Chapter 4: Money in the Bank
Stanley Ipkiss: “How about that account? We have... checking, savings and checking, CDs, savings and CDs, checking and CDs, savings, checking, and CDs, T-bills, or we can just take all your money and throw it in a big mattress back there.”
– The Mask (1994)
Opening a bank account is one of the first steps into the jungle called “financial services.” Beware! There are lots of predators, large and small, looking for a piece of your fleece. They come with friendly faces, alluring offers, breathless promises, and a lot of fine print. But the mattress is not an option. So grit your teeth and take the plunge.
To start, it helps to know that banks make money off you in two basic ways—one you see, the other you don’t. The one you see consists of a laundry list of fees for various things. The other is called the spread. When you put money in the bank, the bank turns around and invests it. They earn more from lending out or investing your money than they pay you in interest. The difference is what is known as the "spread.” The more money you deposit, the more spread they get to keep.
For example, when you open a checking account, you may see an “account maintenance” fee, but the bank may agree to waive that fee if you keep a certain balance in the account. They get paid either way.
Of course, banks are businesses that deserve to earn a profit so they can provide their services. It’s up to you to keep them honest by shopping around. Luckily the banking business is incredibly competitive, so you can find good deals.
Two Accounts You Need
I suggest everyone have at least two bank accounts:
A checking account that charges few fees to be used for day-to-day transactions—accepting paychecks, making deposits, and paying bills. These days almost all checking accounts come with a debit card that you can use to access your money to pay for things in stores and online.
A savings account that pays a high interest rate, often advertised as “high-yield savings” or “high-yield money market” accounts. It doesn’t need to be at the same bank as the checking account , but the two should be electronically linked (a one-time process) so money can be transferred back and forth. Some banks let you open several savings accounts so you can create different savings “buckets” for various goals.
Choosing a bank is boring and there’s a temptation to go with the first one you see. But comparison shopping on the web is easy thanks to sites such as Nerdwallet.com, Bankrate.com, and Depositaccounts.com. Think about how much time you put into comparison shopping for all the “stuff” in your life (you know…shoes, fishing rods, organic yarns, etc.) Commit at least as much time to comparing bank accounts. It will save you thousands of dollars over the years. If you are one of those “average” Americans who has had the same checking account for sixteen years and pays $14 per month in fees, this goes for you too. [5]
When it comes to choosing a checking account, think about what is most important to you. Here are some considerations:
Are there ATMs that will be free to use near your home, work, or where you shop? Check the “in-network” ATM locator for the bank you’re considering.
Do you want to do your banking in person so you can ask questions and get to know the people? A branch nearby, perhaps at a local bank or credit union, might fit the bill.
Do you expect to travel a lot, including internationally? A mega bank with nationwide coverage and extra services could be for you.
Do you live, breathe, and sleep online? A pure internet bank may be just right.
Are you a foreign national living in the U.S. or regularly send money overseas? There are accounts that cater to people who don't have Social Security numbers. One example is Passbook.
Do you need to write checks? Personally, I find it convenient every now and then, but with some “checking” accounts actual checks are no longer an option.
For savings accounts, look for a high interest rate. Interest rates can change daily, so make sure to compare the most current ones. The best rates are often paid by purely online banks. Do some research. Sometimes you can find sign-on bonuses in the hundreds of dollars.
A natural question when thinking about opening any kind of bank account is: How safe is my money? Luckily, there are strong protections in place today; the federal government guarantees that if a bank goes belly up you won’t lose the money in your account. Specifically, accounts are insured up to $250,000 by either the Federal Deposit Insurance Corporation (FDIC) or National Credit Union Administration (NCUA). As long as your account is protected by one of these two, you’re good.
Apps That Zap
Once you have a checking account, you can connect payment apps to it that let you easily send money to anyone using just their email or phone number. Venmo, Zelle, Cash-App, and PayPal are among the most popular—super convenient and fast. But watch out: once you’ve sent money with one of these apps it may be impossible to get it back if you change your mind.
Also, these so-called “fintech” companies often are not banks, so your money may not be protected by the FDIC. Some will deposit your money in an insured bank account; in that case, check the fine print to see which bank.
Juicing Up Savings
Another kind of federally guaranteed savings account you can get at a bank is a certificate of deposit (CD). Usually you earn higher interest rates with CDs than ordinary savings accounts because they require that you put the money in for a longer period (between three months and five years is typical). Certificates of deposit are very easy to open at a bank where you already have an account because the bank has all your necessary personal information. If you’re sure you won’t need the money for some set period, CDs are a very safe way to earn extra interest. Pay attention though, because most CDs renew automatically. You will need to tell the bank if you want the money to go back into your regular savings or checking account at the end of the term.
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