BankingMoney Fundamentals

Banking Basics: What You Need to Know

Banking is a form of money management using products and services related to savings and loans. Learn the basics of banking.

Your success with personal finance includes understanding banking basics. Sure, you can keep your money in your wallet or a jar, but the most effective way to manage money is to use a banking service.

What is Banking?

Banking is a form of money management using products and services related to savings and loans. Banks take deposits from people like you and then use that money to offer loans to other customers.

By depositing your money in a financial institution, you may also receive interest payments, allowing your money to grow, albeit minimally. For example, a bank may provide a personal loan at 8% and pay a 1% interest on your savings.

Different Types of Financial Institutions

Banks

We typically associate banks with banking. They come in different sizes, from community banks serving local needs to online banks offering high-yield savings to national banks with a bigger footprint. There are many banks to choose from. The FDIC insures deposits of participating financial institutions.

Credit Unions

Credit unions are not-for-profit financial institutions and an alternative to traditional banking services. They offer similar products and services as banks but focus on member service and community growth. Because of their not-for-profit structure, credit unions tend to offer better savings rates and lower loan interest rates. The NCUA insures deposits from participating credit unions.

Alternative Financial Services

Neo-banks are non-chartered financial companies that offer banking services. You might think of them as apps that offer checking accounts and debit cards. These services focus on financial technology to offer banking services and customer support. Many neo-banks partner with banks and credit unions to secure deposits.

Types of Banking Accounts

Banking accounts are necessary because they help make financial transactions convenient, trackable, and protected. Here are basic banking accounts:

Savings Account

A savings account helps you save your money. You’re storing your money for future use and hopefully earning a reasonable interest rate. Interest is the money you earn for letting the bank or credit union keep your money. Some financial institutions may require a minimum deposit in your savings accounts and might assess fees and withdrawal limits.

Checking Account

A checking account is a transactional account that allows you to make deposits and withdrawals of your money anytime. It is not the best place to store your money, as the goal of the account is for use, not saving. Most checking accounts come with a checkbook, but you might be required to ask for it. Instead of writing checks, you can simply provide the account numbers and bank routing numbers for deposits and withdrawals.

Most checking accounts do not pay interest, but some do. Be mindful of transaction limits, minimum balance requirements, and fees. Shop around for the best checking accounts.

Money Market Account

A money market account is a type of hybrid savings and checking account. It tends to have higher limits but often pays more interest than a savings account. MMAs offered by a financial institution may have a stated interest rate like a savings account or an interest rate tied to financial markets.

Certificate of Deposit (CD)

A certificate of deposit, also known as a CD, helps you save money with a set interest rate for a specific time. Your cash is term-locked. In exchange, you get a higher interest rate than a traditional savings account. Certificate terms can start at 30 days to 5 or more years.

Individual Retirement Accounts (IRA)

An IRA is a retirement-focused savings account. There are two types: traditional and Roth. These retirement accounts have tax advantages that need further explanation, but you’ll encounter them at banking institutions.

Banking Features and Services

Routing Number and Accounts Numbers

Each financial institution is issued a routing number or an ABA number. This number helps identify the banks using a numerical system. You’ll need the routing number for electronic deposits and withdrawals. Deposit accounts with a financial institution are assigned an account number. For example, to direct deposit your paycheck, you must provide the routing and account numbers.

Earning Interest

Interest is the money you earn for your deposits expressed as a percentage called the interest rate. Essentially, it’s the money you charge a financial institution for storing your money. If you put $100 in a savings account that pays an interest rate of 1%, your savings account would have $101 at the end of the year. You earned money!

Debit Card

Checking accounts come with a debit card, which enables you to spend your money conveniently. A debit card allows you to make purchases at stores and shop online. You can only spend the money in your checking account. Additionally, you can use your debit card at ATMs to make deposits, withdrawals, check balances, and transfers between accounts.

Direct Deposit

Direct deposit is a convenient and secure electronic payment method that allows employers, government agencies, and other organizations to deposit funds directly into an individual’s bank account. Funds are transferred electronically instead of issuing a paper check, ensuring timely and efficient payment delivery.

