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For most of us, having a bank account is an essential part of life. Without access to one, you can’t get paid by your employer, you have nowhere to store your money, and it means you’ll be paying for everything via cash.
But how much do we actually know about our bank account? If you’re just about to open a new account—or you simply fancy a refresher on the basics of personal banking—have a read through this quick guide of banking fundamentals.
Checking Account vs. Savings Account
Although there are many different types of bank accounts, the two most commonly held are checking and savings accounts.
Checking accounts, also known as current accounts, are best for everyday money management. They allow you to withdraw and accept money freely (usually up to a certain daily limit), to set up automatic payments like direct debits and standing orders, to use an overdraft facility, and to access a debit card to pay for goods and to withdraw cash.
A savings account is quite simply an account for saving. A savings account will pay an interest rate (APR) on your money so you can grow its value. It will allow you to earn amounts of interest dependent on the specific account opened. Alternatively, you can open an ISA, which is completely tax free up to a certain amount.
Many people will hold both a current and a savings account so that they can manage their day-to-day finances and build their savings at the same time.
APR stands for annual percentage rate, which is the amount of interest you gain on the money in your account each year. APR is important to understand with regards to savings accounts, where you should be looking for the highest APR possible to grow your money.
Different savings accounts come with different levels of APR. Accounts that allow you easier access to your money often come with lower APRs while accounts where you’ve agreed to lock your money in for a year or two will offer better rewards.
Depending on your circumstances, a checking account will often allow you access to a pre-agreed overdraft. An overdraft allows you to borrow money from your bank up to a certain limit and is a commonly used short-term borrowing solution.
It’s important to remember that an overdraft is real debt and that at some point you will need to pay back what you owe. If you exceed your agreed overdraft limit, you can face high charges that could be difficult to pay back.
Direct Debits vs. Standing Orders
Direct debits and standing orders are an essential part of modern life, allowing regular payments for subscriptions, credit card bills, and utility payments. Both options mean that money is going out of your account on a scheduled basis, but what’s the difference?
Standing orders are controlled by you while a direct debit is controlled by the company the money is being paid to. A direct debit gives an organization permission to take as much money as they require at a time specified by you. Monthly mobile phone bills are an example of this.
Standing orders, meanwhile, might be used by you to pay someone back over regular intervals or to pay a membership to a local club. It’s up to you how much goes out, when it goes out, and how long the payment period is. You can cancel a standing order at any time.
Most of us who enjoy the benefits of a bank account will also be taking advantage of online banking. These days, most online banking is done through an app on your smart phone. Online banking makes access to your finances easier than ever, allowing you to schedule payments, to check your balance, and to make adjustments with the press of a few buttons.
You can also use online services to automate your finances, allowing you to merge your checking and savings accounts to better manage key payments and to help you regularly contribute to your savings, which in turn will help boost your financial stability.
Morgan: London-based Morgan is a digital marketing and content executive who specialises in lifestyle and money saving tips. With both in-house and agency experience, Morgan writes content for a variety of different niches and sites. In her spare time, she can be found keeping up-to-date with current affairs and frequenting her Instagram feed!