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The Basics In Banking
Certificates of Deposit
When we first start using a bank we quickly learn that a savings account is where we put money we want to hold on to and a checking account is where we put our money that we need to use and life off of. There is so much more in to learn.
Did you know that proper banking can easily save the average person thousands of dollars each year. Over the 50 years it can mean the difference between hundreds of thousands of dollars in your pocket or the bank's coffers.
Let's take a quick look at how you can make the most of each of the major banking products.
1. Checking Accounts
2. Savings / Online Savings Accounts
3. Money market accounts
4. Certificates of Deposit (CDs)
Checking, savings, money market account are but some of the ways you can keep your idle money earn some interests while waiting at your disposal. By "idle" it only means that it is on stand by and not being used as of the moment but the time will definitely come that those cash in checking, savings, money market account will finally meet its fate - but maybe not in the case of money market. They are all types of account that has some difference in function, uses and interest rates but all of them can be availed in a bank.
Checking, savings, money market account can be beneficial to anyone who does not have any idea where to invest their money to. Checking accounts are popular among business men to pay off a supplier for a product or services to be used by the company. They do not need to carry some cash with them because it will be automatically deducted from their account once the check was cleared. Some banks require a minimum amount to open a checking account and will ask some identification from the depositor opening a checking account, there is also a minimum amount to maintain a checking account in order to earn some interests. Interest earning checking accounts can offer higher interests than regular savings account.
Savings account is a type of account that earns minimal interest but the thing is it still earn some interest for the cash that you will practically let lying around in the house until the time comes for it to fulfill its purpose. Interest rates and conditions in maintaining the account differs from bank to bank and like checking account, savings account can also be used to pay off some emergency expenses but you have to withdraw the actual cash from he bank, unlike in checking account that you will just issue a check and be done away with it.
Of all the types of account in checking, savings, money market account the last mentioned might just be the most suitable for your idle cash especially if it amounts to $1,000 or more. Money market account is just like savings account and checking account but with higher interest rates (higher minimum balance to maintain the account is one of the reasons for the higher interest compared to checking and savings). If you will avail this kind of account, you will only be allowed to make three to six withdrawals in a month and write up to maximum of three checks per month. Again, interests may vary from bank to bank and will require proper identification from the one opening the account. One thing is for sure - interests in money market are higher than savings or checking accounts.
The difference really in checking, savings, money market account is the interest a bank will pay you for using your money to lend to others. The higher the deposit you will give them, the higher the interest they will give you. They all depend on the amount you will be able to save in their institution.
Checking account were created just for rolling cash in and out. Banks benefit because it increases the insured assets they can claim they have. Also they lend that money out overnight (when you can't get to it) to other banks for a healthily interest payment.
Traditionally, checking accounts do not return interest. Due to the competitive global market, many banks are going with interest. Checking with interest, Yeah! Wait until you see your rate, my one account is getting a rocking 0.15% in interest. That's less than 1/30 my worst online savings accounts return.
Instead of worrying about interest, focus on finding an account that reduces it's fees. In the end, you'll actually come away we saving more money.
Case in point:
My second checking account receives no interest, but TD Bank has no fees for ATM cards. Seeing as I live in the Outback and can only get money through my local gas stations ATM, I take money out of the ATM 3-4 times a month. My other bank charges a $2.25 fee for this. So am looking at $9.00 a month ($108.00 per year) just to get my money.
Let's compare that to my checking with the whopping 0.15% return rate! On average we have $2500 a month in there. That $3.75 a year I'm making with my Interest Checking. Hell I'll stick with NO ATM FEES any day!
Savings / Online Savings Accounts:
A savings account is an account maintained by a commercial bank, credit union, and savings associations. The purpose of the account is to gain funds (interest) over time for simply allowing the institution to maintain the account. Funds may be deposited or withdrawn at any time. Savings accounts are completely liquid assets. The can may be owned by one or more people.
Savings accounts are insured by the Federal Deposit Insurance Corporation (FDIC). This means if the financial institution you hold the count with it goes at a business your money is guaranteed. On the record no one has ever lost their money since the FDIC began insuring accounts.
Some accounts require minimum balances in order to avoid a maintenance fee charge. Some accounts require funds to be held for a period of time, most accounts permit unlimited access to funds. If the minimum balance is not maintained, the account holder incurs a penalty or free.
The account holder is provided interest paid to them, usually, a monthly basis. The interest is based on the average balance the account maintained during a fixed length of time. Interest rates are set by bank based on the financial landscape of the current time. Interest rates can be stated by banks by two methods. The Annual Rate of Interest (APR) does not take into account the compounding of interest within a year. Few banks listed APR quotes, as they are not attractive as compared with APY quotes. Annual Percentage Yield (APY) on the other hand is often quoted. APY quotes take into account the compounding of interest and are therefore higher as a flat rate.
