Personal Finance 101: Getting Started with Banking

personal finance 101We all did it at the beginning of our financial lives. We grew up. We moved out. We opened accounts at a bank on our own, quite often a different bank than the one used by our parents.

And we had to figure it out. How should we pick a bank? How do we move the money over? What should we put in our checking account? Our savings account? What are these CD things?

Michael writes in:

I’m a student, just trying to firm up my financial situation after having read your blog. For the last several years, I’ve used Washington Mutual largely because my parents had an account there but since being taken over by Chase, customer service has gone downhill, and the interest rate on my savings account is ridiculously low.

I’m looking at having an interest-bearing checking account and a savings account at different banks, to maximize my savings. However, how easy is it to transfer money from an account at one bank to one at another? Also, I’ve seen money market accounts, savings accounts, and no penalty CDs? What’s the difference, and how would you allocate money between them?

My first comment would be that I would value customer service strongly at the bank where I held my checking account, but view it as more of a secondary factor at the bank where I held my savings account. The bank with the checking account will handle the vast majority of your transactions for you, while the savings account bank will just handle a small number. So, when you evaluate your checking account bank, ask around and Google for information on their customer service.

Transferring Money Between Accounts
How does transferring money between accounts at different banks work? If a bank features online banking, it’s usually just as easy as logging on and requesting such a transfer. Most likely, if you’re seeking a high-interest savings account, you’ll be getting an account that’s managed primarily online, as most of the best interest rates are offered by online banks such as ING Direct, HSBC Direct, and so on.

In those cases, the online account is often “linked” to your checking account. That means you record the information about your checking account (the account number and the bank’s routing number, which you can get from them upon request or often simply from their website or from Google. Once that’s set up, you will be able to initiate transactions either way – both from checking to savings and from savings to checking – with just a few mouse clicks.

Such transactions are done electronically and usually take around two business days to complete.

Choices for Savings
Michael also wondered about several different options for saving his money. Let’s look at them.

Savings accounts are the default choice. Savings accounts allow you to deposit money as you please and withdraw money up to six times a month. Savings accounts usually have a fixed rate of return that doesn’t change all that often. Usually, high interest savings accounts change their rates whenever the Federal Reserve changes rates, so if you hear about Ben Bernanke on the news, pay attention to your rates.

Money market accounts sometimes offer a higher rate of return than straight savings accounts, but the rate of return on a money market account is variable and is quite often not as high as the online offerings. It changes based on the state of the money market – to put it simply, the money you put into that account is invested by the bank in highly secure government investments. Those investments change rates regularly (based on what the government is offering at a given time, which is usually related to the demand of the market) and thus the rates you get in the account go up and down. On (extremely) rare occasions, money markets will return nothing at all or just a tiny, tiny fraction of a percent – at other times, they’ll blow savings accounts away. Most of the positive legacy of money market accounts comes from the early 1980s, when they returned money hand over fist because treasuries had absurdly high rates of return.

CDs are much like savings accounts, except they have a higher rate of return. The big difference is that you can’t actually touch the money you’re saving during the life of the CD. So, if you picked up a one year CD with a sweet interest rate that’s much higher than your savings or money market options, you wouldn’t be able to touch that money for a year without a stiff penalty. The “no fee” part you mention is something that’s offered by a lot of banks today – the days of charging fees to buy a CD are rolling into the past.

Splitting Up the Money
So what should Michael do?

In my experience, money market accounts and online savings accounts are usually very comparable. If anything, I’ve consistently seen online savings accounts offer a slightly larger return over the years I’ve been following them, but money market accounts at your local bank will likely trounce their savings account rates.

When compared rates between maoney market accounts and online savings accounts are close (say, within half a percent or so), I generally stick with banks that have a good customer service reputation, but I don’t view it as being as important as it is with my primary bank that holds my checking account and handles most of my transactions. Rate-hopping (or rate arbitrage, as some call it) isn’t worth the effort, in my opinion, unless you’re moving around high five-figure or six-figure amounts, in which case I wouldn’t have a large portion of that in a savings account.

What about CDs? CDs can be a really great way to tack on a bit more return for your savings, but it’s often easy to get caught up in CDs and put more of your savings into it than you should. I would make sure that I had a healthy emergency fund in my cash savings (a savings account or a money market account). If you’re single, this would probably be about two months’ worth of living expenses. The ability to just grab cash when you need it to deal with an emergency is vital.

