frequent access to the money, you could consider a Premier Money Market account. A Premier Money Market account acts like a traditional account in that it includes ATM access plus online and mobile banking. However, it also has a maximum number of transactions allowed during a 3-month period and, of course, the $5,000 minimum balance. In exchange, you receive a higher interest rate.
Certificate of Deposit (CD)
Those who want to earn higher interest and do not need access to funds can consider a Certificate of Deposit (CD). A CD is a deposit instrument that has a set maturity period or time that the money must remain in the account to receive the maximum interest available. At Altabank, the maturity period ranges from 3 months to 60 months. Normally the longer the period, the higher the rate. But banks will also offer CD specials that combine a specific maturity period at a more appealing rate – Altabank currently has a special 4-month CD.
It's important to note that just because a CD has a set maturity period, it doesn’t mean you can’t get your money if you need it. Just be ready to pay a penalty for withdrawing funds before the CD reaches its term.
Another way of earning higher interest is to set up a sweep account. A sweep account is a special account in which you define a set amount of money you need in your account to cover expenses. When the amount in the account exceeds that amount, the additional money is “swept” out and can be used for different things – people who want to earn more interest on that money might deposit the amount in a separate account like a Premier Money Market or similar.
A Note on Deposit Insurance
FDIC deposit insurance received heightened attention recently because of the Silicon Valley Bank collapse. There is a lot of fine print associated with FDIC insurance, but for simplicity’s sake, let’s stick to the basic fact that the FDIC insures deposits for account holders up to $250,000 in all of their accounts combined. For additional information regarding FDIC insurance coverage, including amounts of coverage, please see the FDIC’s website.
Consumers and businesses with more than that in their account(s) may worry that any amount over the maximum will be uninsured. At Altabank, that isn’t the case.
We offer an Insured Cash Sweep (ICS®) account to offer insurance on balances above $250,000. The idea is that amounts over $250,000 are swept into another deposit account at another bank that belongs to what is called the ICS network, a group of banks that participate in the program to insure large deposits. If you set up an ICS account, your banking relationship will be with Altabank (versus another member bank) and you will have access to all your funds. The benefit is that by distributing deposits across the network, each is insured.*
Investment Accounts: How to Buy Stocks, Bonds and Treasury Bills
When considering investment accounts, think of stocks and bonds. Entire books cover investing and investment accounts, so we’ll try to keep this simple to make clear the difference between a deposit account and an investment account.
Stocks may be the most common investment account available. A stock represents partial ownership of a company. People who own stock in a company are known as shareholders. Anyone who wants to become a shareholder in a company can buy shares in that company at a price found on a stock exchange such as the New York Stock Exchange (NYSE) or the NASDAQ in the US (other countries have their own exchanges, which people in the US can interact with).
Let’s use an example. Suppose I want to become a shareholder at Nike because I love their products and corporate vision. Nike is traded on the NASDAQ under the symbol NKE. I decide how many shares of Nike I want or can afford to buy. I set up an account with a stockbroker or online with a self-service brokerage like Schwab and place my order to purchase shares. If the price per share goes up from where I bought mine, I make money; if they go down, I only lose money if I sell my shares, which makes buying stocks a long-term financial strategy. (Note this is a simple example – the number of ways you can get into stocks is too many to count).
Another type of investment account is a bond. Bonds are issued by companies or governments to raise money. Think of buying a bond as loaning your money to the issuer for a set period. Bonds have maturity dates and interest rates (known as yield). While you own the bond, you receive the interest, and at maturity, the issuer pays you back the amount you initially paid.
For example, if you buy a 10-year bond with a 2% yield for $1,000, you will receive $20 per year for 10 years ($200), assuming the interest rate doesn’t change. Rate changes determine earnings – you earn more when they go up, less when they go down. Unless the rate goes to zero, you will earn something.
Treasury bills have gotten much attention lately because they offer attractive rates, often better than traditional deposit accounts. These are issued by the U.S. government as a way to raise money. T bills, as they are known, have a face value and are offered at a discount. This means a $1,000 T bill might be acquired for $950. While they don’t pay interest, when the bill matures you would be paid the face value of the bill, or $1,000. T bills have maturity rates of 1 year or less and are fully guaranteed by the government, meaning if you purchase one you will receive your payment once the bill reaches maturity.
Whew…that’s a lot of information. And it just scratches the surface of the options available to you. Remember: Before opening any account or making an investment, consult a professional – a banker for deposit accounts and a broker for stocks, bonds and T bills. Altabank bankers stand ready to help you evaluate deposit options, so feel free to give us a call or stop by a branch (Altabank does not offer investment advice nor does it trade stocks or bonds).
*Placement of your funds through the ICS service is subject to the terms, conditions, and disclosures set forth in the agreements, including the ICS Deposit Placement Agreement, you enter into with us. Limits and customer eligibility criteria may apply. Program withdrawals vary by account.
ABOUT THE AUTHOR
Stan Sorensen is Chief Marketing Officer at Altabank. He joined the bank in 2019, and has previous marketing and leadership experience in software and healthcare. When Stan is not in the office, he enjoys spending time in mountains.