One of the most important tools for managing personal finances remains a bank account. However, not all bank accounts are created equally. You need to do your research to find the best account for your needs.
According to the American Bankers Association, nearly half of all Americans pay monthly fees for their banking needs, even though many banks now have no fees or waive fees when customers sign up for direct deposit of paychecks, opt for electronic statements, or maintain a minimum balance. In the modern market, you simply do not have to pay to maintain quality accounts with the features that you need.
Banking fees add up quickly. A bank that charges $10 each month for an account means that individuals are paying $120 annually for no discernable reason. This $120 does not include other fees, such as overdraft charges, which are commonly as high as $35 per occurrence. By switching to a better account, you can avoid many of the banking fees that you regularly encounter.
You need to ask as many questions with bank accounts as you do with credit cards because many fees can be hidden in the fine print. Understanding this fine print helps you maximize your money by avoiding fees. However, it is also important to look for accounts that allow you to conduct your monthly business without being nickeled and dimed. Keeping the following things in mind will help you choose the best bank account:
Minimum balance requirements
Some banks have minimum balance requirements that lock up money and prevent it from earning significant interest. These requirements can range up to $10,000, depending on the account. Dropping below this minimum balance can also result in hefty fees. Be sure to look for accounts that do not have any minimum balances so that you can maximize the income your money generates.
Sometimes, banks offer free checking if you keep a minimum balance in one or more accounts. This type of deal can be ideal if the minimum balance is not very high, but you need to remember that this requirement significantly reduces liquidity and inhibits income.
Type and frequency of transactions
Ideally, accounts do not have any restrictions on the types of transactions that occur or how often they can happen. When banks impose fees for frequent transactions, or for withdrawing, depositing, or transferring money, you may begin to feel like your hands are tied. You should pay special attention to ATM policies. If the bank charges a fee for withdrawing cash, the penalties can add up quickly. Many smaller banks now reimburse fees for withdrawing from non-affiliated ATMs. If choosing a larger bank, you should make sure that you can easily (and cheaply) access affiliated ATMs.
Overdraft fees
Much of a bank’s income comes from overdraft fees. Some people can avoid these fees by linking their savings and checking accounts, but it is important to read the fine print. People who typically have a lot of padding in their account may not need to worry about overdraft fees at all, but people who have overdrawn their account in the past may want an account that offers some sort of protection.
Think carefully about what your needs are and make sure that you understand the bank’s policy. Reading online reviews can give you a better sense of how banks handle overdrafts. For example, suppose that someone overdraws their account three times in one day. Some banks will process the largest purchase first and then charge three fees while others may process the two smaller purchases and then charge only one fee.
Federal deposit insurance
The Federal Deposit Insurance Corporation and the National Credit Union Administration both provide federal deposit insurance, which guarantees that customers get back their insured deposits should the bank fail. You should look into whether your bank has insurance and what the insurance covers. The standard coverage is $250,000 per depositor, so people with more than that in an account may want to open several accounts at multiple institutions.
Interest rates
You want to make sure that the banks you choose offer competitive interest rates on savings accounts. While interest rates will not typically earn you any sort of real income, they help your deposit keep up with inflation so that the amount does not decrease in purchasing power. In today’s market, many consider interest rates of 0.7% or higher to be competitive.
Sub-accounts
When it comes to savings accounts, many financial planners now advocate for sub-accounts, which allow you to sub-divide your deposits. Each account then serves a different financial goal. For example, you could designate an amount to serve as an emergency fund or set aside money for an upcoming vacation. Automatically dividing money among sub-accounts makes it easier to save and helps you avoid mistakenly allocating money in a single account for multiple purposes. These sub-accounts also make it slightly harder to dip into emergency savings for situations that are not true emergencies. Transferring money between these sub-accounts should not incur fees, which could limit money liquidity.