4. Savings account
Like a checking account, a savings account is a type of bank account where you can store extra funds. However, instead of using this account to manage day-to-day transactions, you put money in a savings account long-term. Your savings account can be used to save for something specific, like a security deposit for an apartment or a vacation, or be set aside as an emergency fund that you grow over time. No matter how you use your savings, you should look for a savings account that offers high interest and will help your money grow. Today, the best high-yield savings accounts offer about 2% APY.4
5. Interest rates
Understanding interest rates is key when evaluating bank products. It can be a bit confusing, though, since the interest rate on a bank account or loan might be expressed as "APY" or "APR," which aren't exactly the same things. Here's the difference:
Annual Percentage Yield (APY)
When you keep money in an interest-bearing bank acount, the bank pays you interest as an incentive for letting them hold your money. That's because banks make money by lending out your deposits — and they want to encourage you to save your money with them. Interest rates on bank accounts (such as saving accounts, CDs, and money market accounts) are often expressed as an annual percentage yield (APY), which is the percent of the balance you will earn each year once compounding interest is factored in.5
For example, if you have a savings account with a $1,200 balance that offers 1% APY and compounds annually, you would earn $12 per year in interest. If the interest is paid monthly, the bank would pay you $1 in interest each month. If your balance goes up or down during the following month, your interest payment for that month will change as well.
Annual Percentage Rate (APR)
When you borrow money, the lender will charge you interest on the money you owe them. You may also owe some fees for taking out the loan as well. The annual percentage rate (APR)6 lets you know the percent of the loan that you will pay for interest (plus any fees or other costs associated with the loan) on an annual basis. This amount will then get added to the amount you borrowed to calculate the total amount you owe. How much you borrow, how long you will take to pay the loan back (called the loan term or loan duration) and other factors like your credit score may impact your annual percentage rate.
6. Credit card
A credit card works similarly to a debit card in that it lets you make purchases by swiping a card. However, unlike a debit card, which pulls money directly out of your checking account, a credit card effectively allows you to borrow money and pay it back later. Your credit limit is the total unpaid balance you're allowed to have at one time and is determined by the card issuer when you apply. Using a credit card also affects your credit score, which is a three-digit number that tells creditors and lenders how responsible you are when borrowing money. Paying your credit card bill on time every month and keeping your balance low will help develop a strong credit history and build a good credit score, while missing payments and maxing out your card will hurt your credit score.
Debt is the broad term for any money you owe a creditor or lender. Debt can include money you owe on your credit card or on an existing loan, such as a car loan or student loan. You need to be careful when acquiring debt, because borrowing too much could saddle you with high payments you can't afford, leading to an unmanageable budget and a poor credit score. However, debt can also be a helpful tool for borrowing money when you don't have all the cash up front, such as paying for a college education or buying a car or a home. It's important to consider how debt payments will fit into your budget and what kind of return on investment you'll get by spending that money. For example, a college education may help you get a better paying job and ultimately earn more during your working life, and owning a home may cost you less over time than renting.7
To manage your money wisely, you need to know where it's coming from and where it's going. That's what a budget is for. In its simplest form, a budget tracks all your income and expenses. The goal is to have money left over after you subtract your expenses from your income. This is money you can use to save for an emergency fund or large purchase (such as a vacation or a car). If your expenses are more than your income, you'll need to tweak your budget to cut expenses in certain areas to at least break even — otherwise, your debt will keep growing and become more costly over time. You can create a budget with pen and paper, a spreadsheet, or if you want a bit more automation, with software such as Mint.8