This week is the start of a new blog series called “back to basics”, and it was inspired by the new school year. In the first few weeks of school, teachers are trying to figure out just what their students know and remember. It can be boring for students, but it’s important to make sure that everyone has a solid grasp of the fundamentals before moving onto the next step. While I’ve written about some more complex personal finance topics during the first half of the year, I started to think that a part of my audience might need a little refresher or review of sorts. So, that’s what I am going to be writing over the next few weeks. I’m going to start with the topic of checking and savings accounts.
A savings account is meant to be a place where you put your cash that you are trying to save for future needs. You cannot access the money in your savings account with a check. Many banks do allow you to access your funds with a debit card. Often, however, you can only use that a limited number of times in a month without incurring transaction fees. When your money is in a savings account, the bank will pay you a small amount of interest every month. The interest rate is very low, so it won’t add up to a lot of extra money. As you continue to save over many years, however, it’s good to know that your cash is doing the work of earning more money for you.
Money that you need to access frequently through the month to pay your bills should go into a checking account. These accounts usually do not pay you interest on your cash balance, but they also don’t usually charge you fees for writing checks or withdrawing cash. A checking account will allow you to access your money with a debit card, electronic banking, or a paper check.
One thing you will need to research before opening a checking account is the types of fees the bank will charge. Up until 2010, just about all checking accounts were essentially free. Banks, however, incur many administrative and transaction costs associated with having you as a customer. Prior to 2010, they managed to earn enough money in overdraft fees (fees they charge you for writing checks in amounts that exceed your account balance) from checking customers to avoid charging other account fees. Due to a change in banking regulations, however, customers were allowed to opt out of overdraft protection. So, the banks came up with a variety of other ways that they could recoup their administrative costs from your account. There are monthly fees, minimum balance requirements, and direct deposit requirements on checking accounts that can add up to a lot of money over the year. So, you should definitely look at the kinds of checking account options available at banks in your area and find one that works best for you.
Online banking is also a cheaper option if you are open to not having a physical bank branch in your town. Wallet Hub publishes a comprehensive list of banks with free checking offers. Go check it out and see if there is a better deal for you.