3 Types of Bank Account and How to Use Them

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Whether you invest in the stock market or not, bank accounts are a vital investment and savings vehicle. No matter how much or little money you have, everyone needs to set aside money that is guaranteed to be there when you need it. Savings in a bank are not considered a “sexy” investment choice and you will not become rich with your money stashed there. However, we all need the protection they offer should something happen and you need cash immediately.

Below, I will discuss the three types of accounts that I recommend as well as the strategy you may use to invest your money.

Checking Account

The checking account is the most elementary of bank accounts. It will offer a very low interest rate (if at all) and the main purpose of your checking account is to use it as a “lobby”. This is where your income comes in and expenses go out.

Have your paycheck deposited to this account. You may pay all of your expenses from this account (i.e., writing checks, paying bills, withdrawing cash, etc.). If any money remains (hopefully there is at least some), transfer those funds to a linked savings account.

Linked accounts are two or more separate accounts that are linked together because those accounts have the same owner at the same financial institution (bank). You create a link between accounts to view all of your accounts together and easily transfer money between them.

*Note: Make sure to always keep enough money in your checking account to cover one month’s worth of bills plus a few hundred dollars. The extra few hundred dollars will prevent overdraft fees and/or bounced checks.

Savings Account

This account will be your middle ground. Whatever is left over in your checking account after paying your bills for the month, put into a high-yield savings account. In the current financial market you can expect to receive an interest rate around 2% APY — check for here for banks with the highest savings rate.

Make sure to choose the highest yielding account that suits your needs.

Certificate of Deposit (CD)

A certificate of deposit is different from a savings account in that the CD has a specific, fixed term (generally varying from 3 months to 5 years), and a fixed rate. The money is locked in that account for the given period at the end of which you may renew the CD or withdraw your initial funds and the interest accrued.

Keep in mind, should you need to pull your money out before your CD comes due, there is a penalty. The penalty will usually be about 30-35% of the total interest to be owned for the duration of the CD.

Interest rates are close to all-time lows. You will be hard pressed to find a rate above 2%. However, rates are always fluctuating and the trend should be for rates to go up from here. For that reason, my recommendation is to choose a 6-month CD. The 6-month CD is a good choice because it is a nice trade off between a short term and decent interest rate.

CD Ladder

You will want to split your CD fund into three portions. A third should be invested now into a 6 month CD. In two months, take another third and buy another 6 month CD at the highest possible rate. In another two months, invest the remaining fund into a third CD. This concept is called a CD ladder and allows you to have one third of your funds becoming fully liquid every two months and allows you to continuously capture increasing interest rates.

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Bill GuardAndrewL. HernandezKen Recent comment authors
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I like the CD laddering idea….now I just got to get some money to open one 🙂 Don’t we all.

L. Hernandez
L. Hernandez

“If any money remains (hopefully there is at least some), transfer those funds to a linked savings account.” “Whatever is left over in your checking account after paying your bills for the month, put into a high-yield savings account.” It’s taken me 20 years, but I have finally recognized that this approach doesn’t work well for me. The very first bill of the month is to the linked savings account, and then the other bills are paid — housing, utilities, etc. It’s hard, after all I get statements and calls from the other folks wanting my money, but if the… Read more »


I agree with the checking account as a hub… one of the frustrating things about this is that banks charge money to move the cash to other banks – then they offer pitiful savings rates… I recommend just having a checking account hub but then open online savings accounts where you can pull money from your checking… Its a little more overhead in management, logging into separate accounts, but you can set up automatic withdrawals to make this easier… I don’t know about CD’s I have not seen a good comparison in the last few years that says CD rates… Read more »

Bill Guard

Although cash in a savings account doesn’t yield a good “return” (at current rates, it loses money after adjusting for inflation), it does provide the advantage of providing a liquid “cushion” in case you get hit with unexpected expenses. I wouldn’t think of this as an ‘investment,’ necessarily; I’d think of it as a line of defense. As you mentioned in the article, choosing a bank with an online portal is essential, because its the easiest way to manage your accounts. (You can also link your accounts online to a central place that monitors and tracks your account activity). Fortunately,… Read more »

3 Types of Bank Account and How to Use Them

by Pinyo Bhulipongsanon time to read: 2 min