Part 10 (2/2)

My new checking account came with a $5 monthly service charge. I didn't think much about it; after all, my parents had always paid a monthly service charge. No big deal, right?

I paid that ”no big deal” for more than 15 years, even after the bank upped the charge to $8 a month. I asked them to waive it a couple of times, but they wouldn't. Eventually I wised up and switched to a credit union that didn't charge a monthly fee-but not before I'd paid that first bank about $1,500 for the ”privilege” of banking with them. And all because I wanted a ”free” Frisbee.

I'm not the only sucker out there. Banks give away all sorts of stuff to bring in new customers: iPods, gift cards-you name it. But as I learned the hard way, you should never choose a bank just because it's giving something away. Instead, pick a bank based on things that matter, like: - Convenience. How convenient is the bank? What are its hours? Where are its branches? How easy is it to find an ATM?

- Fees. What sorts of fees does the bank charge? What's its policy on overdrafts? Does it offer free checking? Free online billpay? Free access to canceled checks?

- Service. How's the customer service? Ask your friends and family, and check for reviews online.

- Internet banking. Is the website easy to use? You may have to hunt around online to get info on this or go into a branch and ask someone to give you a demo.

- Rates. What kinds of interest rates does it offer on savings accounts and CDs? (If you'll soon be shopping for a mortgage or other loan, check those rates, too.) - Values. What about the intangibles? For example, many folks are willing to sacrifice a few percentage points or pay extra fees to put their money in a community development bank (Choosing a Bank). Make sure the bank's philosophy matches yours.

And remember: You're not stuck with a bank forever. Shop around. Don't stay with a bank simply because it's the one you've always had if other banks are offering better rates or lower fees. There's no reason to settle for c.r.a.ppy service at a c.r.a.ppy bank.

TipIf you serve (or have served) in the U.S. military, be sure to check out USAA (), a sort of financial clearinghouse for veterans. USAA has excellent customer service and offers banking, insurance, and investment products at compet.i.tive rates.

After you've figured out what kind of bank would work best for you, there's one other important factor to consider: What kinds of accounts the inst.i.tution offers. The next few pages explain what to look for.

Finding Accounts That Meet Your Needs The other half of the banking equation is accounts. Even if you find what seems like the best bank in the world-one with convenient locations, long hours, and a wonderful website-if its account options don't meet your needs, you're better off somewhere else. This section gives you an overview of the most common offerings and explains the pros and cons of each.

Types of Accounts Picking a bank account is like choosing the right tool for a job: Sure, you can pound a nail into the wall with a screwdriver if that's all you have, but you'll get the work done faster and more precisely if you use a hammer. The same is true with money: Find the right account and you'll get better results. The next four sections cover common types of accounts so you can pick the best ones to help you reach your goals.

Checking accounts Most people use their checking accounts as the hubs of their financial lives. This is where they stash their paychecks and pay their bills. n.o.body expects much more than that from checking accounts. But believe it or not, under certain circ.u.mstances, checking accounts can actually offer better interest rates than savings accounts.

Many small community banks and credit unions offer rewards checking accounts, which they provide in partners.h.i.+p with a company called BancVue (). Different banks have different names for rewards checking accounts, but they all share similar features. These accounts offer high interest rates-if you meet certain requirements. You have to: - Get your monthly statement online-not via snail mail.

- Log into your account at least once a month.

- Make a certain number of debit-card purchases each month (usually around 12-and ATM withdrawals don't count).

- Make at least one electronic transaction per month, like an automatic payment to your electric company.

If you use your debit card often, a rewards checking account makes a lot of sense. The biggest catch is that the high interest rate only applies to a certain portion of the money in your account. (At some banks, this amount is $10,000; at others, it's $100,000.) Any money above that cap earns only a tiny return.

You can read more about these accounts at My Money Blog (tinyurl.com/MMBchecking), or check out the huge list of such accounts at tinyurl.com/HYchecking.

NoteBanks pay interest on many accounts, but they don't do it out of the kindness of their hearts. It's good business. The bank takes your money and lends it out to other folks at higher interest rates, or invests it to earn better returns. In exchange for using your money, the bank pays you interest-but much less than they expect to make themselves.

Savings accounts You use your checking account for day-to-day stuff, but your savings account helps you meet your long-term goals. It's also the best place to tuck your emergency fund (Establish an Emergency Fund). Because you'll eventually end up with a ton of money there, the number-one feature to look for in a savings account is a high interest rate.

A lot of folks have their checking and savings accounts at the same bank. But you're usually better off with your checking account at a local bank and your savings account at an online bank because: - Traditional banks generally offer a pittance on their savings accounts (my credit union's ”high-yield” savings account is currently paying 0.10% interest). Online banks can offer higher rates because they tend to have lower operating costs.

- It's easy to connect your checking account to an online savings account, but it's slightly tougher to transfer money from an online account to your checking account (it usually takes a couple of days for the money to move from one back to the other). This is generally a good thing because it keeps you from spending the money on impulse-you can't simply pull your money from savings to checking and spend it that same day.

