Americans place a high value on saving money, as we learned last year in our survey of 2,000 men and women. In that survey, more than 90% of respondents said that putting away some cash for the future gives them a greater sense of control. Yet for many, that feeling can be elusive. For example, about half of people between ages 45 and 54 said they often feel as though their finances control them.
There’s a fix for that: Brushing up on banking terms can help you gain a greater sense of mastery over what it takes to become a successful—and more worry-free—saver. That’s why we created this plain-English guide to some of the basic banking terms.
What Are Routing Numbers?
Every financial institution in the United States has a unique nine-digit code known as a routing number or transit number, which is used to ensure that money is transferred to and from the right accounts in a variety of transactions. Large banks have multiple routing numbers. If you use paper checks to pay bills, the routing number is that long string of digits in the lower left corner, next to your account number. Together, these two numbers indicate where the funds should be withdrawn from when you pay by check. Routing numbers are also used to exchange money electronically, such as when an employer pays workers by direct deposit.
What Is the FDIC and What Does It Protect?
You might be skeptical if someone offered you a free insurance policy, but you automatically get one if you deposit money in an FDIC-insured bank. FDIC stands for Federal Deposit Insurance Corporation, which is an independent agency created by Congress to boost the public’s confidence in U.S. financial institutions. The FDIC protects your deposits, up to $250,000 in most cases, in the unlikely event that a bank fails. Find out if your bank offers this important safety net by using the FDIC’s BankFind tool.
What Is a Savings Account?
A savings account is a simple way to store money that offers several advantages if you want to set aside funds for short- or long-term needs. Most banks and credit unions offer savings accounts, which are easy to set up, safe and offer ready access to your cash (though some institutions set limits on how often you can make withdrawals). Best of all, savings accounts can earn interest, though some banks offer higher rates than others.
What Is a Checking Account?
Most people use checking accounts to cover day-to-day expenses, such as buying groceries or paying household bills, since money deposited in one is easy to access, with no limit on withdrawals. You can spend money in a checking account by filling out a paper check, using a debit card or using your account number and bank’s routing number to make payments online. You can also use a debit card to withdraw cash at an ATM. Checking accounts can receive direct deposits, such as from an employer, and money held in some checking accounts earns interest.
What Is a Money Market Account?
Money market accounts are similar to savings accounts, in that money market accounts are also FDIC-insured. A money market account usually allows you to write checks and withdraw cash, too. In exchange, banks typically require you to maintain a relatively high minimum balance to avoid fees.
What Is a CD?
If you have some cash that you want to earmark for a future purchase or expense, then a CD (which stands for certificate of deposit) can be a wise choice. Like savings accounts, CDs are insured by the FDIC. However, CDs can earn significantly higher interest than most savings accounts. The trade-off is that you must agree to leave your money in a CD for an agreed-upon period, such as one year or longer. If you withdraw money from a CD before that period ends, a fee will be charged. (Some people use CD ladders to ensure they have access to cash in the case of an emergency.)
What Is a Joint Account?
A joint account is a type of a checking account that is shared by two or more people. Married couples often open joint accounts, but they are also an option for other sets of multiple account holders, such as parents and children. Any partner in one of these financial arrangements can deposit money into the account—or withdraw funds, which is why trust between everyone involved is essential.
What Is a Safe Deposit Box?
For a fee, many banks offer customers access to safe deposit boxes, which are containers kept in a secure vault that can be used to store valuable possessions. Safe deposit boxes vary in size but are appropriate for smaller items, such as expensive jewelry, family heirlooms and important documents, though you should never store the sole copy of any document in one. Likewise, don’t keep anything in a safe deposit box that you may need in an emergency, since the bank might not be open. Traditionally, renters of safe deposit boxes have been issued keys to open them, though some banks now use keyless systems.
What Fees Does My Bank Charge Me?
Some common fees charged by banks include:
● Overdraft fee: If you write a check or use your debit card for an amount that exceeds the funds in your account, banks will charge you for having a negative balance.
● Minimum balance fee: Some types of bank accounts require a minimum balance (such as $100); when funds dip below that level, a fee is charged.
● Withdrawal fees: Some accounts limit the number of monthly withdrawals; exceeding that level comes with a cost in the form of a fee.
● Monthly service fee: Some banks or accounts charge a preset monthly amount unless you hold above a certain balance or fulfill other requirements, like using direct deposit.
Ideally, you’ll want a savings institution that charges few fees and has no or little minimum balance requirements. Check with your bank for details.
What’s the Difference Between a Bank and a Credit Union?
The biggest difference is that banks are for-profit companies that have shareholders, while credit unions are not-for-profit institutions that are owned by their customers. Unlike a bank, a credit union may have certain eligibility requirements, though if there’s one down the street, you can probably open an account there. Fees and interest rates may differ depending on which you choose.
What Are Online-Only Banks?
The digital age has witnessed the arrival of financial institutions that interact with customers virtually through websites, instead of in brick-and-mortar buildings. Online-only banks make it possible to perform many common transactions without ever leaving your home. And thanks to their low overhead—there’s no rent or electric bills to pay—online-only banks can offer higher interest rates and lower fees than traditional banks.
What Is a Cashier’s Check?
