It’s hard to get by without a bank account.
When you think about life’s necessities, finding a bank probably isn’t at the top of your list. In fact, the idea of putting a bank in the same category as having a place to live and enough to eat may seem downright bizarre. But unless you’re paid in cash, pay all your bills in person, and aren’t trying to save for the future, it’s hard to think how you could get along without a bank or its not-for-profit equivalent, the credit union.
The catch is that if you’ve seen one bank, you haven’t necessarily seen them all. The services you can get, and what those services will cost you, vary significantly from bank to bank. So does the way you’re treated if you’ve got questions or problems.
THE BIG PICTURE
Banks are essential to making the economy work. They make loans, which you can use to pay college expenses, buy a car, or purchase a home. They issue credit cards, which let you buy products or services when you need or want them and pay for them over time. And banks provide financial services such as checking, savings, and investment accounts.
The money you deposit in your checking and savings accounts is an important source of funds that the bank uses to make loans. And the interest you pay on your loans pays for the interest you earn on your savings.
But banks don’t fill the role of financial intermediary just because it’s good for you, or for the economy. They want to make a profit. To do that, they charge you more to borrow than they pay you for keeping money in the bank. In fact, they rarely pay you anything for the money you have in your checking account—which you can withdraw at any time—and very little on regular savings accounts, which give you similar access.
And they charge fees on most of these accounts to help cover the costs of processing checks, providing account statements, tellers, ATMs, and multiple branches, plus the costs of advertising and promotion to attract your business.
YOU CAN BANK ON IT
You may have some uncertainties where money is concerned, like whether you’ll be able to live on what you earn and whether you’ll be more financially secure in the future than you are today. Banks can’t solve those problems, but putting your money in a bank will provide one safety net in an otherwise uncertain world. Banks promise that up to $250,000 of your money, deposited in one or more of their accounts, is safe.
Here’s the story: The Federal Deposit Insurance Corporation (FDIC), a government agency, insures accounts in its member banks, which include most banks in the US. (There’s separate, comparable insurance for credit unions.)
The $250,000 limit applies per depositor per bank. For example, if you had $250,000 in a certificate of deposit (CD) in one bank and another $250,000 in a CD in another bank, both accounts would be covered. But if you had $500,000 in one CD, only half would be insured.
You can actually qualify for more than the $250,000 coverage at a single bank if your assets are in different types of accounts. For example, an individual retirement account (IRA) is insured separately from a taxable account. So is a trust account. And you qualify for up to $125,000 coverage on an account you own jointly with someone else.
What’s not insured is any money you invest through a bank that’s not in a checking or savings account. For example, money in a mutual fund the bank sells is not insured, even if the name of the fund includes the name of the bank. But money in the bank’s money market account is insured. The bank is required to tell you which accounts are insured and which are not. Be sure you know which are which.
IN CASE OF EMERGENCY
Most financial advisers suggest creating an emergency fund with three to six months’ worth of income. That way you’ll have some backup if you face a major financial emergency, such as getting sick or being laid off.
Ideally, an emergency fund should be fairly liquid, which means the money is available as cash or can be converted to cash easily with little or no loss of value. But the fund should also produce some return, or increase in value. Certificates of deposit (CDs) and money market accounts will probably fit these needs.
The goal of having your money make some money is one reason your emergency fund probably shouldn’t be in a checking account. The other reason is that it’s too easy to spend.
Finding a bank that will best meet your needs depends, in large part, on your spending and saving habits—or the ones you’re trying to cultivate. The more you know about how you’re likely to use your account, the more effective your search can be. To get started, ask yourself these questions:
- How many bills do you typically pay each month, and how often do you withdraw cash at the ATM?
- Do you have enough cash available to meet a minimum balance requirement for a no-cost or interestbearing checking account, and will you be able to keep that amount in your account?
- Do you have time to get to the bank during banking hours, or do you need a bank that’s open nights and weekends?
- Would you prefer banking online or over the phone?