- managing your money smartly
A 'banking guide' may seem trivial for someone relocating to America. After all, what's there to know? A bank is a bank, anywhere in the world.
Yes and No.
Remember this. While the reasons people move to America are myriad (professional growth, better opportunities, joining family, starting a new life), eventually most of us want to make money. The safety and management of that hard-earned money, therefore, becomes an important need that's worth a little education.
This banking guide walks you through basic but noteworthy concepts of money management, including types of bank accounts, how to maximize your interest rate, and specific recommendations on which institutions to bank with.
The need for a bank account is a no-brainer. You obviously need to a place to keep your money. A bank account is also necessary to receive direct deposits like salaries, or to make debit payments from. But is there more than one type of bank account? Aren’t all bank accounts alike?
Turns out bank accounts can differ widely in their characteristics. The 2 broadest categories of accounts you’ll see in America are checking accounts and savings accounts. And you need to have at least one of each type, for sure.
A checking account can be thought of as a ‘heavy transaction’ account. It allows the use of a debit card and/or checks, and there are generally no restrictions on the number of deposits and withdrawals that can be made. This is therefore your workhorse account – most of your spending should happen from here. In general, checking accounts offer a much lower interest rate (if at all) in return for the privilege of multiple transactions.
A savings account, as the name suggests, encourages you to save, and discourages you to spend. So it offers a higher interest rate, but in return has limits, balance requirements, and excessive withdrawal penalties.
A third type of account – the money market account – is a special type of savings account that offers higher interest rates compared to a basic savings account, but also has a higher minimum balance and charges a higher fees for breaching that balance.
Click here for a banking guide primer on different types of checking accounts, and which banks offer the best options.
Click here for a primer on savings accounts, and what banks offer the best options.
If you wish to invest in stocks, bonds or mutual funds, you need to open a different type of account - called a brokerage account. This account allows you to deposit money and use it to buy investment instruments for a commission fee. Brokerage accounts can be opened in most traditional financial institutions or with brokerage firms that specialize in buying and selling stocks and bonds.
For information on how to open a brokerage account and recommendations on specific, cost-effective brokerage firms, click here.
Certificates of Deposit (CDs)
If you can't digest the risk of investing in stocks, but want an aggressive, fixed rate of interest and are ready to sacrifice liquidity, your best option is the CD. The CD or Certificate of Deposit is the approximate US equivalent of the "fixed deposit" account one finds in other countries. Your money gets locked-in for a period of time (3 months, 6 months, 1 year, going up to 5 years). And in return, you get a rate of interest higher than what most savings or even monet market accounts offer. If you withdraw early, however, you are subject to a penalty.
CDs are offered by almost all banks and institutions that offer savings and checking accounts. For updated information on the best CD rates in the market, click here.
A really cool concept that allows you to maximize your interest rate but also gives decent liquidity is CD laddering.
For more banking guide information on what this is about, and how you can set up a CD ladder, click here.
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