This is probably one of the most important aspects of personal finance, but at the same time it is one of the least talked about areas of personal finance. It is assumed that in this day and age that nearly everyone is part of a bank or credit union. Surprisingly, there are still large portions of the population that do not use banks. For some, this is due to personal reasons, some because of past mistakes, and some simply because they don’t understand banking basics.
I have worked in banking and finance for several years and I still don’t have a complete understanding of the industry. But what I do know and understand is the basics of banking and what consumers need to understand.
For those of you that still use the mattress or jar in the cabinet technique, this is particularly geared to you!
I remember about 10 years ago when my great grandmother died there was a lot of sifting and exploration to be done in her house. She grew up in the early part of the 20th Century and raised a family through the Great Depression when times were very different. But long story short, we found thousands of dollars in jars all throughout her home. I think by the time it was all counted it was enough to pay for her funeral in cash.
Save your leftovers
Here is the thing: by the end of her life she had developed dementia and spent the last 5 or so years in a retirement home. That was cash that she had accumulated over the years from leftovers: change from the grocery store, left over cash from money orders purchased for bills. Think about if that money had over time been put into savings, even just into a basic savings account. The reason why she did not use a bank made sense to anyone who had lived through the Great Depression.
There are still thousands, if not millions, of people that do not use banks both out of fear and out of not understanding banking basics. For these folks, I’ve created this list of the top 10 things you should consider about banking, followed by how to pick the right account, understanding interest, options, and traditional banking alternatives. Today we will look at 10 basics to consider.
1. The money that you put into a bank account is safe. This may be the most important thing to understand about banks. If you put money under your mattress it can be stolen; if you put it in a jar it can be lost or it can burn in a fire. Bank accounts are insured by the FDIC, and credit union accounts by the NCUA, up to $250,000 per depositor. After the year 2014 for the FDIC and 2013 for NCUA, the insurance goes back through $100,000 per depositor per account. If you have questions on how to maximize that insurance, call your bank or credit union.
2. One thing to be mindful of, especially in your search for a bank, is that in most cases you do pay for the convenience of a bank account. Banks do tend to pay lower interest rates on interest-bearing accounts than do most brokerages and mutual fund companies that offer the same check writing privileges. Also keep in mind that some bank fees can be high. Account costs can easily add up over a year unless you keep the minimum required balance on deposit.
3. Even when the rate of inflation is low, the rise in inflation can sometimes, and usually does, outpace what banks tend to pay in interest-bearing accounts.
4. Also very important to keep in mind is that banks usually tend to use different methods to calculate the interest rates they pay. To compare the rate and how much money you will earn from the various accounts, you need to ask for the “annual percentage yield.” Banks will tend to quote both interest rates and the APY, but keep in mind that the APYs are calculated the same everywhere.
5. CDs or certificates of deposit offer some of the best guaranteed rates that you can find and are insured up to $250,000 each. This insurance standard does come back down in 2014 for banks and 2013 for credit unions. The catch with CDs is that you have to lock up your money from anywhere from three months to five years or even more to earn that rate. The upside is that if interest rates fall then the bank is locked into paying you the higher interest rate; the downside is that if interest rates rise, you are stuck with the lower rate. With rising interest rates, money market accounts become attractive options. They typically pay more than bank accounts and you do not have to lock your money up for a specific period of time.
6. ATM fees can take a big bite out of your budget. The convenience of using the ATM is becoming pricier. Banks often charge $2-3 to use a different bank’s ATM, then there is usually a separate transaction fee. Beware of those fees that can add up over the course of a year.
7. You have to comparison shop when it comes to banks and their perks. When finding the best deal for you and your needs, it takes a lot of work. Take for example, if you are car shopping and walk up to a car lot and decide to buy a car, you are going to get a far worse price than if you do your homework. The same principle works for banking. Do your homework.
8. Using the internet is probably the best way to shop for bank services. You can compare fees, yields and deposit requirements nationwide. Sites like Bankrate.com allow you to search and compare everything from the highest yields and lowest costs to the best loan rates available. You can even go as far as to search by region or location.
9. Banking online is the easiest way to manage your bill paying. Electronic bill paying can help you not only with the hassle of paying your bills, but you can also combine your bill payments with your budget and financial planning.
10. This might be the most important thing to keep in mind. You can bank without a bank. There are a number of financial institutions that offer the same products as a bank. The most common of these include credit unions, mutual companies, money market funds, and brokerage cash management accounts. If you don’t like physically going into a branch, you can do the entire process online. You can do everything from finding the bank to changing your direct deposit without ever stepping in a branch office.
Next we will look at how to pick the right account.
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