Current Account: Definition & Components
Different types of bank accounts are going to serve different purposes depending on your needs. You might need an account for business purchases, personal spending, and savings.
A current account is one type of account that can bring several benefits. Read on to learn how a current account works, the factors to consider, and how it differs from a capital account.
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KEY TAKEAWAYS
- Your current account is a way for you to securely store your income. Its main purpose is to handle your daily expenses.
- For extra money left over at the end of the month, a savings account or capital account is the best option.
- Pay attention to your average account balance as it gives you insight into the health of your finances.
What Is a Current Account (Balance of Payments)?
A current account is a financial vehicle used to store your money safely at the bank of your choice. A personal current account helps you keep track of your expenses and income. It also helps you establish payments for your bills with a debit card or automatic clearing house (ACH) payments.
Keep track of how money enters and leaves your account with your transaction history and an account balance. A current account balance is usually expressed in U.S. dollars, pounds sterling, or euros. The balance of payments is also known as your transaction history. It records all financial transactions you’ve made for a period of time. Transaction history shows all the purchases, payments, and withdrawals alongside any income for the period in question.
Current Account vs Capital Account
A current account is a bank account used to manage your day-to-day expenses. It’s also called an operating account or checking account. When you make a purchase, the money comes out of the account and gets subtracted from the balance. If you make a deposit the cash adds to your balance.
Visiting a physical bank branch to set up a checking account, isn’t always necessary. Opening an electronic banking account has the same features, extra services, and support you’d get at a regular bank.
A capital account is a bank account that’s used to save for bigger purchases or expenses, like a house, taxes on income, or a car. It includes things like stocks and bonds and pays out dividends in some cases. It’s also known as an investment account. This is where you can store any current account surplus.
Your investment balances also see a better rate of return compared to a standard savings account. In some cases, your capital account will have even an interest rate that outpaces the inflation rate. This means your capital account balance increases much faster and your money goes farther. However, in an ever-changing economy, the rate of return on your investment balances could change overnight. It fluctuates much more than a domestic savings account.
A current account balance is what you have left in your bank account at the end of the day after processing all your monetary transactions. This is also known as a daily balance. This includes any deposits (cash, dividends, income, or direct deposits). At the end of your statement cycle, you’re also shown an average monthly balance which gives the average of your current balance throughout the month. You’ll also see any fees for extra services included at the end of the statement period.
What Are Some Factors Impacting A Current Account?
When it comes to a current account, several factors impact it regularly. These factors are all based on your personal finances and decisions. It is important to know what these are to maintain a healthy checking account balance.
Income: A regular inflow of money helps you build a healthy account balance. It doesn’t guarantee your account will be current though. If there are more expenses coming out compared to money coming in then you may see an overdrawn account balance. If you are not earning any income then your financial accounts will also be negatively affected. Your income can be from a multitude of sources. In addition to regular income payments from the companies you work for, you might also have income from investments. All in all your inflow of money should outpace your transactions.
Transactions: The more debit transactions made, the more money comes out of your account. Credit transactions add money to your account. The individual transactions you make determine how much income you have leftover. These transactions might include debts, bank deposits, income from investments, transfers, purchases, and monthly bills. Mindful spending habits help to keep that in check.
Services: When you spend more than what’s in your personal checking account, you’re subject to overdraft fees. If you were already short on cash, this creates a vicious circle of being charged for having a current account deficit. Overdrafts and maintenance fees impact your account balance positively or negatively. It depends on which services you use. Some banks charge fees for foreign transactions, foreign currency exchanges, and direct transfers. To know if your bank charges for these services, you should contact their customer service line or visit the nearest branch.
Countries: Different countries with different currencies affect the balance of your current account. Foreign exchange fees and currency exchanges impact your account balance with domestic banks. This is especially true if you have a foreign bank account or making a purchase in a foreign country. Many times, your purchases in other countries come with a foreign transaction fee. The amount of the fee depends on the bank you choose. Foreign banks may also charge a fee for your transactions with them.
Summary
Overall, a current account helps you send and receive money safely, keep track of spending, and manage your income payments. If you find yourself with a surplus of money in your checking account, it’s wise to open a domestic savings account or money market to earn interest on your disposable income over a long period of time.
FAQs on Current Account
You should have a current account balance that covers your basic living expenses. That amount is different for everyone based on what your living expenses are. It is crucial to have a sufficient amount for any upcoming payments in your current account to avoid an overdraft fee. Also, any payments made directly from a savings account would include a fee as well.
The money you keep in your current account doesn’t have a limit. If you have U.S.-based financial accounts you’ll have a limit to how much the FDIC will guarantee. The FDIC guarantees up to $250,000 per depositor. This doesn’t limit the current account balance you can keep. However, your money will earn much less in a checking account compared to an investment account which likely earns more than the inflation rate.
Yes, you should have no issues receiving money in an account that’s current. If the account has a hold on it, you might not be able to receive money. If your account is negative you may need to make transfers payments into the account to cover the current balance so you can receive money. You should be able to receive money into your account through automatic transfer, direct transfers, or international transfers. Other things that might impact your ability to receive money are government garnishments that stay on your account for a period of time for any debts you have.
Yes, you can. As long as you have the cash to deposit, you’re good to go. Depositing domestic currency into your account is easy to do by going to an ATM or bank location. Foreign currency can also be deposited by it may be subject to foreign exchange rates. The cash adds to your average account balance.
Not necessarily. Saving money in a current account is more difficult than putting money in a savings account or money market. If you want to save money, it’s best to use a savings account to keep it separate from your daily transactions. Your checking account is also accessible by your debit card. So any purchases made with it are deducted from your current balance. This prevents you from saving effectively. By putting any surplus funds into a capital account, you are outpacing inflation and typically you’ll earn more money compared to a regular checking account.
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