Basic Banking Products

This is the third post in my financial literacy series. The first two posts can be found here and here. In this post I’ll provide overviews of the most basic banking products, which are checking accounts, savings accounts and Certificates of Deposit (CDs). Having an account at a bank is the foundation of wealth building so it’s important to know your options as well as the pros and cons of each product. In this post I lay out those pros and cons. Before I continue I do want to remind you that work on increasing your income as well as living on a reasonable monthly budget are critical in giving you a chance to use any financial tool effectively. So always consider how well you’re addressing your income and budget as part of any solid financial plan.

A checking account is the banking product that is most useful and also most widely used by everyone who earns a living and pays bills. Checking accounts today differ quite a bit from the accounts I dealt with in my post college years due to the advent of debit cards and easy online electronic transfers. The good news is that checking accounts have become much more flexible than they were in years past. Checking accounts allow customers to gain access to their funds in multiple ways, which is the reason why they are best used for the direct deposit of your paychecks and for paying your regular monthly bills. As the name implies checking accounts allow customers access to physical checks that can be written out and given to someone as a form of payment. The honest truth is that in 2025 people don’t write many checks but there are some instances where it’s useful to have access to a check to pay for something. So it’s good to have the option. Much more common with checking accounts are transactions that occur via debit cards tied to your checking account. A debit card can be used like a credit card to pay for something, either in-person or online, using funds from your checking account. In addition, a debit card can be used to withdraw cash at an Automated Teller Machine (ATM). Finally, it’s possible to link your checking account (either directly or via your debit card information) to automatically pay bills online or transfer money. As you can see checking accounts are important because they offer extreme flexibility in terms of moving your money to where it needs to be.

While checking accounts are a great place to have your pay deposited and to hold money needed in the short-term they are not great for holding excess money that will be needed over the long-term. There are two main reasons why this is the case. First, checking accounts pay notoriously low amounts of interest. Usually much less than 1%. Second, checking accounts and their connected debit cards are prime targets for scammers. While the account holder should not be responsible for fraudulent transactions on their account (your bank may have a time limit for reporting fraudulent transactions so monitor your accounts at least weekly), if fraud does occur you could be inconvenienced while the bank works through the process of confirming the fraudulent activity. For these reasons I recommend that larger amounts of money needed over a longer period of time be held in the next banking product I’ll describe, the savings account.

A savings account is a banking product that offers a bit less flexibility than checking but also can offer much higher interest. This is important because wealth building relies on other people paying you money to grow your net worth. That’s what interest is. Other people paying you for having the privilege of holding your money, which of course the bank can use as leverage to invest (in things like mortgages and other loans) so that the bank can make a profit. The main difference in terms of flexibility compared to a checking account is that most banks do not offer debit cards or checks with savings accounts. You can pay for things using electronic transfers with a savings account which in 2025 is still very useful. If your savings account is with the same bank that holds your checking account you can also transfer from savings to checking, either via the bank’s mobile app or website, with the funds usually being available in your checking account immediately. So there’s not much of a loss in flexibility in moving some money to a savings account, particularly if the two accounts are with the same bank. Transferring from a savings account at another bank to your checking account is likely to take at least 1 to 3 days and that’s something to keep in mind should you decide to open a savings account at a different bank. I’ll explain why you might want to do that in the next paragraph.

Savings accounts offer much more competitive interest rates than checking accounts. In 2024 while many checking accounts were offering interest rates well below 1% you could find savings accounts offering at or near 5%. Savings accounts with the highest interest rates are also called High-Yield Savings Accounts (HYSAs) Why the difference in interest rates? Competition is the main reason. The giant, firmly established banks already have a huge capital base and tons of customers so they know that checking account customers will use savings accounts at the same banks for the purpose of convenience. Hence, those giant banks can offer low interest rates. There are also many smaller banks, and banks solely operating online, that can take advantage of electronic transfer capabilities to grow their own capital base by enticing customers with higher interest rates. And just because a bank is a smaller name or online only doesn’t mean that you’re accepting additional risk in placing your deposits with that bank. Any bank that is ensured by the US Federal Deposit Insurance Corporation (FDIC) should be a safe place to put your money. What you will want to consider if you are thinking of transferring to a savings account at another bank for a competitive interest rate is that bank’s rules for amounts and timing of transfers. You will want the most flexibility possible but must understand that transferring from bank to bank will likely not be instantaneous. For this reason I recommend keeping the account you consider your emergency fund in a savings account with the bank where your checking account is held. Funds above that could be deposited in a savings account at a bank with a competitive rate. It’s also important to note that some banks may require a minimum deposit to get their preferred interest rate so you’ll want to look for that restriction if you plan on opening a HYSA with a particular bank.

