Week 10: Finding the Right Bank For You
This week we're going to be discussing something that applies to all of our readers: bank accounts. What many people don't know is that all bank accounts are not created equal. Checking and savings accounts can be very different from bank to bank, and it is important to have the ones that best fit your needs.
In case you missed one of our newsletters, check out weeks 1-9 below:Week 1: Assessing Your Current Financial Health
Week 2: Setting Up a Budget
Week 3: Establishing Financial Goals
Week 4: How to Get Out of Personal Debt··· For Good!
Week 5: Slashing Your Spending & Expenses
Week 6: Making the Right Investment Choices
Week 7: The Fool-Proof Guide to Taxes
Week 8: 4 Essential Insurances: Are You Fully Covered?
Week 9: The Definitive Guide to Retirement Planning
1) Understand the different types of bank accounts.
This week's Activities for Success:
2) Complete the Simple Savings Calculator.
3) Re-evaluate your banking choices, seeing if there is a better fit for you and your family.
Types of Bank AccountsBefore you begin analyzing what you need from your bank, let's take a look at 5 different accounts that are typically offered by banks:
Savings Account: These are intended to provide an incentive for you to save money.
Basic Checking Accounts: Sometimes also called "no frills" accounts, these offer a limited set of services at a low cost. You'll be able to perform basic functions, such as check writing, but they lack some of the bells and whistles of more comprehensive accounts. They usually do not pay interest, and they may restrict or impose additional fees for excessive activity, such as writing more than a certain number of checks per month.
Interest-Bearing Checking Accounts: In contrast to "no frills" accounts, these offer a more comprehensive set of services, but usually at a higher cost . Also, unlike a basic checking account, you are usually able to write an unlimited number of checks. Checking accounts which pay interest are sometimes referred to as negotiable order of withdrawal (NOW) accounts. The interest rate often depends on how large the balance in the account is, and most charge a monthly service fee if your balance falls below a preset level.
Money Market Deposit Accounts (MMDAs): These accounts invest your balance in short-term debt such as commercial paper, Treasury Bills, or CDs. The rates they offer tend to be slightly higher than those on interest-bearing checking accounts, but they usually require a higher minimum balance to start earning interest. These accounts provide only limited check writing privileges (three transfers by check, and six total transfers, per month), and often impose a service fee if your balance falls below a certain level.
Certificates of Deposit (CDs): These are also known as "time deposits", because the account holder has agreed to keep the money in the account for a specified amount of time, anywhere from three months to six years. Because the money will be inaccessible, the account holder is rewarded with a higher interest rate, with the rate increasing as the duration increases. There is a substantial penalty for early withdrawal, so don't select this option if you think you might need the money before the time period is over (the "maturity date").
Should You Put Money into a Savings or Checking Account?Now that you've read about these 5 different types of accounts, let's focus in on the two that are most important: checking and savings. A checking account should really only be used for bill paying and everyday purchases. Keeping all of your other money in a savings account (or CD) will earn you interest, which can really add up in the long run. Let's take a look at how you can grow $10,000 today into over $25,000 in 10 years:
When choosing a bank, make sure that it has the features that are important to you. Things like interest rates, convenience, FDIC membership, size and minimum deposit amounts should all be taken into consideration.
Researching the services that a bank offers is also a very important step in making a decision. Make sure that a potential bank has the services that you want, such as ATMs, online banking, credit/debit cards, direct deposit, etc.
This is a big factor for many people. Banking fees have risen significantly in recent years, and show no signs of falling. The average price of maintaining a bank checking account is currently about $200 a year. Before you sign up, take a close look at the fees associated with the account, and try to estimate what it will cost. You might not be able to determine it exactly, but an estimate will still be useful. Once you've gone through the process of selecting a bank and signing up, you probably won't be inclined to switch for awhile. When comparing the expected fees of one account with another, be sure to also factor in any difference in the interest rate the two accounts offer. If one account pays sufficiently higher rates than another, it might more than offset the additional fees that account charges.
We hope that you now have a better understanding of what different kinds of bank accounts are out there, how important having a savings account can be, and what to look for in a bank. If you'd like more information, here are some more useful articles to read.
1. Understand the different types of bank accounts.
This week's Activities for Success:
2. Complete the Simple Savings Calculator.
3. Re-evaluate your banking choices, seeing if there is a better fit for you and your family.
Stay tuned for next week's issue, which will cover Loans: When They're Good and When to Run Away.