For this post, I thought it would help to go back almost to the beginning. Your first step, after you have saved a bit (techniques for that in another post) is to put that money to work for you where it can earn something. A savings account at a bank is the obvious, though not the only place. Even among banks, not all are the same. Here is some guidance for making your choice:
It would be foolish to choose a bank simply because it is near your home, but it is a consideration nonetheless. While factoring in this convenience, also consider if that bank has branches near where you work. That may be more important, since you are more likely to be there when the bank is open than at home. Find out if the bank has branches in other cities, especially those that you visit often.
What They Pay
These days, banks offer little interest on savings accounts, less than 1 percent, in fact, and in some cases considerably less. That will change. In time, interest rates will rise. The Federal Reserve, or Fed, as it is called in financial circles, has plans to raise them, perhaps to 3.0 percent or higher. Small savers will benefit as that occurs, because the banks will respond by raising what they pay on their accounts. But that will take time. Savers for now have no choice but to accept low rates. Still, there is more to choosing a bank for your savings than just the rate paid or the convenience of a branch.
Fees and Services
To make your decision, you should check out the banks in your area with a personal visit. Talk to the person in charge of new accounts. Describe your financial needs and listen carefully to his or her responses. Among the issues the bank’s representative will describe, or should, are the conditions attached to newer accounts and what other services the bank offers. Take notes and gather all written material available at the bank and on the Internet. Study these and make comparisons of each bank to the others. Here are matters on which you should focus:
- Minimum deposit requirements. The bank might pay different interest rates on different accounts, usually higher for those that require higher minimums.
- Online services. Almost all financial institutions these days have online services, but not all reach the same standard. See if the bank allows you to deposit checks online, arrange bill paying, and other services. If it does, this could save you a lot of time.
- Help desk. Find out if you must visit the bank in person if you have a question or whether it has Internet or telephone service. Usually, the level of service rises with the size of the account.
- Penalties. Banks often charge fees or reduce your interest if your balance falls below a certain amount. This has become especially important in these times of low interest rates. Identify how large these penalties are and when the bank would levy them. This will not only prepare you, but it will help you plan to avoid such expenses. Penalties might also occur if you fail to make deposits or withdrawals for a long time, or if you make a lot of small withdrawals. Find out and plan accordingly.
- Yield. Banks typically advertise two interest rates paid on deposits: the “annual rate”and the “effective rate.” The difference reflects how often interest is calculated and credited to your account. The effective rate includes a consideration of how frequently the bank credits your account with the interest. The more often it does so, the more each calculation will earn interest on the interest already paid. Find out.
- Automatic savings. Some banks will transfer a specific amount from your checking account to your savings account automatically each month. Find out if the bank offers such a service and if it involves a fee.
- Favorable loan, credit card, and mortgage rates. Some banks offer depositors favorable terms and rates on loans or mortgages. Find out if you have access to such an arrangement. It might involve a larger minimum deposit.
- Currency exchange. The most cost effective way to get foreign currency is through an ATM in the country you are visiting. Not all banks charge the same rates and conversion fees on such transactions. Especially if you expect to spend significant time abroad, find out what each bank charges.
- Overdraft charges. Most banks will enroll accounts in their overdraft program. It automatically advances you funds to cover checks you accidentally write in excess of your balance. Without such an advance, your checks might “bounce” or, even if the check is honored, face a hefty fee. An overdraft program can protect you. Find out how it works. The program itself very likely has charges. Find out what they are, under what circumstances the bank might charge you, and how quickly the bank will notify you so that you can take action to minimize any costs. The best protection, of course, is to keep your checking account balanced and avoid overdrafts altogether.
- Fees on automatic teller machines. These have largely disappeared, but check to make sure. Also, find out what fee the bank charges to use the ATMs of other banks or to use a credit card at the ATM machine. Here are three additional tips on the use of ATMs:
- Each bank will set a limit or how much cash you can withdraw from an ATM at any one time. You should know this to calculate how many trips to the ATM it will take for you to amass larger amounts should you need them.
- Since most banks post interest at 3:00 pm each business day, try to make your withdrawal later in the afternoon so that your interest calculation for that day will occur on as much money as possible.
- All ATMs ask you to create a personal identification number, or PIN, that you must key into the machine to do the transaction. Never give your PIN to anyone. Nor should you keep it anywhere on your person. It should be easy to remember. Do not use your birthday. Hackers are onto this practice.
Make sure any bank you consider is federally insured. The Federal Deposit Insurance Corporation (FDIC) insures deposits up to $250,000 per depositor, no matter how many accounts you have with that bank. For more information, visit the FDIC website, www.fdic.gov. The FDIC also provides information on banks’ relative financial strengths. The Federal Reserve, which is the country’s primary bank regulator, runs a series of what it calls “stress tests” on how each bank would cope in a difficult financial environment. Its website, www.federalreserve.gov, and financial media cover the results of these tests thoroughly. Credit rating agencies, Moody’s, Standard and Poor’s, and Fitch, will, for a fee, provide information on bank finances. Visit their websites: www.moodys.com, www.standardandpoors.com, and www.fitchratings.com. The private firm, Veribanc, also reports on bank safety ratings, www.veribanc.com.