Banking 101: A Comprehensive Guide to Understanding Banking Basics

By UBank
Tuesday, August 29, 2023

They say money doesn’t grow on trees, and they’re right — it grows at banks. Or, more accurately, your money grows at banks if you use certain banking products and services, whereas with others, you’re just storing your money. Either way, though, when you open a bank account, you improve your money management while contributing to other people’s ability to get money.

Yes, that’s right — with this one small decision, you make money more accessible to other people. That’s because banks use some of the money stored with them to fund all kinds of business and personal finance products. Our banking 101 guide will walk you through how banks work, what banks can do for you, and the elephant in the room: interest rates. It’s a worthwhile read whether you’ve had a bank account for ages or you’re just getting started.

What is banking?

anking is the process used by financial institutions to store and lend money as well as transfer it between accounts. It’s how billions of people’s funds are pumped into the worldwide financial system that keeps the global economy connected.

Any institution with the primary function of banking is called — you guessed it — a bank. These institutions take deposits, lend money, and provide financial services. They earn money from their operations since they charge interest on their loans and fees for their services. They fall into three main categories based on who they serve:

  • Commercial banks. These banks serve everyday people as well as small businesses. They offer checking and savings accounts through which customers can easily write and deposit checks. Commercial banks’ checking accounts typically come with debit cards for spending money at stores or online too. Additionally, many commercial banks — including UBank — offer both business loans and personal loans. They fund both via the money in their customers’ savings accounts.
  • Investment banks. Large corporations, as well as investors and government agencies, are the typical clientele at these banks. You’ll often find banking analysts, research associates, trading specialists, and capital market analysts working at these institutions. These teams act as brokers and financial advisors for their clients while managing their wealth and assets. Chances are you’ll only engage with them if your job calls for it.
  • Central banks. Many countries include a central bank in their government. In the U.S., this is the Federal Reserve, which has the sole authority to set federal monetary policy and thus alter the money supply. You might never directly interact with a central bank, but its actions certainly impact you and your bank. The availability of money affects inflation and interest rates — two major financial factors.

3 types of bank accounts

From here on out, we’ll be assuming that you’re only interacting with commercial banks. You can open the below types of accounts at these banks.

  • Checking accounts. Opening a checking account gives you the ability to deposit, store, and withdraw cash. Most accounts also give you a debit card you can use for everyday spending without actually withdrawing your cash. Some accounts even earn you interest! This, though, isn’t all that common — interest rates are much more common for other types of bank accounts.
  • Savings accounts. You earn interest on the money you keep in these accounts, so if your main goal is to store money, choose a savings account. You’ll earn extra money by literally just letting your cash lie still. These accounts’ very structure encourages this — often, you incur fees if you take more than a certain amount of withdrawals per month. Checking accounts, on the other hand, are much more flexible with withdrawals and deposits.
  • Certificates of deposit (CDs). These accounts are the most hands-off of all. You just make a one-time deposit, and after that, you can’t touch it until after a certain time limit passes. This might sound restrictive, but there’s a reason for it — CDs typically offer higher interest rates than savings accounts. When you leave your funds in them for longer, you earn more money. Plus, you can reinvest your monthly earnings right back into your account.

Of these accounts, a checking account is the most fundamental. Without it, everyday spending can be much more challenging. And although you don’t fully need the other two accounts, we absolutely recommend them! Regularly adding extra income to your savings account can help you earn additional income on top of it. Putting some of this money that you don’t expect to immediately need into a CD can further boost your earnings. A great financial strategy thus involves all three types of accounts. There aren’t quite drawbacks to opening bank accounts, but there is one thing to look out for: Many bank accounts impose minimum balance requirements. This means you’ll need to keep a certain amount of cash in them every month. Consider whether the account balance requirements you’re seeing are realistic for your budget before you sign up for any account.

3 types of banking services

Bank accounts come with banking services too — the idea is for you to actually use your money! These services include:

  • ATM withdrawals. Need tangible cash in a pinch? Bring the debit card tied to your checking account to an ATM. You’ll get your cash in just about a minute, though if you use an ATM not associated with your bank, you’ll incur fees.
  • Payments. You can set up direct deposit with your bank account so that, among other earnings, your job income goes right to your account. Similarly, you need a bank account to make payments via debit card (which comes with your account) and platforms including Venmo, PayPal, and Cash App. Some accounts also allow for automatically paying bills directly from your account. This is smart as long as you always have enough cash to cover these costs.
  • Online and mobile banking. Unlike traditional brick-and-mortar banks with opening and closing hours, online and mobile banking are accessible 24/7. Through digital banking, you can access your funds, review bank statements, make payments, and initiate a funds transfer whenever, wherever. We suggest only using these tools, though, when you’re confident your internet connection is highly secure. Otherwise, you could give unwanted third parties such as hackers a door right into your accounts.

Managing finances with a bank

Properly managing your money is how you pay all your costs and avoid landing in debt that requires pricey interest payments, adding insult to injury. Money management is also never something you have to do alone. Commercial banks can help you manage your finances — they are, after all, the very institutions that handle everyone’s money.

We mean this in two ways. The first is that, inside your bank account, you can easily look at all your spending and earning. This is all automatically recorded, taking a ton of tedious work off your plate. Plus, with the financial tools inside your online bank account, you can easily go over your spending habits with a fine-toothed comb.

The other way we mean this is that you can visit your bank in person for help from the folks who work there. Here at UBank, calling it “work” is only partially correct for us. We love what we do, especially when we’re guiding you through key financial decisions and making you feel reassured at every step of the way. With a great bank on your side, you get the best possible use of your banking products and services — and the best possible financial outcomes.

Understanding interest rates and loans

You’ve seen us use the word “interest” a whole bunch in this piece. Wondering what that means? Let us explain — all savings accounts and loans have interest rates. This is the rate at which the money you store in a savings account earns you extra money. It’s also the rate at which the money you borrow via a loan generates additional money for you to pay. In fact, some of the interest that banks earn from loans is paid as interest to savings accounts.

You’ll pay interest on almost all loans that you take out. This includes personal loans, mortgages, and credit cards. If anything, interest is why mortgages are so expensive — depending on current rates, you might pay more in interest than on the loan itself! And while you can’t avoid interest rates, you can take steps to find the lowest ones possible.

For starters, when you pursue loans, resist that totally understandable temptation to choose the first one you see. Take the time to compare three to five loans on factors including their interest rates — lower rates mean more affordable loans. On top of that, certain types of loans are generally lower-interest than others. A bank loan, for example, will typically charge you less interest than a credit card. That said, you’ll pay no interest on the latter if you always pay your balance before the month’s end.

Although we’ve mostly been talking about high interest rates as something to watch out for, they’re great for your savings account. The higher the rate on your account, the more interest it earns you. And just as we suggest comparing loans side by side, we encourage you to do the same with savings accounts. This is a smart move whether you’re looking at regular savings accounts, online savings accounts, or both. It’s how you maximize your earnings through an account with a minimum balance you can absolutely meet.

Banking basics with the experts

Great bankers know that no question is too elementary to ask. That’s our philosophy here at UBank — we’re always eager to help you make sense of banking and take savvy financial steps. We especially love doing this face-to-face in our eight East Texas locations, because there’s nothing quite like in-person help and care. Visit your nearest UBank branch for guidance on banking 101, advanced finance management, and everything in between.

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