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Banking for Beginners


Woman taking photo of check on cell phone

So you are dipping your toe into the pool of banking, and you are starting to realize that it is more than just free lollipops and pulling up to the ATM. As a millennial, I’ve noticed a key lesson that remains untaught when entering adulthood is financial literacy. How exactly should we be keeping our money safe? What type of account is right for me?

Let’s start at the beginning, by tackling some of the lingo you need to know.

APY vs. APR

These terms are big and will affect your money in different ways.  Think of them both as building a snowman. Stay with me here… APY stands for Annual Percentage Yield—this is the rate of return applied to your savings account balance over a full year. The higher the APY the more likely your money is to grow as you continue to earn dividends on your balance. Therefore, you are looking for a high APY when it comes to saving. This application of the dividend rate is referred to as compounding. Picture compounding like rolling the head of a snowman; the more you roll the bigger it gets. The effects of compounding can be both positive and negative. In the world of savings, the bigger the snowball gets, the more your savings grows. However, in the world of borrowing as the snowball grows, the more money you owe. That is where APR comes in.

APR stands for Annual Percentage Rate, or the total amount of interest you will pay on a loan over a full year. This rate, just like APY can also be compounded. So, instead of earning dividends on balances you are paying interest on the loan balance. It is arguably more important to double check how this interest will snowball as you continue to pay off your loan. When shopping around always compare like percentages (APY v APY and APR v APR) Annual Percentage Yield and Annual Percentage Rate are different and are not comparable.

Now we can answer the big question, “how do I keep my money safe?”

Normal Savings Accounts & Reverse Tier Savings Accounts

A savings account is a way to keep your emergency money or money you don’t want to touch separated from your everyday money. The money in your savings account earns dividends and grows the more you make deposits without making any withdrawals. Steadily increasing the amount of money you have saved has the potential to help you when unforeseen problems arise like a flat tire or even allow you to treat yourself, to say, a vacation. Savings account designs can vary, some savings accounts are structured as a Reverse Tier Savings Accounts.

A Reverse Tier Savings Account is helpful in developing strong saving habits for those who may be new to saving or are starting off with a lower amount of money to save with. This type of account works differently than other more traditional savings accounts. The saver is offered a high percentage APY for the lowest tier balance. Imagine walking up a flight of stairs, if your balance is anywhere from $0-$500 your APY will be higher. But, as you climb the stairs, and your balance grows to be above $500 you will earn a smaller APY. You will still earn the higher APY on your first tier dollar amount, but anything in the second tier dollar amount will receive the lower APY. This is to incentivize saving. Remember, the higher the APY, the more dividends you are likely to receive.

Whether you’re new to saving or are a veteran saver both options offer a great way to either continue or kick off more dedicated saving.

Now for the final piece, the money you will spend.

Free Checking & Dividend Checking

Just as your savings account is the money that you do not spend, your checking account is usually the money that you spend on everyday expenses.

Let’s start with Free Checking. Just as the name sounds, there are no fees to open a free checking account. There are also no monthly maintenance fees associated with a free checking account.

For example Service Credit Union offers a 3-tier Everyday Checking Account with no monthly maintenance fee. All checking account benefits are based on account activity. The 3 tiers are Basic, Direct Deposit, and Direct Deposit +.

The major difference between a free checking account and a Dividend Checking Account is that dividends can be earned on money put in a dividend checking account. It is important to note that there can be a monthly maintenance fee associated with this type of account if an average daily balance is not met.

It is up to you to examine your needs and decide which account type is the right move for you.

Banking can be overwhelming but, financial wellbeing is important. Remember to take it one step at a time and choose the options that are right for you. To explore more options, or to further educate yourself, check out Service Credit Union’s resources now.