The purpose of this article is to cover the basics of banking, especially on how to select a bank and a checking account. Before we begin, here are a few basic facts to get you started.
- First, a bank account enables you to access your money quickly and easily, such as by writing checks and by withdrawing money from an ATM.
- Second, a bank is the safest place you can put your money, because funds in U.S. bank accounts are insured against loss by the federal government for up to $250,000 per depositor.
- Third, you pay for the convenience and safety of banking. Some accounts pay interest while others don’t, but those interest rates will be well below the rates offered by mutual fund companies and brokerages. You can earn significantly more by putting it into a certificate of deposit, but to do so you’ll have to agree not to withdraw it for a fixed period of time .
- Fourth, bank fees may seem small, but they really add up. If you’re not paying attention, a simple checking account could cost you $200-250 a year, after the monthly fee, the per-check fee and ATM charges are added up. And while many banks offer “free” checking if you maintain a substantial balance, the account isn’t free at all, since you could be making a few hundred dollars a year by investing that money elsewhere.
With this in mind, let’s discuss the specifics.
Where to Bank
You may be surprised to hear that you don’t need a bank at all in order to access your money quickly and easily. Credit unions, savings and loans, mutual funds, and brokerages offer checking and savings services similar to what banks offer. Before we discuss banks in more detail, here is a brief discussion of these other options:
Credit unions are non-profit, member-owned, financial cooperatives. They are operated entirely by and for their members. When you deposit money in a credit union, you become a member of the union because your deposit is considered partial ownership in the credit union. To join a credit union, you ordinarily must belong to a participating organization, such as a college alumni association or labor union.
To learn whether you are eligible, or to locate a credit union or ATMs near you, visit the Credit Union National Association (or, to reach CUNA by phone, call 800-356-8010 to find the toll-free number in your state).
While the accounts are similar to bank accounts, the names are different:
- share draft accounts (like checking accounts),
- share accounts (like savings accounts), and
- share certificate accounts (like certificate of deposit accounts).
For nearly all credit unions, deposits up to $250,000 are insured by the National Credit Union Share Insurance Fund, but a few aren’t insured, so confirm that the credit union you are considering is backed by insurance before opening an account.
Interest rates tend to be higher and fees tend to be lower than at commercial banks, because they exist to serve their member-owners rather than to maximize profits. On the downside, credit unions usually have very few branch offices and ATMs. However, to compensate for this, in most states credit unions have formed surcharge-free ATM networks among themselves, and the information is freely available at the CUNA site. Another downside is that credit union accounts tend to have fewer bells and whistles than bank accounts, but they are improving in this area. For any credit union you’re considering, confirm that it has the features and services you need.
Another substitute for a bank account is a cash-management account at a brokerage. You’ll earn money-market rates, which will usually be significantly higher than the interest the bank would pay. The fees will generally be less than what the bank would charge, and the fees might be waived entirely if you have a substantial portfolio at the brokerage. If you overdraw your account, the interest rate will be lower than what the bank would charge, and in addition it’s usually tax-deductible because it’s considered margin interest. You’ll be able to perform all the basic banking functions, such as check writing and using a Visa debit card at any ATM.
However, there are a few downsides. Very few brokerages have ATM networks, so when you use an ATM you will be charged by that ATM’s owner and possibly also by your brokerage’s bank partner (if the brokerage itself isn’t a bank). Also, as with credit unions, brokerages lack some of the bells and whistles that commercial banks offer. Some brokerages don’t allow you to drop by a branch to deposit checks, some don’t offer automatic bill paying, and some don’t accept checks written to you from someone else.
If you already have a brokerage who offers cash-management accounts, check it out to see if it has the features and services you need. If you’re in the process of choosing a brokerage for your trading and might want a cash-management account along with it, be sure to investigate the offerings of the brokerages you’re considering.
A final banking alternative is a money market account at a mutual fund company. They offer basic features such as check writing, but lack a lot of the other services banks offer. The rates tend to be significantly higher than those offered by banks. However, the accounts aren’t FDIC insured against losses.