A field guide to financial institutions
Quick—what kind of business specializes in keeping people’s money? Did you say “a bank”? That’s right—but a bank is only one kind of financial institution. And knowing the difference can be important. Let’s take a look.
Know your options
Just because a financial institution can afford to do a lot of advertising doesn’t mean it’s right for you. Where you put your money is an important decision, so do your research.
Talk to friends and relatives about where they put their money.
Ask the institution to show you all of your options so you can choose the account that’s right for you.
Make sure you fully understand the terms of any special offers the organization is providing. How long do special rates or services last? Are you paying more in fees to get them?
Places to save and spend
A bank is a business that keeps money for people. The bank may invest, loan, or exchange the money, usually trying to make profits for the bank’s owners. In the case of a publicly traded bank, that means the bank’s shareholders.
A credit union is made up of members who share a common bond like working at a particular company or living in the same state. Credit unions take deposits from members and pay back interest (called a dividend). They also provide loans. Credit unions often provide higher yields and lower loan rates than commercial banks.
Whether you choose a bank or a credit union, you can typically choose a savings account or a checking account. A savings account usually pays you interest, but you’re not allowed to move the money around as much. A checking account is best for making purchases and paying bills.
Places to invest
If you’re willing to accept a higher risk for the chance of greater rewards, you might consider investing. You’ll need a custodian to be responsible for your investment account if you are under 18. The important thing when choosing where to invest is to fully understand the fees and loads you’re being charged–and that most investments are not guaranteed.
A brokerage firm executes orders to buy and sell specific stocks on behalf of its customers. They make their money from fees that they charge.
A mutual fund company maintains a portfolio of investments using the pooled money of investors. They make their money by taking a percentage of what customers invest, called a “load.”
Both mutual fund companies and brokerages can offer banking services such as checking accounts and credit cards. They can also offer you advice, although a mutual fund company has an interest in getting you to invest in their funds.
Places to be careful about
Payday lenders provide quick loans against a future paycheck. They charge high fees and interest rates. Sometimes people go in for a small loan and find themselves trapped in a cycle of debt. If you want to use credit more wisely, build your credit score so you can get a low-interest credit card. Or, better yet, don’t spend more than you earn!