If you’re just stopping by for the first time, this is a class in a series of classes over the next few months which will culminate in the development of a complete financial plan. Stop by HERE for a complete list of classes currently available and HERE for more information about the website.
Class Objectives: To learn the benefits and basics of how to choose a bank account including checking, saving, money market accounts, CD’s and Treasury Bills.
Assignment: Bank Account Interest Rates in Excel | Google Docs (previews in lecture material)
These days, you may wonder why you even bother keeping your money in a bank. Or, maybe you did give up on banks and keep it in a box under the bed instead. Realistically, the interest you will earn on a basic savings account, even if you have a fairly substantial amount of money, is so close to zero that it seems as though it may not even be worth it, at least certainly not for the return. For example, the average savings interest rate for 2016 is a mere .06%. Assuming you had $10,000 in the bank, you’d only make $6 for an entire year (not hardly even enough to buy yourself lunch) and even $100,000 would only earn you $60 (basically nothing to someone with $100,000 in the bank). Fortunately, there are some other options to increase your return, at least nominally, and we’re going to talk about them.
However, the reasons you should have a bank account go beyond earning money to providing convenience that actually helps you to save money and time as well. And we’re all about saving time and money around here.
In addition, there are certain accounts that are better than others in terms of interest rates and fees. The more you know, the more you can do with your money.
5 BENEFITS OF A BANK ACCOUNT
There are both monetary and other benefits to having bank accounts. Some of these include:
- SAFETY FROM PHYSICAL THEFT OR LOSS – One of the best reasons to keep your money in a bank account instead of in your home (or in your purse) is to keep it physically safe. While I realize that account fraud and stolen account numbers do exist, it is more common to lose physical cash. In addition, if someone hacks into your bank account or uses your debit card fraudulently, the bank will hold some responsibility for the lost money and you are much more likely to get the money back.
- LOWER COSTS – The ability to cash checks is a privilege you only have for free if you have a bank account with an institution. The cost to cash your check if you don’t have a bank account is $6 on average (that’s an entire year of interest with the average interest rate!). Without using checks at all, you can switch to online bill pay, which will save you money on buying checks, envelopes, postage stamps, etc. Transferring money is also less expensive when you have a bank account. Even if your bank charges a monthly fee, you’re still likely paying less overall.
- RETURN – Even earning a small amount of money in interest is better than earning nothing at all. Doing your research on accounts with higher interest rates available to you will help you to increase your return.
- CONVENIENCE – When you have a bank account, your money is always there when you need it with just a swipe of a card. If you’re out and about and find yourself needing cash, you can stop at one of the millions of ATM’s worldwide and get it immediately. Most large banks and credit unions also offer online bill pay, which you can set up to automatically pay certain bills each month.
- FUTURE CREDIT NEEDS – If you establish a relationship with a bank, you’ll have greater access to credit in the future. For example, this includes mortgages, auto loans and other lines of credit.
While I would bet that 100% of all people reading this have bank accounts, it’s important to realize the benefits that we have and also learn more about how we can get more out of our banking relationship (and more out of our money in general, right?).
WHAT TO LOOK FOR IN A BANK
If you’re just starting out in a new area or for any reason are looking to open up a new account, there are a number of things to specifically look for. A few of these include:
- MONTHLY FEES – While I understand the logic that banks need to make money to be able to provide the services that I use, I’m also very adamant against personally paying bank fees. Most banks will waive monthly fees if you meet certain criteria such as maintaining a minimum balance or having other linked qualified accounts. If you will be paying monthly fees, be sure to compare several banks to lower this cost or maximum the services you get for that fee.
- INTEREST RATES – If you keep more in your bank accounts than you need on a regular, ongoing basis, the interest rate will be a concern for you. Hopefully you have an emergency fund saved up where you keep a small amount of money for an immediate emergency and a cash reserve fund where you keep 3-6 months expenses. This chunk of money should be kept in something like a high-interest online savings account.
- ONLINE ACCESS – Being able to see my money online is essential to me. While we were living in Asia for 4 years I didn’t have online access to my local accounts and struggled with keeping my transactions and accounts updated on a paper system. Online access is something I no long take for granted! It also means that you can also pay bills directly with your account, receive money electronically and transfer money to other accounts or to others. Some websites are easier to use than others, so it’s a consideration.
- EXTRAS – Some accounts offer certain things as bonuses for having an account with them such as free checks. free ATM withdrawals from any bank ATM and free money orders. If you have these extra things that you use, you should consider the costs of them at several different institutions in addition to their monthly account fee.
