As you budget and begin to save, you need somewhere to store your money (no offense to mattresses). Fortunately, there are lots of banking options to choose from. This section will provide a brief overview of the two most common types, credit unions and traditional banks.
Credit unions are considered non-profits. They are comprised of members who have something in common such as the same school, employer, or location. Usually the interest rates are lower at credit unions than at a traditional bank. You can benefit from a credit union if you are wanting a banking relationship that is local to the area. Most credit unions are only in one specific part of the country. However, if they are a part of the National Credit Union Administration (NCUA), you will be able to take care of your financial affairs in many places across the country. See what credit union service locations are located in Tuscaloosa.
Traditional banks are for-profit businesses. They typically have more branches or locations in a specific region or across the country. This provides you with more access while travelling to different places within the country. Depending on the type of account you choose, there may be a monthly fee. Most traditional banks also offer college-based accounts that do not have any fees.
No matter what banking option you choose, you want to make sure they are FDIC insured. The Federal Deposit Insurance Corporation (FDIC) protects you against loss of your deposits. This is in the event that your FDIC-insured fails. It insures up to $250,000 for single ownership.
Interest is the amount that is added to your balance. This is a good thing for your savings and bad for your debt. You should seek a low interest rate when you are taking out debt and the highest rate when you are saving. Simple interest only adds interest one time. The annual percentage yield (APY) factors in when you are compounding interest. For example, if your APY is 12% compounded monthly then each month you will have 1% interest added to your balance. Again, this is ideal for savings but not for debt.
A certificate of deposit (CD) is a type of savings account that allows you to save money at a fixed interest rate. Credit unions and traditional banks both offer CD options. CDs have fixed terms that can be as short as 3 months, or as long as several years. When selecting a CD, you must be sure that you will not touch the CD during that time period. Early withdrawal will cause a penalty and you may not get your full deposit back.
Individual retirement accounts (IRA) are set up in preparation for life during retirement. Traditional IRA’s are tax-deferred accounts. You will not be taxed until after retirement on the deposits in this account. ROTH IRA’s are after tax dollars.