A basic savings account is probably the simplest and most important type of bank account. A savings account safeguards your money and easily lets you deposit and withdraw funds. You can also collect a modest amount of interest.
Savings accounts have several important purposes. They safeguard the money you deposit so you don't have to hide cash in a shoebox under your bed. They also provide psychological motivation to save money.
However, there are limitations and drawbacks to some savings accounts. Although a savings account does draw interest, that rate is usually lower than you'd receive with a CD (certificate of deposit) or MMDA (money market deposit account). Also, a savings account won't let you write checks to make any sort of payment, and if your account balance falls below a specified minimum, some banks will charge you a fee.
With a checking account, though, you can write checks to pay for goods and services. A so-called basic checking account has very few extra features and if it pays interest on your balance, it's generally not as much as a savings account would.
Specific rules and restrictions often apply to checking accounts. For example, you may be limited to a certain number of transactions per month. Other checking accounts may require a minimum number of debit card transactions.
If you select an MMDA over a traditional checking or savings account, the bank invests your money in a short-term debt account, such as CDs or treasury bills. An MMDA lets you write a small number of checks per month but often charges you a fee if your balance falls below a specified minimum. MMDAs usually offer better interest rates than other account types, but banks raise the initial minimum balance you must deposit before you can even open an MMDA.
Alternately, you might choose to open a CD account. CDs are also known as time deposits because when you deposit your money into a CD, you agree to leave it there for a predetermined amount of time. The time frame might range anywhere from a few months to several years.
One downside to CDs is that you cannot access the money after you deposit it. The upside is that the bank offers you a higher interest rate on your balance. The longer the duration on a particular CD, the higher the interest rate you should receive in return.
If you do remove your money (called an early withdrawal) before the maturity date you'll have to pay heavy penalties. There's no point in opting for a CD if there's any chance you'll need the money soon.