Bank holds on to your money for you to access by writing a check. Checks tell the bank it is okay to transfer that amount of money to another person.
Stop Payment: if you contact your bank before the check is paid, they can stop the payment on the check and the person will not get the money.
Advantages/Disadvantages of Checking Accounts
Adv.
Easy access to money via. Check or ATM/Debit card
Money is safe, no need to carry large sums of cash
Dis.
Most checking accounts do not earn interest. As inflation increases, the value of your money decreases.
Bounced Check
If there is not enough money in your account, the bank can refuse to honor the check. Your bank will charge a fee and the person who you wrote the check to may charge a fee. Overdraft privileges with your bank prevents bouncing checks.
Special Checks
Cashier’s check: guarantee that the check is good because it is drawn from a bank’s account
Certified Check: personal check guaranteed by the bank
Traveler’s Check: issued by travel companies and can be used where personal checks will not be accepted
Money Order: pay teller amount and they create a check for you.
Savings or Deposit Accounts
Bank account where money earns interest but less accessible than checking accounts.
Advantages/Disadvantages of Savings Accounts
Adv.
Deposited money earns interest (1-2%)
Money is safe and relatively easy to access
Dis.
Interest earned is low, often lower than inflation.
Cannot access with checks
Certificate of Deposit (CD)
Person deposits money with a bank and promises they will not withdraw money for a set period of time (6 months, a year)
Money withdrawn early is charged a fee.
Advantages/Disadvantages of CDs.
Adv.
Earns a higher interest rate than savings account or inflation
No fees
Money is safe form changes in the economy
Dis.
Money is locked into set interest rate. If other interest rates go up, still stuck with lower one.
Cannot access money until set period of time. Penalty fees for taking money out early.
Why do banks pay interest?
Interest is payment by the bank for use of your money.
Banks take deposits made and use them a loans for homes, cars, etc. Money that is more likely to remain in the bank earns a higher rate of interest (CDs), while money that may be used receive little to no interest (Savings/Checking accounts)
Money Market Accounts
Accounts where the bank invests the money in short-term investments. These investments pay out interest.
Advantages/Disadvantages of Money Market Accounts
Adv.
Pay out more interest than CDs or other accounts
Dis.
They require a high minimum deposit to open, usually between $1000 and $10,000 and must keep a high balance to avoid fees
Subject to change in market/interest rates
Strict limits on the number of checks that access these accounts.