3 Ways to Bank Smarter

by Jill Terry

Keeping your money in the bank as opposed to under your mattress is smart. There's no doubt about that. But are you using your bank accounts as effectively as you could? Most people aren't, which is how banks make money on their customers. By learning how deposit accounts actually work, you can keep more of your money for yourself, rather than allowing the bank to profit from what you don't know or understand.

1. Never store money in a checking account. Unless your checking account is a NOW (Negotiable Order of Withdrawal) or MMDA (Money Market Deposit Account), which means that it earns some interest, keeping anything more in your checking account than what you need to pay your bills is a missed opportunity for the bank to pay you interest.

Most banks offer a variety of checking accounts and it's imperative that you evaluate each one based on how you use a checking account. If you write a lot of checks, for instance, an MMDA account won't suit you because it allows only three checks per statement cycle. If "free" checking is dependent on direct deposit but you live on freelance income rather than a regular paycheck, you may not be able to take advantage of direct deposit, so your account will not be free, after all.

Beware of checking accounts that are advertised as "free." They often require you to maintain a minimum balance, use direct deposit, or are contingent on some other requirement. If you must maintain a minimum balance to get a free checking account, what would you be earning each month if that minimum balance were in a savings account? Is your checking account paying you the same rate of interest that the savings account would? Is the money you save in fees substantially more than what you could be earning in interest? If not, you don't want to keep your money in an account that earns money for the bank but none for you.

2. Never withdraw a Certificate of Deposit before its maturity date. Certificates of Deposit (CDs) are deposit instruments that function as a big promise between you and the bank. You agree to keep a certain amount of money in the bank for a certain amount of time, and if you keep your promise, the bank pays you a rate of interest that's usually higher than what it pays its savings account depositors.

The penalties for early withdrawal are nice money-makers for the bank but can prove to be a significant loss to you, causing you at times to end up with less principal than you initially deposited. Read about a bank's penalties very thoroughly before you open a CD account and don't deposit the money unless you're certain that you will not need it before the maturity date.

Ask yourself some questions to ensure that you select the right CD term.

  • When do you need the money? Anticipate the worst; plan for financial emergencies happening sooner rather than later and you won't be overly optimistic when you choose a CD term.
  • Is this money your only savings? If so, find a different type of account. Odds are good that you'll need to access savings at some point during the CD's term, which means you'll be paying a penalty.
  • Is there another FDIC-insured account type that pays comparable interest but still allows you access to your money? Sometimes, CD rates are not the bargain they appear to be when you consider the limited access to your funds. Compare accounts and rates. A money market or savings account might be a better alternative for you.

3. Understand how interest is computed. No, you don't have to get out your calculator, but you need to have a basic understanding of the types of compounded interest that exist.

Here's a shocking fact. The account that pays the highest interest rate is not always the best choice. How interest is compounded, rather than the rate itself, is what you need to look at.

Compounding is what happens when interest is reinvested in the principal. How often it's reinvested is important. For instance, if you deposit $1,000 in a savings account that pays three percent interest and leave it there for three years without making additional deposits, here's what you would earn under varying compounding scenarios:

Interest compounded monthly: $94.05
Interest compounded quarterly: $93.80
Interest compounded semi-annually: $93.44
Interest compounded annually: $92.72

Even with these small amounts, you can see that the more frequently a bank compounds your interest, the more money you stand to make. Always ask your banker to explain how often interest is compounded before you commit to a deposit account.

Take the Next Step

  • Make sure you're getting the best CD rate. Use our simple CD tool to find out. It's completely private, easy to use and you'll know what rate is available to you in seconds!
  • Get the interest you deserve! Compare money market and savings account rates with our best rate finder. It only takes a minute and your privacy is completely protected.
  • Stop struggling to get ahead financially. Subscribe to our free weekly Surviving Tough Times newsletter aimed at helping you 'live better...for less'. Each issue features great ways to help you stretch your dollars and make the most of your resources. Subscribers get a copy of Are You Heading for Debt Trouble? A Simple Checklist And What You Can Do About It for FREE!

Jill Terry is a freelance writer and former bank examiner. Her articles have appeared in America's Community Banker and she has been a columnist for the websites Ms. Money and Financial Finesse.

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