- LOCATION – Physical location is becoming less and less important, but if you regularly deposit large amounts of cash or just find it important to bank in person, you’ll definitely want to consider both the actual location and number of locations in the areas to which you frequently travel. If you regularly visit ATM’s to pull out money, find a bank that has ATM’s in the areas you frequent will save you on ATM fees.
- FDIC INSURED – While I do believe that essentially all banks and credit unions are FDIC insured, this should be clear and apparent with any bank that you choose to do business with. Not advertising this would be a huge red flag.
- CUSTOMER SERVICE – If there is ever an issue with your account, customer service will be on the top of your priority list. Avoid a headache later down the road by researching reviews about how good a bank is about resolving issues before you open an account with them.
Asking friends and family about which banks they use and why they do or don’t like them is a good start. Ultimately, you may have different needs and wants from others, so it’s a good idea to do your research. In addition, look for new customer sign-up bonuses which can range from $100-300 or even more for premier accounts.
TYPES OF ACCOUNTS
When I’ve referred to bank accounts previously in this course, it’s been more specifically about checking and savings accounts. However, there are other similar accounts that can provide you with similar benefits, but an increased return on money that you need to keep immediately available.
Let’s go back to talking about interest rates specifically. In today’s U.S. market, interest rates are very, very low. For example, 10 years ago, the treasury bill rate was over 5% and it was common to find savings accounts with 4-6% annual interest. Now the treasury bill rates are all far less than 1%. We live in a different financial world than before and we have to make extra effort and take extra risk to be able to maximize the potential of our money.
Let’s talk about the basic types of accounts that you have the option to use for your short-term funds.
BASIC CHECKING accounts are useful for day-to-day bills, but are earning essentially no interest. PREMIER CHECKING which always require higher balances and possibly other linked services, provide a maximum of .75%, but for most big banks, it’s only around .05% (pretty much nothing).
SAVINGS accounts are earning only slightly higher and as mentioned earlier, the average interest rate is .06%. ONLINE SAVINGS accounts are considerably higher at around 1%, but include the big trade-off of not being able to bank in person at all, which may or may not be important to you (it’s not to me…).
CERTIFICATES OF DEPOSIT, which earn a slightly higher rate because you are committing your money for a specified period of time and will have to pay a penalty if you withdraw your funds, are still only earning slightly higher than checking accounts at brick-and-mortar banks. Even with online accounts, the larger returns are only at 1.5% with a 3-year commitment.
TREASURY BILLS were mentioned before and the effective rates on them go from .24% for a 1-month T-bill to .62% for a 12 month T-bill. Treasury bills are not bank accounts, but a short-term debt from the U.S. government that you purchase for a discounted price and then receive a greater amount at maturity. For example, a 12-month treasury bill could be purchased for $938. In 12 months you would currently receive $1,000 which resulted in a $62 gain.
I’ve updated the spreadsheet for this class with the rates from some of large financial institutions. When you’re doing your own comparison, you can update it for your local banks and any other accounts you are interested in.
This was just a summary of types of accounts, benefits and things to look for in a bank. In this current financial environment, it’s important to maximize your returns as best as you can, but not to get too caught up in taking too much risk to compensate for the low interest environment.
I truly believe that the way you are tracking and handling your money on an ongoing basis is going to make much more of a difference than earning an extra $50 in interest. Financial education, being intentional about your money and working hard are going to make you rich, not the interest on your bank accounts!
EXAMPLE: THE SMITH FAMILY
The Smith family currently has a small amount of money in their emergency fund (around $1,500), but they will be greatly increasing their cash reserve once they’ve paid off their high interest rate consumer debt. They decide that keeping the $1,500 in their savings account linked to their current checking account is the best choice for them so that they can easily access it.
Because Jim has a variable income, it’s important for them to have access to extra money in tight months.
Once they start to save for their cash reserve, they’ve decided to open an online savings account. They will then earn 1% interest, but still have easy access to those funds through free bank-to-bank funds transfers if they need it.
You may want to take a look at your options for bank accounts and see if there are additional features or returns that may improve your finances.
- IMPROVING– At a minimum, check your current interest rate on your checking and savings accounts.
- INVESTED– Compare your current bank’s interest rates to other banks and determine whether you have additional cash that you would benefit from transferring to an online bank account or putting in a short-term CD.
- UNSTOPPABLE– Complete the spreadsheet to compare the big banks and local banks and credit unions in your area. Look into the features of those banks and choose the best one that fits your needs. Open an online account and deposit your cash reserve.
Make sure you keep a copy of your research in your Financial Plan binder.