With the increase in online banks and other financial institutions, Americans have more choices than ever when it comes to where they keep their money. To navigate the system with ease, we’ve put together the essential banking terms you need to know.
Savings account: A bank account that earns interest. The intention of a savings account is for money to be held for a long period of time. As a result, federal regulations limit the number of withdrawals to six per month. A high yeild savings account is a type of savings account earns a higher interest rate than a typcial savings account.
Checking account: A bank account that facilitates spending money. Because money is moving through these accounts, they typically do not earn interest, but there are no limits on the number of withdrawals you can make.
Money Market account: A type of savings account that offers a higher interest rate in exchange for a higher minimum deposit.
Initial deposit: The initial amount of money you first deposit into your account.
Minimum deposit: Some banks and financial institutions require you to deposit a minimum amount of money in order to open an account.
Account balance: The total amount of your initial deposit plus any subsequent deposits and the interest you’ve previously earned on your deposits, less any withdrawals you’ve made.
Minimum account balance: Some banks and institutions require you to maintain a minimum amount of money in your account in order to retain a high interest rate and/or to avoid additional fees.
Interest rate: The percentage of your account balance that the bank or financial institution pays you for the privilege of holding your money for you.
Interest: The money a bank or other financial institution pays you for the privilege of holding your money. The interest the bank pays you is determined by multiplying your account balance by the interest rate. Your bank will pay you interest on your account balance every time your account “compounds” (see next definition).
Compounding: The schedule on which your bank pays you interest on both your original deposit and your previous interest earnings. Most schedules are: yearly, monthly, or daily. The more often your interest compounds, the faster your money grows.
Annual Percentage Yield (APY): The total amount of interest an account is expected to earn in a year. It’s calculated using the interest rate and the number of times interest is paid in a year.
Debit card: A card issued by your bank or institution which you can use to access your money. Debit cards can be attached to both checking and savings accounts and used at ATMs, the bank counter, or at the point of sale in order to withdraw cash or pay an expense from your account. Benefits providers, like HSA or FSA accounts, may also issue a debit card tied to that account to be used for specific, qualifed expenses.
Account holder: The person who owns the account. This is usually the person who opens the account but can be a minor, or multiple people (i.e. a married couple).
Fees: Some banks and financial institutions charge fees for different types of services. These can include fees for electronic banking transfers or other services, a monthly administrative fee charged to your account for account maintenance, and or fees that are assessed if the account balance falls below a certain amount or there are excess withdrawals. Before you open an account with a bank or financial institution, make sure you ask for a complete fee schedule so you know exactly what you will be charged, for what, and when.
FDIC (Federal Deposit Insurance Corporation): An independent federal agency in the United States that regulates the safety and security of banks and other financial institutions. One major function of the FDIC is that it insures the deposits you make to participating banks and institutions. That means if said bank or institution fails, goes under, or comes under some other duress, the FDIC will replace your money up to a certain threshold.
Loan: A loan is money you borrow from a bank or financial institution (i.e. “lender”), and in return for giving you money, the lender will charge you interest on the amount. As you pay back the loan, your monthly payments will include a principal and interest. The interest a lender charges you is the same concept as the interest earned on your savings or money market account, but its function is reversed. Instead of money paid to you for the privilege of holding your money, it’s money you pay for the privilege of borrowing the bank's money.
Loan Amount: The original amount of money you borrow.
Principal balance: What remains of the original loan amount after you’ve begun making payments.
Knowing these basic banking terms can empower you to be a more informed choice when choosing a bank or opening a new account, and take initiative with your money to make sure it’s supporting your life.
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Disclaimer: the content presented in this article are for informational purposes only, and is not, and must not be considered tax, investment, legal, accounting or financial planning advice, nor a recommendation as to a specific course of action. Investors should consult all available information, including fund prospectuses, and consult with appropriate tax, investment, accounting, legal, and accounting professionals, as appropriate, before making any investment or utilizing any financial planning strategy.