Banks And Credit Unions
What kinds of bank accounts are there?
There was a time when it was very simple to make a decision about banking. You walked into a bank and you could get a checking account or you could get a savings account or both. Today there are a variety of choices that individuals have when they go into a financial institution. They can get a checking account, they can get a savings account, they can get a money market account. They can go to a desk where somebody will sell them financial products like mutual funds. You can get certificates of deposit. There are just a wide range of financial products that are available to a consumer today. Sometimes they can be very complicated because the comparison from one financial institution or bank to another can be difficult because while the product may sound the same, they may have different terms and conditions to them that makes comparison shopping an important issue.
What kinds of bank accounts should I have?
In my opinion, everybody who is earning a paycheque should have a chequing account of some kind. The chequing account can provide you with the resources to be able to pay for things; pay your bills, pay your utility bill, your rent bill, your car payment, and your credit card bill with something that you will get documentation on, and will provide you with a permanent record of payment of the obligation. In addition, most people should have a savings account of some kind. It could be a plain old vanilla savings account or a certificate of deposit, a combination of them, or a money market account.
How do I open a bank account?
A lot of people wonder how they should get a bank account -- how they can get a bank account -- and it's actually a sad state that a very substantial number of people in our country are -- and the term of art is "unbanked", undocumented workers; individuals who are working in the cash economy. They do not have bank accounts and that can be a problem for them. The first thing that you have to have in order to be able to open up a bank account is a Social Security number because there's going to be an application form of some kind that has to be prepared and they are going to want to have a Social Security number.
What is an "overdraft"?
Hopefully, you will not write a check and have insufficient funds in the checking account, meaning you've written a check for more money than has been deposited. If you did, you'd have an overdrawn account or an overdraft or, as we say, an "OD". An individual may become overdrawn if they do not keep a running record of the deposits that they've put into the account less the withdrawals or checks that they've written from the account.
What is "overdraft protection" and how does it work?
A tool that some people can use is called overdraft protection. And overdraft protection is to have a line of credit that is unused, but in the event you write a check, inadvertently or deliberately, for more than is in the account this line of credit will automatically populate money into the account so that your account is not overdrawn. Of course there is no free lunch with overdraft protection. There will be an interest charge and possibly even a transaction fee for overdraft protection when money is drawn down from that line of credit into the checking account to cover the overdraft.
Is "free checking" really free?
The old story is there is no such thing as a free lunch. Indeed, a "free checking account" might not have any service charges, any monthly service charges or transaction charges attached to it. But there may be a requirement that you maintain a minimum balance in the free checking account and that minimum balance could be anywhere from a few hundred to a few thousand dollars. In a free checking account, you might not receive interest on that money. So while you are not paying any fees, you could still be losing opportunity to make money because of the requirement to maintain the minimum balance in the account.
Should I balance my checkbook each month?
Many people ask, "Should I balance my checkbook every month?" The CPA in me says absolutely. The reason I say that you should balance your checkbook monthly is that, first of all, it's good discipline because you always know where you stand in terms of the balance in your account. If that's not a good enough reason, balancing the account and reconciling it to the bank statement each month, in my opinion, is an essential exercise because banks and computers are imperfect. They do make mistakes. If you reconcile the account, balance your checkbook and compare it to the statement, you will be able to intercept any errors and get the bank to correct them.
What does it mean if an account is "FDIC Insured"?
Today an individual can have up to 100 thousand dollars in any one financial institution and have insurance from an organization that's a subdivision of the United States government that will guarantee the deposit up to 100,000 thousand dollars for an individual. The insurance is from the - the acronym is the "FDIC" which stands for the Federal Deposit Insurance Corporation, and that's for commercial banks and most banks. This coverage is for any monetary deposit where the bank owes you the money. So it would be a savings account, checking account, money market account, certificate of deposit. Where a lot of people are confused however, is that is doesn't cover other products that you might buy from your bank. So for example if you ended up purchasing a mutual fund from your bank, then that would not be covered by any kind of insurance, and so it is important to understand what your buy - if you don't understand it have it explained. If you still don't understand it don't purchase the product.
What is a "Certificate of Deposit" (CD)?
A Certificate of Deposit (CD) is where you, as a depositor, lend money to the bank for a period of time and the bank will pay you interest for the period of time that they have it. The Certificate of Deposit (CD) can be a valuable financial tool because it generally pays a higher interest rate than a savings account or a money market account. The downside of it is that you have to keep it in there for the pre-prescribed term; otherwise, there will be a penalty if you have to draw it down.
How do I choose a CD account?
When trying to determine what the best CD is for you, you have to evaluate several things. The first is, what period of time you will feel comfortable tying up the money? The second is, how much interest will you be paid? and different banks pay different rates at different times, so comparative shopping is important. Generally speaking, the longer the period of time that you're going to tie up the money, the higher the interest rate will be. Sometimes, a certificate of deposit will not pay interest until the certificate has matured. Other times, you can actually have the interest paid to you on a monthly basis. And determining, first of all, if you need interest, if you have a long-term certificate of deposit, say a year or could be up to five years, and you need monthly cash flow from it, making sure you can get the interest on a monthly basis can be an important determination. If, however, you don't need it on a monthly basis, one can just allow it to accrue until the duration of the certificate.
What are the risks associated with a CD account?
People have to understand that with any financial instrument that they get, any investment, there's a certain degree of risk. Bank account deposits, including cerificates of deposit however, are as close to risk free as one can get.
What is a "money market" account?
Unlike a savings account which typically has a stated rate of interest, or a certificate of deposit which has a stated rate of interest and a duration, a money market account can be set up in such a way that you put your money in and take it out anytime you want, and the interest that will be paid on it will fluctuate depending upon what that bank is willing to pay. Money market accounts' interest rates fluctuate depending upon market conditions, and those fluctuations can occur even from day to day.
What are the advantages of a money market account?
The advantage of a money market account over a savings account is that the interest rates paid are generally higher, and you have ultimate flexibility in terms of when you can put the money in and when you can take it out. Generally, there is a requirement for a minimum balance, and it's usually somewhere in the vicinity of several thousand dollars.
What are the risks associated with a money market account?
A money market account would have the same risks as any account that any individual or business entity would have with a financial institution. A money market account is covered by FDIC insurance so it's as safe as a checking account or as a savings account or a certificate of deposit.
What is a "credit union", and how can I join one?
A financial institution that we're starting to see a lot more depositors use is something called a credit union. People are sometimes confused. What is a credit union, as compared to a bank? A credit union is similar in many ways, but it is also different. First of all, credit unions are not-for-profit organizations, whereas banks are for-profit organizations. Credit unions are also established, they're cooperative organizations. Credit unions are typically formed with people who have a common interest in something. It might be a common employer. It could be a common union. In recent years, we're even seeing it could be in a common neighborhood.
Can I get better interest rates at a credit union?
While there is no rule of thumb that a credit union will either provide higher returns or charge a lower rate of interest, there can be situations where they do pay higher rates and they do have lower interest requirements on loans. The reason for it is quite simple. Since the credit unions are there for the benefit of the members; the depositors of members, and those members are not depositing for the purpose of earning a profit but for getting financial services. However, traditional banks have a requirement to make a profit so that they can pay dividends to their shareholders. So, that difference alone often gives customers of credit unions the opportunity to get advantages, not huge advantages, but when you're talking about interest rates, either whether you're receiving a higher rate or paying a lower rate, even small amounts compounded over intermediate periods of time can have significant effects.
