We're celebrating Financial literacy Month with today's article on banking; to broaden your understanding of personal finance, start with What is Financial Literacy? To learn more about how broader economic concepts influence banking, read our guide on the Basics of Supply and Demand.
Banks are essential to the way money moves in our economy. They help individuals and businesses manage money, offer a safe place to deposit funds, and provide credit to those who need to borrow money. From checking and savings accounts to business loans and investment services, banks play many roles within the larger financial system.
When you put money into a bank, you’re not just storing it; you’re helping fuel the economy. Banks use the money from deposit accounts to make loans to others, such as homebuyers, students, or small business owners. This cycle helps keep financial transactions flowing and supports economic growth.
Bank accounts are a fundamental tool in managing personal and business finances. They allow you to deposit money safely, earn interest, and access funds through various services like checks, ATMs, and debit cards.
There are several types of bank accounts:
We’ll look at these options in greater detail as we go.
There are several types of financial institutions where you can open bank accounts or get financial services. Most people are familiar with commercial banks, such as Chase or Wells Fargo, which are for-profit entities that serve both individual and corporate clients.
Another popular option is credit unions, which are nonprofit organizations owned by their members. Credit unions often offer lower fees, better interest rates, and a more community-focused experience.
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A traditional bank typically has physical locations where you can interact with a teller or banker. This is helpful for those who prefer face-to-face customer service or need services like safe deposit boxes.
In contrast, online-only banks operate entirely through websites and mobile apps. They often offer lower fees and higher interest rates due to lower overhead, but they may not provide all the services you’d find at a traditional branch.
A deposit account is any account where you can place funds for safekeeping and potential growth. These include checking, savings, and money market accounts.
When opening a deposit account, consider:
The Federal Deposit Insurance Corporation (FDIC) is a U.S. government agency that protects deposits at insured banks. If an insured bank fails, the FDIC covers your deposits up to $250,000 per depositor, per bank, per ownership category.
This is a key reason many people feel safe using banks instead of keeping cash at home. To verify if your bank is insured, visit the FDIC’s official website.
Credit unions, while not covered by FDIC, are usually insured through the National Credit Union Administration (NCUA), which provides similar protection.
You can deposit money into your account through:
Direct deposit is the most common method today, offering faster and more secure access to your paychecks.
For more help with understanding deposits and planning your savings, explore Basics of Saving.
A savings account helps people set aside money for future needs, big purchases, or emergencies. It earns interest over time, helping your money grow safely. Some of the best uses include:
Savings accounts are ideal for storing money you don’t need to access every day. However, interest rates can vary widely between banks, so shop around.
An emergency fund is money set aside for unexpected expenses such as:
Most experts recommend having three to six months’ worth of expenses in your emergency fund. This money should be kept in an account that is easily accessible, such as a savings or money market account, but separate from your daily checking.
To explore savings strategies for building emergency funds, consider reading Celebrate America Saves Week This Year.
Traditional accounts include standard checking and savings accounts found at brick-and-mortar banks. They may offer benefits such as:
However, traditional accounts may also come with higher minimum balance requirements, maintenance fees, or lower interest rates compared to online alternatives.
An interest bearing account is any type of bank account that earns interest on your deposits. This includes:
Interest rates vary depending on the financial institution, the type of account, and economic conditions. It’s helpful to compare offers from credit unions, commercial banks, and online-only banks to see which ones offer more interest with fewer fees.
To better understand how interest works in banking, read What Are Interest Rates and How Does Interest Work?.
Understanding how to calculate simple interest is important when choosing savings products or taking out loans. The formula is:
Simple Interest = Principal × Interest Rate × Time
Let’s say you deposit $1,000 in an account that pays 2% annually. After one year, your interest earned is:
$1,000 × 0.02 × 1 = $20
This basic concept applies to many financial products, helping you compare options and set realistic expectations for savings growth.
A money market account combines features of checking and savings accounts. It may offer:
However, money market accounts often come with higher minimum balance requirements and may limit the number of transactions per month. They are a good fit for people who want to earn more interest while still having access to their funds.
A certificate of deposit is a time-based deposit account that pays a fixed interest rate for a set period of time, usually between three months and five years. CDs often offer better interest rates than savings accounts, but they require you to leave the money untouched until the term ends.
If you withdraw early, you may face penalties. CDs can be a great tool for people with financial goals like saving for a car, wedding, or home purchase.
CDs and some savings products come with fixed interest rates, meaning your interest won’t change during the term. It’s also important to understand annual percentage yield (APY), which reflects the total interest you earn in a year, including compounding.
