Imagine that it’s a perfect world and someone walks up to you and hands you $1,000. It’s yours and you can do anything you like with the money, but you need some time to think about it. What do you want to do with this gift? You’ll want to put the money into some type of bank account while you consider that.
You have at least five options if you decide to tuck the money into a bank account while you figure out how to get the most mileage out of it given your personal concerns and needs.
A Checking Account
Maybe you’re really stretching each month to pay all your bills, and you’ve fallen a little behind. You want to use that $1,000 to get caught up. A simple checking account would meet this goal nicely. Sometimes called a transactional account, it accommodates daily spending, either by check, by debit card or electronically. You can almost always access your account online or on a mobile app.
You’ll probably have to give a little of the money to the bank in the way of a monthly maintenance fee, however, particularly if you pay some bills and whittle that $1,000 down below the bank’s minimum balance requirement. You might even have to pay up if your bank doesn’t impose a minimum balance requirement – all customers must pay the maintenance fee – or if you fail to make a required number of direct deposits during the month.
You might be dinged a small amount of cash when you use that debit card as well, and you’ll certainly be hit with a financial penalty if you spend than your $1,000 and end up with a negative balance. This is known as an overdraft fee.
You might earn a little interest on that $1,000 in a checking account. Some banks pay interest on these accounts and some don’t, but the interest will most likely be less than you would receive in a simple savings account and you’ll probably have to maintain a higher minimum balance to earn it.
A Savings Account
Now let’s say that you’re the cautious type and you really don’t want to spend that $1,000. You want to tuck it aside so the money is there for you in case of emergency, but you don’t want to have to jump through hoops to get your hands on it if an emergency should arise. You might want to drop it into a savings account in this case.
The money will earn a little interest for you while it’s sitting there waiting for you to need it. The interest rate won’t be anything to get too excited about, but it will compound – you’ll receive a little interest on your principal balance this month, then you’ll be paid interest on that principal plus the last interest payment in the next month. The end result is your annual percentage yield, or APY. You can opt for a high-yield savings account that will pay a better interest rate, but these are usually subject to steeper minimum balance requirements.
You won’t be able to get to your money as easily as you could if you’d put it into a checking account instead, but that’s the idea, isn’t it? You don’t want to be tempted to tap into that $1,000 on impulse. Not to worry, the bank will make it somewhat difficult for you to do this. You probably won’t be able to access the funds via a debit card unless you also happen to have a checking account with a debit card with the same bank. You’re also generally limited to no more than six withdrawals or transfers a month without paying a fee.
Most savings accounts also come with online and mobile access, and some have minimum monthly balance requirements even for accounts that aren’t high-yield. You might not receive interest if you don’t meet this threshold, or you might even be charged a fee.
A Money Market Account
A money market account might be a good fit if you think that having both a savings and checking account meets your needs, but you want your money to earn some decent interest. This type of account is something like a hybrid checking and savings account. Your money will earn interest as it would in a savings account, but at a more significant rate. You should also receive checks and a debit card so you’ll have relatively easy access to your money, but the number of withdrawals you can make will be limited.
There’s one significant difference with money market accounts: You might not be able to open one if all you have to deposit is that $1,000. These accounts typically have relatively high initial deposit requirements, anywhere from $2,500 to as much as $25,000, and you’ll have to maintain a healthy balance if you want to keep receiving that significant interest rate.
Read more: Requirements to Open a Money Market Account
A money market account might be a good option if you really don’t think you’ll have to tap into the cash at any time in the foreseeable future, but you want to be able to get to it without a lot of fanfare if you do. You want your money to earn as much interest as possible in the meantime.
A Certificate of Deposit
A certificate of deposit, often referred to as simply a CD or as a “time deposit,” might be the ticket if you want to save that $1,000 for the long term, maybe for a wedding that’s still years away or for a down payment on your dream home someday. This type of account will earn you a much better interest rate, but with a catch: You have to contractually commit to leaving your money with the bank for a set period of time that can range from a matter of months to as long as six years. You’ll have to pay an early withdrawal penalty if you take any of the money sooner than the period of time you’ve agreed to.
That nice interest rate might actually increase as time goes on, too, after you’ve held the account for multiple years, and it’s usually guaranteed not to decrease. But your access to the funds would obviously be pretty limited.
Individual Retirement Accounts
You have yet another option if you’re thinking of a really long-term plan for that $1,000, such as retirement. Some banks offer individual retirement accounts, and these IRAs are a particularly good deal if you know you won’t touch that money until you reach your golden years.
In a nutshell, your bank will invest your money for you over the years, although you might have a say in what investments are chosen. You can take a tax deduction for that $1,000 when you invest it into a traditional IRA, so you won’t have to pay taxes on the money or on any earnings until you take the money out in retirement when you might be in a lower tax bracket. On the downside, you can’t take your money back before age 59½ without paying a 10 percent tax penalty to the IRS.
You might also invest in a Roth IRA. You won’t get a tax deduction for opening this type of account, but you won’t be taxed on the money in your later years when you take the money out, either, not on your initial investment nor on its earnings. You’ve already paid taxes on the principal once. And there’s no age limitation for early withdrawals with a Roth if you meet certain other rules.
Either type of IRA can be a particularly good option if your employer doesn’t offer retirement benefits and you’re in a financial position that allows you to put money away for the long haul. Most banks are set up to provide you with this account option, but you might be limited as to your choice of investments within the account. You can also open an IRA with a fund firm or a broker-dealer.
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- Roth IRA Short-Term Gains Vs. Long-Term
- How to Find Emergency Money to Pay Your Bills
- Ways to Pay Bills With Little Money
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Beverly Bird has been writing professionally for over 30 years. She is also a paralegal, specializing in areas of personal finance, bankruptcy and estate law. She writes as the tax expert for The Balance.