The four types of bank accounts: Which are right for you?

M1 Team
M1 Team June 7, 2023
M1 Blog, Man Laptop

Bank accounts serve as the foundation for managing our personal finances, providing low-risk accounts to deposit, build, and access our wealth. There are four types of bank accounts to choose from, each with different purposes, features, advantages, and disadvantages.

Many clients have more than one type of bank account. Which accounts you select ultimately comes down to your personal financial goals. Consider factors such as liquidity needs, interest rates, accessibility, and the time horizon of your savings goals.

In this post, we’ll define checking accounts, savings accounts, certificates of deposit, and money market accounts and how each one works to help you save.

What is a checking account?

A checking account is a deposit account that allows you to easily deposit and withdraw funds for everyday transactions. They can be accessed through ATMs, checks, debit cards, and online banking.

Unlike other types of bank accounts, checking accounts usually don’t pay interest. However, they can sometimes provide easier access to your money.

What can you use a checking account for?

A checking account is used for everyday transactions.

Advantages

  • No limits on withdrawals
  • Ability to deposit and withdraw at any time
  • Highly accessible through debit cards, checks, ATMs, and banking apps
  • FDIC-insured if offered by a Member FDIC institution

Disadvantages

  • Low interest rates but usually no interest at all
  • Potential fees for using ATMs outside of your banks network

What is a savings account?

A savings account is a deposit account that allows you to earn interest on your money. It offers easier access to your funds without penalty, but some banks and other financial institutions have a monthly limit on the number of transactions.

High-Yield Savings Accounts

A high-yield savings account is a savings account that offers a higher interest rate compared to a regular savings account.

M1’s High-Yield Savings Account currently offers 4.00% APY1 with unlimited transactions and up to $5 million in FDIC-insured coverage.

What can you use a savings account for?

A savings account can be used for short- and long-term savings goals.

Advantages

  • Potentially high interest rate
  • Unlimited withdrawals (unless your bank enforces the six-transactions-per-month regulation)
  • FDIC-insured if offered by a Member FDIC institution

Disadvantages

  • Rates can change over time
  • Sometimes lower interest rates than CDs

What is a certificate of deposit (CD)?

A certificate of deposit (CD) is a deposit account that usually offers a higher fixed interest rate than a traditional savings account. When you open a CD, the money you deposit must stay in the account for a set period of time (typically anywhere from six months to five years).

In exchange, the bank or credit union pays you a fixed rate of interest on your deposit. If you withdraw your money before the maturity date, you may be subject to an early withdrawal penalty, which is usually the equivalent of several months of interest.

What can you use a CD for?

A CD can be used for longer-term savings goals.

Advantages

  • Sometimes higher interest rates than traditional savings accounts
  • Fixed rate of return for the term of the CD
  • FDIC-insured if offered by a Member FDIC institution

Disadvantages

  • Penalties for early withdrawal
  • Limited access to your money
  • May not have higher interest rates than high-yield savings accounts

Learn about the differences between CDs and savings accounts here.

What is a money market account?

A money market account is a deposit account that combines features of both savings and checking accounts, offering competitive interest rates and easy access to funds. It typically requires clients to maintain a high account balance.

What can you use a money market account for?

A money market account can be used for short- and long-term savings goals.

Advantages

  • Competitive interest rates that may be increase with higher balances
  • Easy access to funds while potentially earning a higher APY
  • Accessible through debit cards, checks, ATMs, and banking apps
  • FDIC-insured if offered by a Member FDIC institution

Disadvantages

  • Sometimes requires a higher minimum balance
  • May carry fees
  • Potential transaction limits
  • APY usually lower than a high-yield savings account

The M1 line

When deciding on which account or accounts make sense for your financial goals, consider factors such as liquidity needs, interest rates, accessibility, and your time horizon. By understanding the different types of bank accounts and their advantages and disadvantages, you can make informed decisions to manage and build your wealth effectively.

You may want to consider a high-yield savings account, since it has all of the strengths of the other bank accounts but almost none of their weaknesses. With the M1 High-Yield Savings Account, you get unlimited transactions (like a checking account), an industry-leading 4.00% APY1 (better than nearly all money market accounts), and easy liquidity (unlike a CD).

Start saving now.

DISCLOSURES:

M1 is not a bank. M1 Spend is a wholly-owned operating subsidiary of M1 Holdings Inc. M1 High-Yield Savings Accounts are furnished by B2 Bank, NA, Member FDIC. 

1Obtaining stated APY (annual percentage yield) or opening a savings account does not require a minimum account balance. Stated APY is valid from date of account opening. Account fees may reduce earnings. Higher APY rate subject to paid M1 Plus subscription. Rates are subject to change.