In some large financial transactions, sellers won’t accept personal checks and may instead require you to make payment in the form of a cashier’s check. The reason: The latter is guaranteed by the bank that issues it, unlike a personal check. To obtain a cashier’s check, go to a bank where you have an account and specify the amount of money you need. The bank will withdraw that amount from your account and hand over a cashier’s check, which typically costs under $10.
What Is a Money Order?
Money orders are similar to cashier’s checks, but while they’re often easier to obtain, they also have certain limitations. You can purchase a money order with cash or a debit card at a bank, no account necessary. (You may be able to use a credit card as well, but beware of fees and interest.) However, money orders are also available at many other locations, such as supermarkets and the post office. Money orders cost less than cashier’s checks but are typically limited to $1,000 per check. If your purchase exceeds that limit, you’ll need to buy multiple money orders.
What Is a Stop Payment?
Imagine you mailed a personal check to someone and then realized you wrote the wrong address on the envelope. Or you discover that one of your checks has been stolen. A stop payment order cancels a check, meaning it cannot be processed and no funds will be withdrawn from your account. However, stop payment orders only work if you promptly contact your bank, which will charge a fee (usually around $30) for canceling the check.
What Is APY?
When you open a savings account, money market account or CD, it’s important to know the APY, which stands for annual percentage yield. The APY is an indicator of how much interest your deposit will earn over the course of one year, assuming you don’t withdraw any funds from it. A bank calculates APY using a formula that includes the interest rate offered and the frequency of compounding (another concept you should know; see “What Is Compound Interest?” below).
What Is APR?
Borrowing money from a bank can help you achieve goals, such as buying a new home. APR, or annual percentage rate, is the total cost of borrowing money from a financial institution over the course of a year. That includes the interest rate, but also any additional fees you may be charged. If you use a credit card, which is a form of borrowing, you should know the APR—but if you pay off your balance every month, you won’t be charged interest.
What Is Compound Interest?
Banks pay interest when you make a deposit (known as the principal) in a savings account or other financial tool, which allows your money to make money. With compound interest, you earn money not only on the principal, but on the interest it earns, too. (By contrast, simple interest is only paid on the principal.) Over time, compound interest can increase your initial deposit.
What Are Overdrafts and How Are the Fees Calculated?
An overdraft occurs if you draw more money than you have from an account and its balance drops below zero. A common form of overdraft is a “bounced” check. Banks charge a fee, usually around $30, for an overdraft. If you have made multiple recent charges to your account, banks process the largest ones first. That depletes your funds faster, and once you have a negative balance in your account, you will be charged a fee for each overdraft.
What Is a Minimum Balance on an Account?
Some banks require you to maintain a pre-specified amount of money in a checking account, known as a minimum balance. If the balance dips below that minimum, you get charged a fee that month. The obvious way to avoid such fees is to keep a large sum of money in your checking account, but that’s not always possible or desirable for some savers. An alternative is to open an account with an online bank, since many don’t have minimum-balance requirements.
What Are ACH Transfers and Wire Transfers?
ACH and wire transfers are methods of moving money electronically—no paper or ink needed. ACH stands for Automatic Clearing House, which is a network that processes many forms of electronic transactions, such as when you pay a bill online or your employer pays your wages by direct deposit. It can take a few days for an ACH transfer to be completed. Wire transfers are similar, but the transaction happens in real time, so the funds are available much sooner. The trade-off: Wire transfers cost more than ACH transfers, so they’re best for large transactions that need to happen quickly.
What Is Direct Deposit?
Just as ACH transfers allow you to pay bills electronically, you may receive money you’re owed in the same manner through direct deposit. A growing number of companies eschew paper paychecks in favor of the convenience of direct deposit, which is a transfer of funds from a company’s bank account via the ACH network into its employees’ bank accounts. And if you recently received a tax return, it may have arrived in the same manner.
What Is a Monthly Bank Statement?
Most banks send customers a document every 30 days that lists all recent transactions (such as withdrawals and deposits), the account’s current balance and any other relevant information about the account. Monthly statements were traditionally issued by mail, but many banks now offer you the alternative of receiving them by email, as well as the option of logging on to their website and viewing your account status in real time, whenever you like.
What Is an Available Bank Balance and a Current Bank Balance?
Think of the available balance in a bank account as the maximum amount of money you can actually spend right now. That’s often going to be less than the current (also called present) balance, which includes your available balance, as well as any pending transactions, such as a check you deposited that has not yet been cleared.
What Does It Mean to Balance a Checkbook?
Balancing your checkbook is a way to make sure you and your bank agree on how much money should be in your checking account. Not long ago, most people paid many of their bills by writing paper checks and logging each expense on a transaction register. To balance (or reconcile) a checkbook, you compare the withdrawals and deposits you recorded with the transactions reported by the bank in your monthly statement. While many people now prefer to pay bills electronically and use online portals to check balances, keeping track of your transactions and cross-checking them with a bank statement regularly can help you spot errors and get a handle on your budget.
Timothy Gower is an award-winning journalist whose work has appeared in more than two dozen major magazines and newspapers, including Prevention, Reader’s Digest, Esquire, Men’s Health and The New York Times.
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