The big question I’d ask myself is why I would want to put money in CDs. This goes beyond just earning a higher rate of return – if you just want that, put the money in a CD that will mature within a year and keep recycling it (unless you have a year or more worth of living expenses in your savings account, then you can shoot for longer ones). Are you saving for a particular goal? When do you expect that goal to come to fruition? If you have a goal in mind, buy the highest rate CD that matures before that goal.

Of course, if you’re finding that you want to get more aggressive with saving for goals, you can begin to look into index funds… but that’s another story entirely.

Good luck, Michael.

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16 thoughts on “Personal Finance 101: Getting Started with Banking

  1. Shannon says:

    What is a “maoney market account?”

  2. Benjamin says:

    Unfortunately, interest rates are ridiculously rate at all banks now. On the other hand, it allowed me to refinance my mortgage from 6.5% to 4.87% resulting in over $4000 of interest savings this year!

  3. Benjamin says:

    ridiculously “low”

  4. Jane says:

    We actually found a credit union that has 4.5% interest on their checking account. This beat ING and other online accounts that we were using. The only catches were that they had a limit ($15,000), and you had to jump through a few hoops to receive the higher interest (a certain number of debit transactions, electronic withdrawals, etc.). It’s sad that this rate beats most CDs and online savings account, but we were glad to find it for the time being. I would check out your credit unions and see if they have something similar.

  5. Tammy says:

    I agree with Trent, never underestimate good customer service at your primary bank. Bank tellers are sadly underpaid for a job that takes a lot of skill and attention to detail. Don’t assume tellers don’t know what they’re talking about…some tellers make this their career. They DO know what they’re talking about. If you are ever in a bind, you will be glad you have good people helping you out.

    On that note…
    Be sweet to your tellers and they’ll be sweet to you! They may tell you about specials you never heard about, or programs that may benefit you…simply because you have a good relationship with them. I can make much better recommendations for folks that I know well than for the rate shoppers, who often won’t tell me anything about their financial picture and are often rude besides!

    Just remember what your mama said…you always catch more flies with honey than with vinegar.

  6. Doctor S says:

    I have jumped around the last few years when it comes to my bank accounts. I had a checking and savings acccount with TD for the longest time since my mom worked there. However, I have moved onto opening up other accounts because they have made my life easier. I know still have my original checking account and an ING checking and savings account. My paycheck goes to my TD account and I have my savings transfers automated to the ING accounts. ING offers free checking with no fees and tons of free ATMs.

  7. Kevin says:

    Trent, I wonder if maybe this article was rushed out the door. It seems to suffer from a couple major editing flaws.

    Specifically, the section I was most interested in (“Transferring Money Between Accounts”) seems incomplete. For one thing, you open a parenthesis in the second paragraph, but the matching closing parenthesis is missing.

    Secondly, you describe the process for the primarily-online accounts, but the section describing transferring money between 2 major brick-and-mortar institutions is nowhere to be found.

    “Most likely, if you’re seeking a high-interest savings account, you’ll be getting an account that’s managed primarily online [...]. In those cases, [...]”

    OK, great – but what about the OTHER cases? How do I transfer money between CIBC and TD?

    That’s not rhetorical – I’m looking for an actual answer. I accumulate our annual RRSP contribution in our Savings account at CIBC (where our paycheques and bills live). Once a year, I transfer the savings to our TD Savings account, where I can then add it to our RRSP. In past years, I’ve literally just been withdrawing the cash, walking across the street (a little nerve-racking while carrying $20,000 in cash in an envelope), and depositing it. I could use a cashier’s cheque or a money order, but those cost money. Cash is free, but riskier. Is there an easy way to do this online?

    Sure, I could ask the bank, but I was hoping to find the answer in this article. I was disappointed that such a common task was completely overlooked in an article professing to be the “101″ of banking.

  8. Doug says:

    Like Kevin, I was looking for an answer to Michael’s question: “. . . how easy is it to transfer money from an account at one bank to one at another?” That was not addressed in the article.

    Another relatively safe option for cash is a short-term bond fund. I’ve moved about half my emergency money from a money market to a short-term bond fund (both at Vanguard).

  9. Steven says:

    @#7 + #8

    Can’t you just write a check from the account you’re withdrawing from and deposit it at the bank you want the money to go to?

    That’s what I did when I switched my main account between TD Bank and my credit union. I left a $300 in checking for emergencies and avoid maintenance fees. When I use a bit of money from that account, I write a check from the CU and deposit it at the bank. Given that both banks gave me a checkbook for free, it’s easy for me.