Bill Pay

Bill Pay is a convenient service offered by banks and financial institutions that allows customers to pay bills electronically through their bank accounts. Instead of writing and mailing physical checks or initiating individual online payments through various biller websites, Bill Pay consolidates all bill payments into one centralized platform.

Banking Statements

As a customer, you’ll receive monthly statements that help you review and track your savings and spending. These statements include account balances and a detailed list of deposits and withdrawals. It’s important to review these statements and store electronic versions.

Balancing Accounts

Review your statements to verify the deposits and withdrawals are balanced.

Account Alerts

Set alerts for account activity like deposits and withdrawals to spot potential issues early. Many financial institutions offer customers alerts sent via in-app notifications, text messages, and email.

Account Transfers

Account transfers, also known as fund transfers or electronic funds transfers (EFTs), refer to the movement of money from one bank account to another. This can involve transferring funds between accounts held at the same bank or at different financial institutions. Account transfers can be initiated through various channels, including online banking, mobile banking, in-person transactions at bank branches, and automated phone systems.

Many banks offer auto-transfer features. Setting automated savings transfers to reach your goals is a good habit.

Online Banking

Online banking refers to the services banks and financial institutions provide that allow customers to perform various banking transactions and services over the Internet. This typically includes functions such as checking account balances, transferring funds between accounts, paying bills electronically, viewing transaction history, and managing account preferences.

Mobile App

A mobile app, often provided by banks alongside their online banking services, is a software application designed for smartphones and tablets that enables customers to access and manage their accounts.

Mobile banking apps offer similar functionalities to online banking, including checking balances, transferring money, paying bills, and depositing checks remotely using the device’s camera. Additionally, mobile apps may offer features such as fingerprint or facial recognition for secure login, account alerts, budgeting tools, and ATM locators.

Branches

Bank branches are physical locations where customers can conduct various banking transactions and services in person. These transactions may include opening new accounts, applying for loans or mortgages, depositing or withdrawing cash, obtaining cashier’s checks or money orders, and seeking assistance from bank representatives.

Bank branches typically have customer service desks, teller windows, and private consultation areas to accommodate different banking needs.

ATM Access

Automated Teller Machines (ATMs) are self-service banking machines that allow customers to perform basic banking transactions without visiting a bank branch. These transactions commonly include withdrawing cash, depositing checks or cash, transferring funds between accounts, and checking account balances.

ATMs are usually located in various public places such as shopping malls, airports, gas stations, and bank branches.

Loans and Credit Accounts

Because of your deposits, financial institutions can extend loans to other customers. Many of them offer credit and loan products to serve financing needs.

Credit Cards

A credit card provides flexible access to borrowed money from financial institutions. Getting a credit card requires approval, considering your income, current debt, and credit history. With credit cards, you can use the available credit at any time and must pay the amount due each month.

Line of Credit

A line of credit is similar to a credit card but doesn’t come with a card number or plastic card. It is a flexible loan consisting of a defined amount of money. You can access the funds as needed and repay them over time.

Loans and Mortgages

Other financing types include car loans, personal loans, student loans, and mortgages.


How to Choose the Right Banking Service

Choosing the right banking partner is vital because it is the foundation of money management.

You have many financial institutions to choose from and many more account options. To help you make the best choice, answer the following questions:

  • Does the financial institution align with your values?
  • Does local banking matter or national big bank convenience?
  • Are deposits FDIC or NCUA insured?
  • What are the products and services offered?
  • What are the fees?
  • Are there minimum balance requirements?
  • Do you need a physical location (like a branch), or do you prefer better mobile app services?
  • Is there a robust online banking and mobile app?
  • What is the ATM surcharge-free access?
  • Can you set auto-transfers, auto-payments, and alerts?

You want to determine how the banking provider aligns with your needs, the cost of the services, safety and security, and overall convenience.

Jason Vitug

Jason Vitug is a bestselling author, entrepreneur, and founder of phroogal.com and thesmilelifestyle.com. His purpose to help others live their best lives through experiential and purposeful living. Jason is also a certified yoga teacher and breathwork specialist and has traveled to over 40 countries.

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