← Money Basics After High School · about 45 min
Banking and savings
Where to keep your money so it's safe, free, and growing.
Three kinds of accounts
Once you get a paycheck, you need somewhere to put it. Most people use two accounts: a checking account for spending and a savings account for money they don't touch.
| Account | What it's for | Interest | Watch out for |
|---|---|---|---|
| Checking | Everyday spending: debit card, direct deposit, paying bills | Usually none or almost none | Overdraft fees, monthly fees |
| Savings | Money you're keeping, like an emergency fund | Low at most big banks | Minimum balance fees, very low rates |
| High-yield savings | The same job as savings, but it actually grows | Much higher, often at online banks | Rates can drop at any time; check the APY |
Rates change all the time. The FDIC posts national average rates each month (link in Sources).
Words you need
- Bank vs. credit union
- A bank is a business owned by investors. A credit union is a nonprofit owned by its members, so it often has lower fees and better loan rates. Either is fine if it's insured.
- Interest rate
- The percent a bank pays you each year for keeping money there, before counting compounding.
- APY (annual percentage yield)
- What you actually earn in one year, including compounding. Always compare accounts by APY.
- Compound interest
- Earning interest on your interest. Each month's interest gets added to your balance, so next month you earn on a bigger number.
- FDIC / NCUA insurance
- If an insured bank (FDIC) or credit union (NCUA) fails, the government covers your deposits up to $250,000 per person, per institution, per ownership category.
- Overdraft
- Spending more than you have in checking. The bank may pay it anyway and charge you a fee for each overdraft.
Worked example: interest on interest
You put $1,000 in a high-yield savings account that pays 5% APY. You don't add or take out anything. How much will you have in 10 years?
- Year 1: earn 5% on $1,000
$1,000 × 1.05 = $1,050.00 - Year 2: earn 5% on $1,050 (not just $1,000)
$1,050 × 1.05 = $1,102.50 - Keep going: multiply by 1.05 once per year
$1,000 × 1.05¹⁰ = $1,628.89 - How much of that is interest?
$1,628.89 − $1,000 = $628.89
You'd have $1,628.89. Simple interest (5% of $1,000 every year) would only give you $500. The extra $128.89 is interest on interest.
Try it
Change the numbers. Try the same $100 a month in an account paying 0.01% and one paying 4%. Over 10 years that's about $12,006 versus $14,670: the same deposits, and about $2,664 more just for picking a better account.
Compound interest calculator
Assumes the APY stays the same and deposits land at the end of each month. Real rates change.
Fees and traps
- Overdraft fees: for years a typical fee was around $35, and you could be charged more than once a day. Many banks have cut or dropped them. Read your bank's fee schedule, and you can turn off overdraft coverage for debit cards so a purchase just gets declined instead.
- Monthly maintenance fees: often waived if you set up direct deposit or keep a minimum balance. If you can't meet the rule, pick a different account.
- Minimum balance: some accounts charge a fee if you dip below a set amount.
- ATM fees: using another bank's ATM can cost you twice, once from each bank.
- Too-good-to-be-true rates: make sure the bank is FDIC insured or the credit union is NCUA insured. You can look it up on their websites.
Practice
An account pays 5% APY. You deposit $1,000 and leave it alone. How much interest do you earn in the first year?
Show answer
$1,000 × 0.05 = $50. APY already includes compounding, so for one year you just multiply.
You deposit $2,000 at 4% APY for 3 years with no more deposits. What's the balance?
Show answer
$2,000 × 1.04³ = $2,000 × 1.124864 = $2,249.73.
You have $300,000 in one individual savings account at one FDIC-insured bank. How much is NOT insured?
Show answer
$300,000 − $250,000 = $50,000 is over the limit. (Spreading it across banks or ownership categories would fix that.)
Your checking has $40. You buy $55 of groceries with your debit card and the bank charges a $35 overdraft fee. What's your balance now?
Show answer
$40 − $55 − $35 = −$50. You owe the bank $50, and $35 of that bought you nothing.
Bank A: 4.10% APY. Bank B: 4.00% interest rate compounded monthly. Which pays more?
Show answer
Bank B's APY is (1 + 0.04/12)¹² − 1 ≈ 4.07%. Bank A's 4.10% APY pays slightly more. Always compare APY to APY.
Can you…
Sources and dates
- FDIC: Understanding deposit insurance · as of Oct 2026
- NCUA: Share insurance coverage · as of Oct 2026
- FDIC: National rates and rate caps (monthly average savings rates) · as of updated monthly
- CFPB: Data Point, Checking account overdraft (median overdraft fee $34 at banks studied) · as of 2014