As kids, piggy banks were used as a way of safeguarding cash. Eventually though, these kids grow up to be adults with businesses and careers, and need safer, more convenient ways of storing their money. This is where bank accounts enter the picture.
Here are five types of bank accounts, as well as an advantage and disadvantage of each.
Flexible Spending Account
A flexible spending account or FSA is a kind of savings account that gives the owner specific tax advantages. This will allow an employee to allot a portion of their everyday earnings to pay for medical and dental costs. One advantage of owning an FSA is that it lowers one’s taxable income. This means that less tax will be paid due to decreased income, part of which was allocated in the FSA. A disadvantage of this type of account is that it follows a “use it or lose it” policy, which means that if an account holder does not utilize the tax-free funds before the end of the plan, they will risk losing that money.
A checking account is a kind of deposit account that permits withdrawals and deposits. This type of account is very liquid and can be accessed using checks, ATMs, and electronic debits. One advantage of holding this account is that the owner can earn interest. On the other hand, a disadvantage of holding a checking account is that its balance minimums can be high, which means that a considerable amount of money has to stay in the account in order to keep the account open.
Vacation Fund Account
A vacation fund is an account that is meant for saving money for leisure and travel sometime in the future. A great advantage of owning this type of account is that it makes it so much easier to put money away for that much-awaited holiday. However, a disadvantage of owning this is that one must maintain a high balance minimum for an account that is not seen to be as essential as other accounts.
Emergency Fund Account
An emergency fund is a separate savings account used to cover the cost of an unforeseen situation. An advantage of owning this type of account is that the owner becomes financially prepared to shoulder the costs of an emergency, whether it be an accident or health-related event. On the other hand, a disadvantage of this is that it takes away the holder’s extra income from other financial goals. This a risk one must be willing to take if there is a desire to have funds saved to cover unfortunate events.
An investment account is a type of financial account that contains a deposit of funds and securities. An advantage of owning this is that it has the potential for great investment returns. However, a disadvantage of owning an investment account is that there may be great potential for financial loss due to stock market volatility. It must be taken note that with investment comes the risk of losing some money.
More than merely saving up, it is also important that one knows how to allocate one’s money for financial goals through bank accounts. Hopefully, young people will soon realize that this is a crucial step in financial independence and that one must go beyond the bare minimum in handling finances.