    Or, you could use a wire transfer, but that costs money, but faster IRC. This is for B&M banks.

    For online banks, I only looked up ING, but they allow you to link 3 non-ING checking accounts to the online account, and money transfers are free and take ~2 bank business days.

  10. Steven says:

    @7

    Just thought of this after I replied, but $20k in a checking/savings account?

    I seriously hope you’re getting a good interest rate to pull a risky stunt like that. I mean, did you really need it in the other account that quickly? If you did, you should have planned that a little more.

    Also, the title of the article is “Personal Finance 101: Getting Started with Banking”.

  11. Little House says:

    I have an aversion to Chase Bank. In my opinion, they are doing a horrible job transitioning their WAMU customers to Chase customers. I think that Michael should definitely change banks. Your options are all solid. I have a money market account with Capital One (online) and I have liked them so far. It’s easy to transfer money to and from my other bank account, but it usually takes about 3 business days. I hear that ING is really good as well. I think your information will give Michael a good start.

  12. Kevin says:

    @Steven: Yes, I could have written a cheque (and I’ve done that in the past). However, with such large sums of money, the majority of it gets “held” for up to a couple of weeks, making it a little tricky to ensure the money is in my RRSP before the deadline.

    Regarding the amount, that’s just how our investing strategy is structured. Every month, $2,150 is transferred from our Chequing account into our Savings account, for retirement savings. This used to be a high-interest online account, but since the rate was only 2.5%, we’ve since opted to just keep it at our local bank’s Savings account. The interest is lower, but it’s more accessible.

    Anyway, after 12 months of saving, there’s over $25,000 there. In February, after the last payment goes in, we move the money over to our TD Savings account, where we then direct it into our individual RRSP and TFSA accounts. Waiting 2-3 weeks for a cheque to clear would mean we’d have to be paying close attention as the end-of-February deadline approached, waiting for the cheque to clear. So to date, we’ve just been moving it literally as an envelope stuffed with 100′s.

    This has its own problems (risk of loss/theft, paperwork at the other bank when depositing that much cash, etc.), but it’s free. I’m open to better solutions!

  13. Bonnie says:

    @Kevin-I’m not sure where you live, since I have no idea what RRSP and TSFA accounts are, but I’m guessing not in the U.S., so hopefully my suggestion is still applicable to you. Maybe you should look into using another bank or credit union for your savings. At my credit union, they’ll just waive the hold on your checks if it’s a check that you regualarly deposit. So, if you regularly deposit a $2150 check from your other bank and it always clears just fine, a solid bank/credit union would just waive the fee.

    @#4Jane-I second the credit union rewards checking idea (if you’re pretty good at keeping track of your expenses). Our rate just dropped from 4% to 3.5% with a $50,000 cap, but it’s still the best around. There’s a website somewhere that lists all the rewards checking accounts in the nation, but I don’t remember the URL. They all have eStatement and debit requirements (usually 10-15 per month), because that’s how they’re able to make extra income to cover some of the costs of giving members such high interest.

  14. Steven says:

    @Kevin

    My banks allow me to cash a check if I’ve got enough cash in the account to cover the check. So, I cash it, then deposit it as cash right away, and I have access to it immediately. Don’t know how it works in Canada, but a lot less worrying this way.

    Don’t know if this applies in Canada, or any other banks/CUs beside mine, but it works for me. I had to do this at University every semester when my financial aid and loans came in. I would cash it, and deposit it right away so I could use the money for books, rent, and buy groceries.

  15. deRuiter says:

    between “maoney” market + editing mistakes
    Trent:
    1. Spell check.
    2. Edit /proof read.
    3. Look up words to make sure they are used correctly.
    4. Have your wife or another educated adult proof your work.
    5. If you took English classes in University you might have a lawsuit for non delivery of services.

  16. Kevin says:

    @Bonnie:

    Sorry, those are Canadian savings vehicles. An RRSP (Registered Retirement Savings Plan) is tax-deferred retirement savings account. It’s like a 401(k), but it doesn’t have to be sponsored by an employer. You open it yourself with any bank or brokerage. A TFSA (Tax Free Savings Account) is like a Roth IRA, only much better.

    @Steven:

    My bank doesn’t put a hold on the entire amount, just any amount over $5,000. 99% of the time, that’s more than enough, and there’s no problem. But the once a year when I transfer our accumulated amount to our Savings account at the bank where our retirement accounts are held, the amount is substantially more than that (~ $25,000), and we have to wait for the cheque to clear before gaining access to the money and transferring it into our individual retirement accounts.

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