Banking Definitions
Deposit Account Types
This is an account you use for transactions. Where savings is meant to hold the funds (more on that later). This type of account you would use for everyday use, you add funds via direct deposit (most common) or a cash transaction via ATM or Branch Teller. You are given a debit card that can be used with funds in your account. This is where you need to be careful. When you open the account and are asked if you want to opt-in for debit card overdraft, say no. This way, if you have no funds or less funds than the transaction the card will decline. This is one of the many ways banks make money off of you. If you opt-in for the debit card overdraft, you will be able to continue using the card even though you do not have any funds. Every time you swipe, it could cost you. Depending on the bank, it can cost you up to$ 45.00 per transaction. At this point, you have until the end of the bank day to get funds into the account or you will be charged their overdraft fee. Normally, the ATM cutoff is 10pm, be sure to check your banks hours. If you don’t add funds to your account by the end of the day, you will be charged the fee for every transaction made during the absence of funds and you will owe the bank the cost of the funds. Some banks may charge per day for every transaction you made during the absence of funds up to $300.00 per transaction, depending on the banks policy.
There are 2 types of savings accounts.
This type of savings account does not earn much interest.
Some banks call these type of accounts, money Markets. This type of savings earns higher interest (the bank will pay YOU better interest depending on the amount you have in the account). To have a High Yield Savings without fees, most banks require that you have over $5,000 in the account. In some banks, High Yield Savings accounts have the ability to write checks. However, these accounts are meant to hold funds.
Do your best not to consistently take money out of your savings, there is a Federal Reserve Regulation called Regulation D. Regulation D states that you cannot take out of a savings account more than 6 times in a statement cycle (a months time frame). If you happen to take out past the 6 times, you will receive a fee that cannot be reversed, in most cases. In the event that this happens 3 times, the bank will change the account into a checking account and the account can not be reverted back to a savings account. However, your bank will notify you via USPS and email if this seems to be a pattern. The only transfers that don’t count toward the 6, are the ones physically done by the Teller in a branch.
This is an account that locks your funds for a certain time frame and allows you to earn interest. You can take your funds out early but most banks make you forfeit the interest and/or charge an early withdrawal penalty fee. Although, there are some banks that do not have an early withdrawal fee on their CDs. Credit Unions typically allow you to earn more interest by offering higher interest rates.
Example: If you put $5000 into a 5 year CD at 3% APY (Annual Percentage Yield). What that means is the bank takes your $5000 and locks it up, this way you cannot use it. Each year for the next 5 years, you will earn 3% APY on your $5000. After the 5 years, the contract is over and you can choose another CD or put it back into a savings or checking account.
There are multiple types of retirement accounts. These are accounts that you can build and add to every year for your retirement. It is important for you to consult with a CPA to learn the amount you are able to put into your retirement account each year, as the amount can change every year. You are typically unable to take funds out of your retirement account. If you choose to take funds out of your retirement account before retirement age, you may be subject to a 10% penalty. There are only a few reasons that you are able to take out of your retirement plan without paying an early penalty fee, before retirement age.
Most commonly used. You put funds into your retirement account before tax. Due to placing funds into your account before taxes, this means the contributions may be tax-deductible. Which means, you may pay less income tax when you put it into this type of retirement account. The interest also is tax deferred (you won’t pay until you take it out.) Typically, you would not take out of your retirement until you reach a certain age (currently that age is 59 1/2).
You put funds into your retirement after your tax contributions. Which means, you won’t get income tax breaks when you add funds. However, the taxes are already paid and this way when you retire, you won’t need to pay taxes on your retirement account, including the interest. (I prefer this personally as I want to pay taxes now, not when I don’t have an income.
Self employed IRA can be Traditional or Roth- these are for self employed people and small business owners, these offer the ability for higher contribution limits than the normal IRA/Roth IRA.
Savings incentive match plan for employees are for small businesses that will do an employer match. (Please refer to 401k below)
This is an account you open when you inherit an IRA from someone who passed away. This can be Traditional or Roth. Consult with a CPA before taking funds out of this account.
Lets go to employer plans
This is a for profit company plan. With this plan, you are able to make contributions via your pay check and it goes into an investment account before taxes. Depending on the company, you can choose what to invest in, most have preset holdings that you are able to choose from. Most employers offer matching contributions anywhere from 4-10%, it could be more or less depending on the company. What this means is if you put in 8% of your paycheck the company will match that 8% as well. Check to see if your company offers plans like this and find out what they will match up to. With this plan, you will pay taxes when you take your money out, once you hit retirement age. If you change jobs, you can roll this over to the new company or into an IRA.
This is the same as a 401k but after taxes (Similar to the ROTH IRA). These are becoming more available. When the company does match, it is not Roth (after taxes) which means, that when you retire you will have a Roth portion and a traditional (before taxes) portion and will need to pay taxes on the portion that the company contributed/matched. There was an act passed recently, called Secure 2.0. Secure 2.0 makes it so that an Employer can match in the Roth part. This needs to be offered by your company.
This is Similar to the 401k, but for schools, certain non-profits, some states and local governments.
This is similar to the 401k. This is a deferred compensation plan for some states, local governments and other tax exempt organizations.
If you want to discuss what your employer offers, please do not hesitate to reach out and book an appointment here.
Investments
There are a variety of ways you can invest. Please note, with any investment comes risk. Please make sure you understand what you’re doing before you invest. If you don’t know, ask for help
A stock is a share of ownership in a company. When you buy a stock you become a part owner of that company. Giving you entitlements to that companies assets and earnings. Companies offer stock to raise money for their business. When you are buying in, you are doing this in hope that the companies value will increase. However, that doesn’t always happen.
