Basics
This chapter explains the money terms you need to know. It will help provide the basic foundation for your financial decision making by discussing where to keep your money, how to balance your checkbook, and providing tools to examine where your money goes each month which can be a positive first step in creating your livable budget.
Banks and Credit Unions
A bank is a for-profit, financial institution controlled by a board and stockholders. Bank deposits are insured by the Federal Deposit Insurance Corporation (FDIC) up to $100,000 for any account (except retirement accounts, for which the limit is higher). A credit union is a member-owned, not-for-profit financial cooperative. Credit union deposits are insured by the National Credit Union Share Insurance Fund (NCUSIF).
Checking vs. Savings Accounts
Understanding the difference between checking accounts and savings accounts is important when it comes to learning how to manage your money. A checking account is a service many banks provide to ensure their customers an efficient way to pay bills and deposit money. Checking accounts seldom generate interest. (Interest is money the bank pays you in exchange for keeping your money in the bank account.) A minimum balance is sometimes required and some banks charge monthly fees. However, the benefits of having a checking account include that you do not have to use money orders or carry large amounts of cash for items such as rent or making a mortgage payment. There is usually a branch or Automated Teller Machine (ATM) nearby and you can access tele-banking/online banking.
A savings account is an account that holds your money for future use or emergencies. Savings accounts normally pay you a small amount of interest, which is typically higher than the interest rates that checking accounts generate. You may hear the following terms in relation to savings and checking accounts. A withdrawal is money taken out of your account. Debit is another term that simply means money taken out of your account. A debit transaction is an electronic transfer of money from your account. A deposit is money put into the account. A direct deposit is an electronic transfer of money into your checking or savings account. Direct deposits can come from your paycheck, your Social Security check, your pension, perhaps your IRS refund, etc. You may be able to access your money in a checking or savings account through an ATM using a debit card or ATM card. ATMs are convenient—they allow you 24-hour access to money without having to go to the bank or credit union in person.
Credit and Debit Cards
A debit card operates like cash or a check. When you make a purchase using a debit card, the bank or credit union withdraws money from your checking or savings account that is linked to the card. With a debit card, the money is taken directly from your account when you make the purchase, so you must have the money in your account to cover the cost. Your bank may charge you a transaction fee or require you to pay interest if you spend more than what is in your account or if you use the bank’s overdraft protection.