The Ultimate Guide to Financial Literacy

By Caleb Silver, Editor in Chief of Investopedia

We know that the earlier you learn the basics of how money works, the more confident and successful you’ll be with your finances later in life. It’s never too late to start learning, but it pays to have a head start. The first steps into the world of money start with education.

The basics of banking, budgeting, saving, credit, debt, and investing are the pillars that underpin most of the financial decisions we’ll make in our lives. At Investopedia, we have over 30,000 articles, terms, FAQs and videos that explore these topics, and we’ve spent more than 20 years building and improving our resources to help you make financial and investing decisions.

This guide is a great place to start, and today is a great day to do it.

Introduction to Bank Accounts

Bank accounts are typically the first financial account you’ll open, and are necessary for major purchases and life events. Here’s a break down of which bank accounts you should open and why they are step one in creating a stable financial future.

Why do I need a bank account?

While the majority of Americans do have bank accounts, 6.5% of households in the United States still don’t have accounts. Why is it so important to open a bank account?

  • They’re safer than holding cash. Assets held in a bank are harder to steal, and in the United States, they’re insured by the Federal Deposit Insurance Corporation (FDIC). That means you’ll always have access to your cash, even if every customer decided to withdraw their money at the same time.
  • Many financial transactions require you to have a bank account, including:
    • Using a debit or credit card
    • Using payment apps like Venmo or PayPal
    • Writing a check
    • Using an ATM
    • Buying or renting a home
    • Receiving your paycheck from your employer
    • Earning interest on your money

Online vs Brick-and-Mortar Banks

When you think of a bank, you probably picture a building in your town. This is called a “brick-and-mortar” bank. It means the bank has a physical building. Many brick-and-mortar banks also allow you to open accounts and manage your money online.

Some banks are only online, and have no physical buildings. These banks typically offer all the same services as brick-and-mortar banks, aside from the ability to visit them in-person. 

What type of bank can I use?

Retail Banks: This is the most common type of bank most people work with. Retail banks are for-profit companies that offer checking and savings accounts, loans, credit cards and insurance. Retail banks can have physical, in-person buildings that you can visit, or be online-only. Most offer both. Banks’ online technology tends to be more advanced, and they often have more locations and ATMs nationwide.

Credit Unions: Credit unions provide savings and checking accounts, issue loans and offer other financial products, just like banks. However, they operate under the direction of elected board members. Credit unions tend to have lower fees and better interest rates on savings accounts and loans. Credit unions are sometimes known for providing more personalized customer service, though they usually have far fewer branches and ATMs.

What types of bank accounts can I open?

There are three main types of bank accounts the average person will open:

  1. Savings account: A savings account is an interest-bearing deposit account held at a bank or other financial institution. They typically pay a small interest rate, and their safety and reliability make them a great option for saving cash you want available for short-term needs. They usually have some limitations on how often you can withdraw money, but they’re generally incredibly flexible, so they’re ideal for building an emergency fund, saving for a short-term goal like buying a car or going on vacation, or simply storing extra cash you don’t need in your checking account.
  2. Checking account: A checking account is also a deposit account at a bank or other financial firm that allows you to make deposits and withdrawals. Checking accounts are very liquid, meaning they allow numerous deposits and withdrawals per month, as opposed to less-liquid savings or investment accounts, though they earn little to no interest. Money can be deposited at banks and ATMs, through direct deposit or other electronic transfer. Account holders can withdraw funds via banks and ATMs, by writing checks, or using debit cards paired with their accounts.
  3. High-yield savings account: A high-yield savings account is another type of savings account that usually pays interest 20 to 25 times more than the national average of a standard savings account. You might be able to open a high-yield savings account at your current bank, but online banks tends to have the highest rates. The trade off for earning more interest on your money is that high-yield accounts tend to require bigger initial deposits, larger minimum balances, and more fees.

What’s an emergency fund?

An emergency fund is not a specific type of bank account, but can be any source of cash you’ve saved to help you afford financial hardships like losing your job, medical bills or car repairs. How they work:

  • Most people use a separate savings account
  • They should cover 3 to 6 months of expenses
  • Don’t pull money from your emergency fund for regular expenses

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