Online saving isn't your only option. Some traditional banks actually offer decent interest rates, so check rates in your neighborhood. When you do, don't forget to ask about unadvertised specials; they might offer great deals you won't know about otherwise.

Be sure to keep an eye on your savings account's interest rate. Rates fluctuate from time to time, and an account that once had a high rate may eventually offer next to nothing. It usually doesn't make sense to chase after higher rates every time your bank makes an adjustment, but you don't want to get stuck in an account paying 0.25% when others are paying 2.5%!

Money market accounts Money market accounts are basically souped-up savings accounts that sport higher interest rates and higher minimum balances. My credit union, for example, requires me to have at least $10,000 in my money market account, though not all banks have minimums this high. With some money market accounts, you can write a few checks every month, too.

Because money market accounts have higher minimum balances, banks have more leeway to use the funds in your account (see the Note on Savings accounts Savings accounts), so they're able to pay more interest. Other than that, there's not a lot of difference between money market accounts and regular savings accounts. Still, it's important to know the term because it's one you'll hear often.

Certificates of Deposit Certificates of Deposit (CDs) are time deposits: You give your money to a bank and promise not to touch it for a specific amount of time. A CD is basically a loan that you make to your bank, which can invest the money however it wants during period you agreed to. In general, the longer you let the bank keep your money, the higher the interest rate you get.

Unlike a savings account, once you put money into a CD, the interest rate doesn't change. If you open a 12-month CD at 3.50%, say, and then interest rates drop to 1.00% (as they did in 20082009), you still earn 3.50% over the whole year.

The catch is that CDs are less liquid than other accounts, meaning you can't move money in and out of them any ol' time without paying penalties. If you take your money out of a CD before it matures (that is, before the agreed upon amount of time), you'll be docked interest. In some cases, you may even lose part of your princ.i.p.al.

NoteUnlike savings accounts, CDs end-or mature-after a set period. What happens then depends on the arrangements you've made with the bank. Many CDs renew automatically, which may not be what you want. So make sure you know what will happen when yours mature.

Here's a screenshot showing info about an actual CD that I opened recently at ING Direct to set aside money for a trip to France and Italy: [image]Figure7-1.The Anatomy of a Certificate of Deposit This CD started out at $14,000, earns 1.75% interest, and has a term (lifespan) of 12 months. If I decide to redeem this CD early, I'll sacrifice 3 months' interest, regardless of whether I've already earned that interest. In other words, if I had taken my money out of the CD during the second month, the bank would have taken part of my princ.i.p.al because I'd have only earned 2 months' interest at that point.

When my CD matures on November 12, 2010, I'll have $14,244.99-almost $250 more than I started with, which is enough to pay for quite a few nice meals in Europe! That's not a huge return, but your goal with CDs isn't to get rich-it's to earn a decent return in a safe account, and CDs are super safe. This account is a great way for me to earn a little extra money for my trip without worrying about losing money in the stock market. (There's more about risk in Chapter12 Chapter12.) Choosing Accounts As you can see, certain accounts are better for certain situations, so you want to make sure you're using the right tool for each job. When you choose an account, ask yourself: - What do you need the account for? Long-term savings? Business? Personal? Everyday use?

- How much will you keep in the account? Remember that some accounts require minimum deposits to get the best interest rate. (To get the top rate with my credit union's money market account, I need to have $50,000 in the account.) - How liquid does the money need to be? If you need quick, easy access to your cash, choose accounts at a local, traditional bank. If you don't mind a small delay in getting to your dinero, an account with an online bank will work fine. And if you can let your money sit for months (or years) at a time, a CD might be your best option.

- Do you need easy access to the money? If you need frequent access to your account, make sure to open one with a bank that has ATMs all over the place. If you'd rather create a sort of barrier so it's tougher to spend your money, choose an account that isn't tied to an ATM card.

- How important is online access? Do you want to download your transactions to Quicken or Excel? Do you need online billpay? Some accounts (and banks) offer more advanced online features than others.

Your answers to these questions will direct your search: If you need constant access to your money, a CD isn't the best choice. If you intend to keep a high balance, look into a money market account. By putting in a little time and doing some research, you can pick the best accounts for your situation.

Making the Most of Your Accounts You'll have more fun banking-and earn more money-if you do more than just accept the accounts you get by default. When you open an account, find out everything about it; read the fine print to learn what you can and can't do. And remember that accounts aren't just places to stash money-use them to pursue your goals! Here are some easy ways to make the most of your accounts.

Finding the Best Rates If you're shopping for the best interest rates, check out online banks (Online banks). In general, they offer better rates than traditional banks and credit unions.

Many websites have tables listing current interest rates. I keep one at Get Rich Slowly (tinyurl.com/GRSrates), and you can find others at sites like MoneyRates () and BankRate ().

Keeping Your Accounts Optimized If you use a traditional bank or a credit union, you should ask a teller once or twice a year if there are any improvements you could make to your accounts. Ask about: - Better interest rates. Is there a similar account that might give you a better return?

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