There are a few things about savings interest rates that are important to know. Savings interest rates are subject to change and not guaranteed. While some of the highest rates in 2024 were as high as 5% the rates have since dropped to about a high of 4%, which is still very good historically. In the future the rates could go up or could go down, but given how high rates got in 2024 it’s likely that rates will continue to slowly move downward for a while. When rates do change your bank will typically send you an email informing you of the pending rate change. It’s also important to know that interest earned on checking or savings accounts is subject to income taxes at your normal tax rate. The banks where you have accounts will send you a form called a 1099-INT in January of each year with the amount of interest earned in the prior year. All of this interest is required to be added to your income for tax purposes. For most people it won’t be a large amount of extra taxes. If a person has $10,000 in a 4% interest savings account for a year that will generate about $400 in interest income. That may increase your tax liability (although the numbers will vary) by about $100 and for many people it may just reduce their refund. Still, I wouldn’t avoid seeking out savings interest due to the potential for extra taxes. When you’re in the mindset of building wealth you shouldn’t take any opportunities to earn risk free money for granted.

The final basic banking product I’ll highlight are CDs. CDs are products that differ from both checking and savings accounts in that they offer the least flexibility. When you select a CD from a particular bank the interest rate is based on the term (which is the amount of time) the CD needs to be held. CD terms can vary from about 3 months to several years. When you choose a CD of a particular term you’re choosing to lock up your money for that amount of time but, unlike with HYSAs, you are guaranteed to earn the promised interest rate for the term of the CD. In addition to a term CDs will also have a minimum dollar amount that you need to deposit into the CD. This will usual be at least $500 or $1,000. CD interest rates will usually be competitive with HYSAs with interest rates typically going higher as the term goes longer. Most CDs will allow you to withdraw money prior to the end of the term but will charge you a penalty to do so and that will likely eliminate any financial benefit that you may have gotten from the CD. There are no-penalty CDs offered by some banks that allow you to withdraw without penalty after a specified period of time. These offers vary so it’s wise to take a close look at the terms of each particular CD before you decide to invest your money into it. I will be honest and say that I’ve never used a CD as financial tool but that certainly doesn’t mean that CDs aren’t worthwhile. Because of the lack of flexibility and potential for penalties I could see a CD being used as a place to park money that will most likely not be needed in the near term and is meant to serve a specific purpose in the future. Like saving for a home down payment or the purchase of a car. It’s important to know that, in 2025 at least, CD interest rates aren’t much better than the rates for HYSAs. But since you’re assured to earn the promised interest rate for the entire term of the CD it may be a worthwhile product for you. Finally, at the end of the CD term you are free to decide what you want to do with the money. You can transfer the money to a checking or savings account, or you can roll the money into another CD.

You’ll notice that a key aspect of all of the above products is the interest rate. People who are smart with money will take the time to research interest rates to insure that their money is earning the most money possible. Which is a beautiful thing! There are many websites on the internet where you can research interest rates. I’ll recommend one to get you started and that’s Bankrate. Bankrate has been around a long time, even before the internet when they ran a paper newsletter, providing information on the rates for various bank products. Do keep in mind that Bankrate and other financial oriented websites earn revenue from referrals for the products offered on their website. That usually means that search results will highlight certain products first that may not offer the best rates and terms. So read the different options carefully and don’t assume that the first option shown is the best.

Okay, so now you know something more about the basic banking products. Since I’m committed to helping people improve their financial literacy I’ve decided to write a follow-on post that will cover the area of brokerage products. Brokerage products take you beyond saving and into investing. While saving is the foundation of personal wealth, investing is like the walls and the roof. You must combine saving and investing in order to secure the financial future for yourself and your family. There are exciting opportunities but also some tragic pitfalls with investing. In the near term I plan to cover the basics that will allow someone without much knowledge of investing to get started in a safe, orderly manner. Till then, happy wealth building!