Where to start?

Majority of the people have a normal checking and savings accounts. The purpose is to store your money and have easy access to it. It’s safe and simple, yet there is one big problem your money still faces: inflation.

There are many ways to combat inflation, but the best beginning option for most people are to open a High Yields Savings Account, Money Market Account, IRA, or Brokerage Account. Let’s first start with High Yields Savings Accounts (HYSA) and Money Market Accounts (MMAs), as they aren’t retirement accounts.

High yields savings vs Money market accounts

Both of these accounts are better than a normal checking and savings accounts. Both are dominated by online banking firms, as having a physical location has high overhead. By functioning digitally, it’s able to provide higher rates to its users compared to its brick-and-mortar competitors.

Despite their similarities, lets look at the comparison table below to see their major differences:

    
            Variables
            High Yields Savings
            Money Market Account
        
            Compound Interest

            Yes
            Yes
        
            Minimum Balance
            Varies
            Varies
        
            Provides Debit Card
            No
            Yes
        
            $250,000 Insured
            Yes
            Yes

            ATM Access
            No
            Yes
        
            Monthly Fees
            Varies
            Varies
        
            Tax Benefits
            No
            No

When you look at it at face value, it almost seems like a Money Market Account is just strictly better. You have to keep in mind that there are other outlier variables that can make each account attractive. Let’s go more in depth and explain their benefits.

HYSA

Majority of accounts don’t require a minimum balance. However, if they do, they typically offer a higher APY.
There aren’t any tax benefits; when dividend yields accrue, they must be taxed in that year.
Most of these accounts don’t have monthly fees, but be sure to check if there are any.
People choose HYSA because it’s easier to manage money, especially if you’re an impulsive spender. Downside is that you’re unable to link it to autopayments, debit cards, or have ATM access.
Functions great as an emergency funds account the money is “harder” to access.
FDIC Insured for up to $250,000.

MMA

Typically has a minimum balance, but they typically offer higher rates than HYSA. Some accounts cannot be opened unless you have that minimum amount.

There are no tax benefits, so when yields are gained they are taxed in that year.

Some accounts may charge monthly fees (~$5 to $10) if the minimum balance isn’t maintained.

The main attraction to this account is having easy access to your money. It functions like a checking account They provide a debit card, easy transfers, and ATM withdraw access. The downside is that this account isn’t great for impulsive spenders, as easier access may lead to “overspending”.
NCUA Insured for up to $250,000.

So there isn’t really a “better” option, but it’s based on user preference. There are many firms that offer these accounts, so be sure to research them in depth to find the one that fits you best. Make sure they’re trustworthy. I like to use NerdWallet or BankRate to find a bunch of HYSA and MMAs to compare their requirements and benefits.

Individual Retirement Account (IRA)

Unlike HYSAs and MMAs, an IRA is the most beneficial for retirement. There are three major points you must understand before opening an account:

With an IRA you must pick an investment option provided by the firm. You can choose multiple if you’d like, but just know that you cannot just put money in your account and hope to earn interest without investing.
An account that is active is when you’re able to pull out any amount of money without fees. An account will be active when you’re age 59.5 or older. If you pull out any interest money before it’s active, there will be a great fee. However, you can still pull out your principal amount without fees, but try to avoid this.
Another thing to note is that there is a maximum amount you can invest into your account, which is $7000, or $8000 if you’re 50+.

Now that we understand the basics, we should understand that there are two different IRA Accounts that we’ll talk about: Traditional and Roth. Let’s look at the comparison table below:

    
            Traditional IRA
            Roth IRA
        
            Tax Deductible

            Yes
            No
        
            Tax Benefits
            No (Varies)
            Yes (Varies)
        
            Compound Interest
            Yes
            Yes

Traditional IRA

What does it mean to be tax deductible? It means that the amount you invested into your Traditional IRA is subtracted from your normal income. This means your taxable income will be less, potentially lowering your federal tax bracket.

Technically there aren’t any tax benefits, since as you pull out money from an active account, it will be recognized as income, therefore you will be taxed.

This option is great for those who believe they aren’t going to earn any more money than they are now. Even if they do, as long as their tax bracket doesn’t change, this option is great. This is because the amount you save on taxes from a Roth IRA is marginal, but the ability to take advantage of it being tax deductible can be more significant.

Roth Ira

Unfortunately, any amount put into a Roth isn’t tax deductible. So this means it can’t change your taxable income.

The upside is that there are tax benefits. Any interest earned from your Roth isn’t taxed, so any amount of money you pull when the account is active is tax free.

This option is great for those who believe their current income is going to be less than their future income. This is because if you believe you’re only going to go up in tax bracket, you’ll greatly benefit from the tax-exemption in your retirement, as your tax bracket will be significantly less. As you make more money, you’ll be less likely to take advantage of the tax deductibility,

Brokerage Accounts

I’ll briefly discuss what a brokerage account is, as it’s not a bank account nor a retirement account. Most people associate investing as this type of investing; where you buy stocks, bonds, ETFs, mutual funds, and index funds to name a few.

The main benefit is that there isn’t a limitation in how much money you can invest and its differing tax benefits when you recognize yields. The high highs of beating market rates depending on your options, but it’s almost always too good to be true.

When we talk about this account, we’re talking about real risk, where you can lose any amount of money you invested, even when purchasing safe options. This account isn’t FDIC or NCUA insured like all the other accounts discussed before.

You now understand the basics of the four major accounts. If you’re curious about anything more, research more about it on credible websites. If you’re interested on what type of investment options are out there, take a look at my other blogs, where I talk about the basics in understanding them!

banking & Retirement