Bank account basics: how do you choose the perfect account for you?

The secret to paying less fees and earning more interest from your bank

 

If you are like many people, you opened your first bank account as a child, most likely at the bank where your parents’ accounts were based. You may even continue to hold that same account today.

At some point, you will want to open another bank account. Maybe it’s a joint chequing account to share with your sweetie, or maybe it’s a new savings account to keep your holiday-savings fund sheltered from the rest of your cash.

Before you go ahead and open the same-old account at the same-old bank, it might make sense to learn how the banks work, how they make money off of you…and how you can sweeten your deal!

The following tips will give you something to think about…

What’s in it for the bank?

When you open a deposit account - meaning any savings or checking account where you deposit your money - you are not merely giving the bank your money to hold for safekeeping. It may feel that way, but in fact you are lending the bank your money to use for their own investments.

The bank earns interest for itself on all the deposits it holds. As a result, the bank is willing to pay you interest on the funds you leave with them. The difference between how much the bank earns in interest (a lot) and how much it pays you in interest (a little) is called “the spread”. While the spread is historically how banks make a profit, today full-service banks also generate profits through other areas of financial services, such as investment banking, wealth management and insurance.

Savings versus checking – does it really matter anymore?

There was a time when you chose your account on the simple basis of checking versus saving. A checking account was where you kept your money for spending and writing checks for household expenses. Today, you are more likely to pay your bills online rather than using paper checks, but the function of the checking account remains the same – an account where money is coming in and going out at a frequent rate.

Savings accounts were traditionally designed for storing money that you didn’t want to use immediately, while keeping it nearby and accessible. As such, banks have generally been willing to pay a higher interest rate on savings accounts, due to the fact that you provide a more reliable amount of money for the bank to use than you do in your ever-fluctuating checking account.

With paper checks going the way of the VCR, many banks today offer accounts that blend the traditional advantages of savings and checking accounts. You can have debit card access to your savings account, as well as pay your bills and transfer funds as easily as you can with your checking account. Some banks even offer higher-interest checking accounts that rival what you would receive in any savings account.

So the main consideration is no longer: “savings versus checking.” The questions you need to ask are “what will you pay?” and “what you will earn?”

What should you pay?

Yes, as we said, by opening a bank account and depositing your money into it, you are essentially loaning the bank money. So why on earth would you pay the bank to loan them your money?

From the bank’s perspective, you pay for the transactions you choose to do and the services you use. Transactions include withdrawing money, depositing money, using your debit card at the Automated Banking Machine (ABM), transferring funds from one account to another, paying bills out of your account, and writing checks. Fear not, hanging out at the branch and eating donuts is still free. Services include all those extra things the bank can do for you, such as certifying checks, issuing money orders and bank drafts, giving you overdraft protection or renting you a safety deposit box.

How you wish to pay for these transactions and services is a key factor in choosing a bank account. Most accounts charge a flat monthly fee that covers a set number of transactions and a range of services. Monthly fees can range from as low as $4 a month for minimal transactions and no extra services, to as high as $25 a month for unlimited transactions and many extra services included.

For many people however, the idea of paying a monthly fee is detestable and they want an account with no monthly fee. This can be a smart idea; however, it is important to examine the individual transaction fees that you will pay on such an account and be aware of how often you do said transactions. Those seemingly little incremental charges can add up quickly!

What should you earn?

If you have a mortgage, a credit card or a student loan, you are probably used to cheering on low interest rates. This is because you are used to paying the bank interest. When it comes to interest on your deposit account, the Jimmy Choo is finally on the other foot.

When choosing a deposit account, look for the highest possible interest rate available to you. Banks are very competitive with these products, so there are tons of choices. While traditionally, savings accounts paid higher interest rates than checking, this is no longer always the case.

The secret to paying less and earning more

Remember, the banks’ goal is to borrow your money, earn interest for themselves on it and use it for their own investments. If they can make money by using your money, then they are less inclined to charge you fees and more inclined to pay you interest.

Here’s the thing…if you are in the habit of draining your account empty each month, the banks won’t be able to generate anything with your money since they can’t rely on it. In this case, they will be eager to charge you transaction and service fees so as to generate some kind of return for the favour of babysitting your cash.

The secret to skipping fees and earning more interest is thus to maintain a minimum balance in your account at all times. This way, the bank can count on your money being there for them to use and they will be much more generous when it comes to fees and interest. Keeping as little as $1,000 or as much as $5,000 in your account at all times can really pay off. But remember – this is money you could be investing elsewhere for a bigger return – so be demanding! Look for high-interest earning accounts that waive monthly fees and provide unlimited transactions in exchange for maintaining a minimum monthly balance.

 

From Goldengirlfinance.ca/ Posted by Mags