A bond is a debt security. It is essentially a loan from a company, the government, or municipality that you can buy into. The issuer (which is the company, government or municipality) promises to pay back the amount purchased plus interest over the life of the bond. Government and Municipal bonds are issued by the government or local towns for projects like roads, parks and other large projects. Corporate bonds are secured by the company. You need to check the bond rating to understand the risk. They rate it from AAA-D, with AAA being the highest and most secure companies. As with any investment, it is important to do your research.
This is a type of fund that is traded on a stock exchange. These typically hold a bunch of different assets, such as stocks, bonds and commodities. They are designed to track a certain index (a statistical measure to track a group of stocks) depending on the fund. There are a bunch of different types of ETFs you can choose from. For further information, schedule an appointment here.
This investment gathers money from different investors to buy a variety of securities, such as stocks, bonds and other assets based on the funds specific goal. There are different types of Mutual Funds. For further information, schedule an appointment here.
Similar to the deposit side, there are brokerage CDS on the investment side. Brokerage CDS are also FDIC (Federal Deposit Insurance Corporation) insured to a point. The difference being, these are traded on the market, and typically have higher interest rates. Similar to the deposit CD, you sign up for a time frame for a certain range of interest and then you hold it for a specified time frame. The interest on the brokerage CDs can fluctuate, depending on the market. Your principle(what you put in) is not at risk but the interest rate is. Please make sure you understand the terms before purchasing.
In this section, we have covered the basic’s for investment opportunities, to give you general knowledge. For more information regarding investment’s, please schedule an appointment here.
Credit cards
A credit card is an open line of credit you use and pay off. This is where a lot of people get into trouble financially, which makes the use of credit cards dangerous as it is a slippery slope. Credit cards become dangerous when a consumer is charging their card and only paying the minimum payment, which helps interest accumulate and sometimes those interest rates are extremely high. It is a common misconception to think that keeping a balance on your credit card will help build your credit score. In fact, charging your card and paying it off by the end of the month (or as often as you want) will help your credit score increase. The only time balance matters is when you have charged above 50% of what your credit line is worth and you are unable to pay it down quick enough, in which case it will negatively affect your credit. It is okay to hold your balance for a bit, but if its becoming a common theme, you may want to look into other options with better rates. If you are struggling to get your credit card down and need guidance on what steps to take next, schedule an appointment here, and let’s figure out your best options moving forward. Credit cards are a valuable resource. While they are valuable, they are extremely dangerous. You can use credit cards to your advantage by playing the rewards game. (We will discuss this further in the travel section.)
Typically, there are only a few categories of cards. They are Secured, Cash Back, Travel, and Low interest.
These are for persons that either have no credit history or bad credit history. These are typically used to help rebuild your credit, you will give the bank or credit card company money, that they lock up and issue you a card with that same dollar amount limit. This does not mean you can use the card to the max and not pay it. You must pay it off when you use your line of credit. If you choose to go this route, you must make sure to pay it in full or nearly full every month. This way you are proving to the bank or credit card company that you are responsible enough for them to upgrade you to a credit card with no backing. Typically, after 6-12 months of using a secured card and having no late/missed payments, you can typically call or go into a branch and ask if you qualify for a non-secured credit card. Please note that if you have bad credit, it will take longer for you to obtain a non-secured credit card, as they can see mistakes were made in the past, which is why the secured credit card is valuable to building their trust. Once you have had the secured credit card with no problems, and you obtain a non-secured credit card, you can then close the secured card and get your funds back that the bank or credit card company locked up.
These cards are exactly what the name suggests. You use the card and get cash back on purchases. Most cards have different categories for spending, such as 4% on gas, 3% on groceries, 2% at restaurants, etc. If you want cash back, search around for the higher percentage categories that work best for your spending habits. Depending on the bank where you get your cash back card, they may set a limit on the higher percentage cash back purchases and once you meet that spending limit, the cash back percentage will decrease until the anniversary of when you first got your card. Some banks will store the cash back and pay out each month and others may hold the cash back until you inquire and then deposit into your own account. Most banks hold the cash back until the client inquires.
These cards are used by people who know they are going to buy something and can’t pay it back for a while. Interest rates vary. These cards typically have a 0% interest period on new purchases. This credit card option is perfect when you need to buy something but need time to pay it off before interest starts to accumulate. You still need to make monthly payments (if not more) on these while its sitting at 0%. Please don’t think you can use it and not pay it for 15 months.
Balance transfer is where they will offer you another 0% for 15 months, if you transfer the balance to a new card. Typically, there is a 3% one time transfer fee. When this is an option, you transfer the balance and then get some relief on the interest side while you continue to pay it off. Most people use this strategy by moving from bank to bank until they can pay it off. You typically cannot do a balance transfer within the same bank as the card, you would need to find a different banking institution. For additional information, schedule an appointment here.
These cards can be tied to an airline or to a bank. Some are tied to theme parks or other experiences. The main cards are through airlines and banks. These normally come with sizable sign-up bonuses. This mean that when you open a card, in order to receive the sign up bonus, you must spend a certain amount within a set time frame. If your goal is to travel, there are many options to rack up the travel points and travel without spending a ton on flights, hotels, etc. If you would like to learn more, please schedule an appointment here.
Disclaimer: As with any credit card, make sure you understand the benefits you are getting and can get when signing up. It is equally as important to understand the consequences or interest rate if you’re not able to pay it off.
Parents there are ways to help your newly adult child get credit without giving them a card. Please schedule an appointment to learn more..