Nov 2, 2019 4 min read

As we help people with planning, we find many are confused about what banking products they can use and how they work. I will explain the most common bank products and the features they possess.

The first product most of us recognize is a savings account, which can be opened in any bank or online. This account requires a minimum deposit and pays a minimum amount of interest.

You can deposit or withdraw money from a savings account at a bank or at an ATM (automated teller machine). Deposits can be added to savings accounts today by apps on your smart phone and your laptop. You can have your paycheck directly deposited into your savings account. And you can transfer money from your savings account to pay bills with a debit card or use your phone.

The second-most common product is a checking account, which allows you to transfer money from your bank to other people through the use of checks. Checks are legal documents that authorize the bank to transfer money to someone else. Today, people not only use checks, but have debit cards and computer access that can transfer money from their checking accounts.

Banks also offer interest-bearing checking accounts and Money Market accounts. An interest-bearing checking account enables you to transfer money to other people and the money earns interest while it is still in your checking account. A Money Market account will act like an interest-bearing checking account, but pay you a higher interest rate if you agree to certain conditions. Usually, these conditions are a higher initial deposit, a higher minimum balance in the account and limited withdrawals.

If your goal is earning higher interest on your money, a certificate of deposit may interest you. CDs are issued by banks, have minimum deposit requirements and require that the money stays in the CD for a specific period. Banks are willing to pay higher interest because they know your money will be with them longer, and if you cancel your CD before the agreed period of time, the bank may charge a penalty.

As an example: a 36-month CD with a $500 minimum deposit paying 2.10% means you must give the bank $500 to open the account, leave the money in the account for 36 months and the bank will pay you $ $532.16 after 36 months. This point the end of a CD is known as maturity. At the maturity period, you can take your money or renew your CD or start a new one.

Surrendering this CD before the 36-month mature date may mean you not only do not get your $32.16 in interest, but you may not get your $500 back. You will hear the term Jumbo CDs when setting up a CD. Jumbo CDs exceed $100,000, and they may pay higher interest because of their amount of initial deposit.

Tax effects are an important part of any financial planning. Your bank will report the interest you earn to the Internal Revenue Service based on the calendar year earned. I bring this to your intention because when purchasing a CD, you may owe tax on money you did not get. The previous example of a 36-month CD explained interest and principle not returned for 36 months. Taxes on the interest earned will be due at the end of the calendar year.

Banking products have several features that make them the first choice a person should use to accumulate money. They are insured up to $250,000 for each account against failure of the Bank by the Federal Deposit Insurance Corp.

They can be set up with little initial deposits. They have liquidity – you can get to your money quickly. Today, while combining the features of bank products with advantages of technology, you can manage your money and maximize your return from the comfort of your living room couch. My 27-year-old daughter has never been in a bank. She has her paycheck deposited, she pays her bills and she accumulates money all from her smartphone.

Bob Hollick is a State Farm Insurance agent based in Washington.

To submit columns on financial planning, investing or business-related matters, email Rick Shrum at rshrum@observer-reporter.com.