Financial Institutions
As you grow older and start living on your own, at some point you will need to open your own checking, account, brokerage, and retirement accounts.
When you are ready to open these accounts, you need to understand the differences between the various financial institutions that offer each of these accounts so you can make the best decision for your needs.
Most people in the U.S. have a checking account to deposit their paychecks and pay their bills. When you spend more money in your account then you have, your account is said to be “overdrawn,” and your bank will charge you a fee. The average overdraft fee is $33.
Common Types of Financial Institutions
Banks
- For-profit—they profit by loaning money and
charging fees
- Offer checking and savings accounts
- Offer personal and business loans
Credit Unions
- Generally smaller and more local
- Primarily savings and short-term loans
- No commercial loans
- Non-profit
- Locally owned by depositors
Savings and Loans
- For-profit
- Do lots of home loans (called mortgages)
- Not as efficient as banks
Brokerages
- For-profit
- Allow you to invest in stocks, bonds, and mutual funds
- Offer many retirement accounts
Life Outside The System
Some people avoid banks and other financial institutions, preferring to live just with cash. This means every paycheck needs to be cashed with a cash-checking service, and every bill needs to be paid with a Money Order.
The costs for these services add up fast. The average check cashing service charges a 5% fee on each check, while each money order costs about $2. This means you need to pay extra both to access and spend your money!
Between check cashing fees and money order fees, a person earning $50,000 per year living outside the financial system pays almost $2,600 per year just in transaction costs!
In the Budget Game, your checking account, savings account, and credit card are all managed by the same commercial bank.
Budget Game Tip