Very often when people think of banks, they mistakenly assume that these big almost ‘legal’ institutions are looking out for them and their savings. This is a fallacy. Banks don’t care about you. They care about your money.
Never assume that a bank has your best interests at heart. No… these faceless behemoths are only interested in increasing their own profits and reserves.
The same bank that offers you a credit card with very attractive rates, will repossess your house if you incur enough debt on the card which you can’t repay. You’ll then see first-hand how ruthless these banks can be.
So always remember that your relationship with your bank is a mutually-beneficial one, but there’s no ‘friendship’ here, and you MUST be wary of loans, credit cards, etc. that they may ‘generously’ extend to you. Don’t get hooked by their bait.
- Why you need banks?
The most obvious reason is that you need a place to store your excess cash. You can’t be hiding your dollar notes under your mattress or in an empty egg carton in the refrigerator. You’ll need to open a savings account and deposit your money there.
Having a bank account also means convenience. You can easily withdraw money at the ATM in the middle of the night, if you need to.
If you’re investing in stocks, etc. having a brokerage account with your bank is a must.
So, you do need banks to hold your money for you… and they do serve a purpose.
- How to choose a bank
These days there are online banking platforms and many options available to you. Ultimately, it all comes down to a few key points.
- Does the bank offer free checking?
- Does it provide debit cards?
- Does it offer mobile and online banking?
- Do you have ATMs conveniently located near where you live?
- Are the fees reasonable?
- Does it charge fees based on average daily balance or minimum daily balance?
It’s better to pick a bank that uses an average daily balance to calculate fees.
If the bank satisfies your needs, you may choose it.
- What types of bank accounts do you need?
Checking Account
For starters, you’ll need a checking account. This may also be known as a ‘current account’, ‘transaction account’ etc.
A checking account is where you’ll keep your spending money. It’s the account that will usually see the most transactions. The interest rate on checking accounts is very low because banks know that the money inside these accounts don’t stay there long.
Savings Account
You’ll need a savings account so that you can save up 3-6 months’ worth of income, in case you have an emergency and need cash immediately. This is an emergency fund that you’ll not touch for anything else.
The interest rate on savings accounts tend to be higher than checking accounts, but are still miserably low. Nevertheless, when you need money in a pinch, you can easily take it out of your savings account, unlike other assets which will not be as liquid.
Timed Accounts
These are also known as certificates of deposit (CD) or fixed deposits. These accounts have a higher interest rate than savings accounts.
You’ll have to leave your money with the bank for an agreed-upon duration. For example, $5000 in a CD for 12 months.
During this period, your money will earn a fixed interest rate. In some cases, for longer durations, the interest rate will increase at intervals. This is known as a step-up rate.
The reason timed accounts are not as liquid as savings accounts is because should you suddenly need to withdraw the money from the bank before the maturity date, the bank will impose a penalty.
You may either lose a portion of the interest, or all of the interest. So, be aware of that. If you have sufficient funds in your savings account, you can then save up for a timed account.
Brokerage Account
This account is also known as a securities account. It’s used to buy and sell stocks, funds, bonds, etc. To trade in the stock market, you’ll need a brokerage account.
Money Market Accounts
These accounts (also known as variable-rate savings) are generally preferred by wealthy people. The interest rates fluctuate according to market interest rates, but are higher than what you’d get with a savings account.
Your deposit into such an account will have to be significant. You can’t have a money market account without a high balance.
Joint Accounts
A joint account is an account that is held by 2 or more individuals. Usually, married couples get a joint account where both parties can contribute to or withdraw from the account.
It provides convenience. For example, if the husband is out of town on business, his wife will still be able to access the account to pay for expenses. Most banks offer each account holder of the joint account their own debit card to access the funds.
- Other pointers to note
Always try and minimize your bank fees. If your bank requires you to maintain a monthly balance, make sure it is maintained or you’ll be charged a fee should your balance dip below the minimum.
Some banks charge fees for ATM transactions. Some banks levy a surcharge if you use another bank’s ATM. So you’ll be paying fees for that too.
Be aware of these fees and try not to withdraw too frequently. Alternatively, you could ask for ‘cash back’ at a supermarket when buying your groceries, etc.
Switch to digital statements if your bank charges for paper statements.
Avoid letting your checking account get into a negative balance or you’ll be charged overdraft fees.
Make sure your bank is insured. Most of the big and reputable banks are. Even if the banks go out of business, your money will still be safe.
This article is a primer to educate you about banks and the different accounts. You may wish to do more research on the topic so that you’re better informed. Financial literacy will always serve you well. Finally, choose a good bank and watch your money, transactions and fees closely. Over and above, watch what the bank is doing too. You can never be too safe.