Comparing APYs can help you find the best account for earning interest over time.
Overdraft protection allows your bank to cover transactions when your account balance is too low, preventing declined payments. However, this service often comes with overdraft fees, which can add up quickly.
Some banks also charge:
Look for low or no fees when comparing banking options.
Direct deposit is a safe and efficient way to get your paycheck or government benefits. Your funds go directly into your account, often faster than paper checks. Many banks offer incentives or lower fees for setting up direct deposit.
To access funds, you can use:
Some accounts also allow mobile check deposits and online bill pay.
A debit card is linked to your checking account and allows you to make purchases or withdraw cash. It offers convenience, but you need to track your spending carefully. Unlike credit cards, debit cards pull money directly from your account, so overspending can lead to overdrafts.
Modern banks offer tools to transfer funds between accounts, pay bills, or send money to others. These services can be accessed via:
Setting up automatic transfers can help with saving money and sticking to your budget.
For more tips on creating smart savings strategies, see Taking the Right Steps to Achieve Your Pledge.
Many banks require a minimum balance to avoid monthly fees or to earn the advertised interest rate. Always ask:
Keeping track of this requirement is especially important in money market and interest bearing checking accounts.
Financial institutions include commercial banks, credit unions, savings and loans, and investment banks. Their primary purpose is to help individuals and businesses manage money.
These institutions form the foundation of the financial system and help support everything from small businesses to major infrastructure projects.
An insured bank gives you peace of mind that your money is protected. As mentioned earlier, most U.S. banks are insured by the FDIC, which covers up to $250,000 per depositor. Always check your bank’s FDIC status to ensure your funds are protected.
Credit unions offer the same protection through the NCUA.
To verify insurance coverage, check the FDIC’s BankFind Suite.
A traditional savings account is a reliable option for storing extra money while earning interest. These accounts:
While they may not earn as much as other savings vehicles, they offer flexibility and security, making them ideal for beginners or anyone building an emergency fund.
The interest you earn in a savings account can be simple or compound interest. While we discussed how to calculate simple interest earlier, compound interest is even more powerful. It allows your interest to earn additional interest over time, boosting your savings without any extra effort.
To learn how this works in your favor, explore The Power of Compounding Interest, which breaks down the math in a simple and motivating way.
Your emergency fund should be easy to access but not so easy that you’re tempted to spend it. Keep it in a savings or money market account that offers:
Avoid locking this money into long-term CDs or accounts that limit access, as emergencies don’t follow a schedule.
Traditional accounts—like standard savings or checking—are the go-to choice for most consumers. However, specialized accounts such as:
…may offer better returns or specific features. The best option depends on your financial goals, income stability, and spending habits.
Banks make financial transactions easier through tools like:
Using these tools can help streamline your finances, avoid late fees, and support your budgeting goals. You can even set up rules to save money automatically, such as transferring a portion of each paycheck into a savings account.
While online banking is convenient, some people prefer visiting a bank branch for services like:
Branch access is a key feature of traditional banks, especially for those who value in-person customer service or live in rural areas.
The amount of interest you earn depends on the account type, your balance, and market conditions. As of mid-2025:
Always compare the annual percentage rate (APR) or annual percentage yield (APY) across banks and credit unions. Use calculators like our Savings Goals Calculator or budgeting calculator for guidance.
When comparing savings and checking accounts, think about access vs. growth:
Many people open both and set up automatic transfers from checking to savings to encourage consistent saving habits.
For more on building a healthy saving routine, read Basics of Saving.
Banks also offer currency exchange services for travelers or people who receive international payments. If you travel frequently or send money overseas, check:
These services are often cheaper and safer than airport kiosks or private exchange offices.
To dive deeper into how different forms of money function, see Basics of Currency.
Corporate clients have different banking needs than individuals. Banks offer specialized products for businesses, including:
Small business owners should compare offerings from both commercial banks and credit unions, as each may offer unique benefits depending on the size and needs of the business.
Banks are closely regulated by the national government through agencies like:
These organizations ensure that your money is handled responsibly and that banks remain financially healthy. They also regulate capital gains taxes on interest earned, which can affect your tax filings.
To learn how taxes interact with your banking activities, check out Basics of Taxes.
At the heart of all banking tools is your goal: to manage your money effectively and achieve your financial goals. Whether that’s:
…banks can help you stay organized, save efficiently, and make progress toward a better financial future.
To build a strong foundation, explore our financial literacy resources, including Celebrate America Saves Week This Year and What is Financial Literacy? Remember, we're ready to help you master your personal finances. Contact us to talk to a certified counselor for free.
