Being Smart with Your Checking Accounts
If there’s any one kind of bank account that almost everyone has, it’s a checking account. As useful as they are, checking accounts still provide several ways for you to get into financial trouble. In this chapter I’ll show you how to get the most out of your checking account without the usual downsides.
How Checking Accounts Work
Wait—doesn’t everyone know how a checking account works? Make deposits, write checks, and hope that you don’t have an overdraft. Yes, that’s certainly true, but there are more details you should know about.
Types of Checking Accounts
The most basic kind of checking account is sometimes called a fee account because you pay fees for the services the bank provides. There is usually a monthly fee as well as a per-check fee, but there are no minimum balance requirements.
Banks also offer a variety of fee-free accounts. In most cases this kind of account requires that you always keep a certain minimum balance—perhaps $800—in the account. As long as you maintain this minimum balance, there are no monthly or per-check fees. If, however, the balance dips below the minimum, even if just for a day and for one dollar, you are hit with the regular monthly service fee.
How can banks offer a fee-free checking account? The answer lies in the minimum balance. This is money they, in effect, have on permanent deposit and is part of the capital they have available to lend out to other customers. In other words, they earn interest on the money in your account and this lets them offer the account without fees. Also, by offering fee-free accounts, they attract customers who will probably use (and pay for) other bank services, such as loans and safety deposit boxes.
Many checking accounts are touted as paying interest. Hey, sounds great—earn interest on your money while it sits in the account! But take a look at the rates being paid. The last time I did, I was receiving a paltry 0.1%—that’s right, one-tenth of a percent—on my checking account. If my average balance for the year is, say, $1,000, I will earn—drum roll, please—exactly one dollar in interest for the year. Sure, every dollar counts, but the point is that the interest on your checking account is not going to make any real difference one way or the other. In addition, with rates far below inflation (even though inflation is historically low now), you are in theory losing money while it sits idle in your account.
What About Money Market Accounts?You might have heard about money market checking accounts that offer much better interest rates. This is correct—such accounts are currently paying in the range of 1.5%–2.5% per year, a lot better than a standard checking account. The downside is that these accounts almost always have restrictions, such as the minimum check amount (typically $250 or $500) or the number of checks you can write per month. This means that money market checking accounts are not suitable for your everyday expenses. They can be a good place to park cash you want to have available when needed but do not foresee needing in the short term. Suppose, for instance, that you write about $2,500 a month in checks for things such as rent or mortgage, car loan payment, groceries, and credit card bills. Put the cash in your money market account to take advantage of the better interest rate. The few large items, such as rent/mortgage and a car payment, you can probably pay directly from the money market account. Then write one check from the money market account and deposit it in your regular checking account to be used for the more numerous, smaller expenses, such as groceries. |