The main feature of a savings account is a convenience. Many banks provide customers with ATM access to the money. With the advent of the Internet banks have slowly transition their business to the online space. The online space has greatly lowered the overhead involved and financial institutions and greatly increased the scalability of their business. The online space allows banks to do business with him many more people while keeping their costs lower than ever. For this reason, banks offer more attractive interest rates to lure potential clients. In this case the online world is a win-win situation for customers and banks.
If you have a savings account with your local bank, you are being robbed! Get rid of it immediately! Instead find a good online savings account and attach it to your checking account.
Online savings accounts are a great way to get the most bang for your buck while still keeping your cash liquid. In most cases you link your checking to your online account and then you transfer money between the two at any time. When you transfer money into this account usually there is a longer than normal hold period.
Because the accounts are mostly electronic and require minimum resources for the banks to maintain, you receive excessively good rates in most cases. The rates on these accounts in most cases will rival, if not beat, the local rates of CDs.
Many people worry about having their money accessible online. I have to say, about 3 years ago I was pretty much a fool for putting my money online. Today though the technology and level of security they offer is great. I feel more secure online bank than going to an ATM in my local town.
Let me share some of my experiences with you:
I keep accounts with these lenders. I have others, but these are good stories about industry leaders.
1. HSBC Online Savings Account- I have my mortgage with HSBC, so I keep a save to pay off the mortgage account with them. They have always responsive to the market, which can be a good and bad thing. They usually offer a rate that keeps them in the top 25% as far as rates go. They played a lot of catch up with their technology, so they are a little behind in bells and whistles category. But, the better rate always trumps technology for me.
Customer service is horrible on the phone. You will usually talk to someone in another country who is poorly trained. The last time I called it took about 15 minutes for the support person to realize the question I was asking them. I asked this same question to ING Direct support. ING Direct gave me an answer immediately. Their email support is handled well though. I usually get thoroughly clear answers.
2. ING Direct Online Savings Account- If their rate was better, I would without a doubt put all of my savings account money with them. The features of their web site is robust and lead the industry. I actually have a better day when visit their site. Their customer support is the best in the business. They actually sound like they love the company and what they are doing. I don't know who trains these people, but the are awesome!
The sad thing is that the rate sucks in the last 40 months. They once lead the way and now I would say they are in the bottom 25% as far as large online banks rates go.
Money Market Accounts
Money market accounts usually yield higher interest rates than basic savings accounts. In return for the higher interest rate, you get make less transactions with your account and are required to maintain a higher balance. In English you have less access to your account, but the bank pays you a little more.
Money Market Pros:
Money Market Cons:
If you are into traditional banking and you have a decent amount of liquid on hand, money markets aren't a bad deal. Especially since you can write a few checks, in case you are making a large purchase.
If you are comfortable with online savings accounts, I would say to stay clear of any traditional money markets. You'll also find a lot of great online savings accounts that have killer rates over money markets. You'll also find a few great online money markets that edge out many online savings accounts. GMAC is my favorite online money market account right now.
What's the Difference between a Money Market Account and a Savings Account Online?
There is very little difference between the two types of accounts. In the past I have seen the Money Market account to mean you were going to get more interest, but I can't say that this is true any more.
Money market accounts differ from savings accounts mostly because they give you greater access to your money and require a higher balance. The balances can be quite high. In many cases they can be greater than $5,000.
Traditionally money market accounts provide a higher interest rate. The online world is slowly offering money market accounts as well. We're starting to see greater rates on these accounts. I anticipate to see this trend continue.
Money market accounts do have a catch. Most banks allow for a maximum of three to six withdrawals per month. You can make more than six withdrawals, but will incur a penalty. Balances that fall below the minimum are also charged a nominal fee of $5-$10.
Money market accounts allow you to write checks. Also the new online rates have been one third to one half percent greater than online savings accounts. Money market accounts are insured by the Federal Deposit Insurance Corporation (FDIC).
I foresee money markets making a greater play online in the coming years. Money markets are very valuable to people who do not access their money more than four times per month. Money markets are also very attractive due to the check writing feature.
Let's look at the similarities between a Savings Account and Money Market Account:
1. They are both FDIC insured up to $100,000 per account holder.
2. They both offer similar interest rates online. In most cases.
3. They both offer ATM access to your money.
4. They both offer you multiple methods to deposit your funds.
What do Money Market Accounts have that Savings Accounts don't?
1. The ability to write checks.
2. In some cases you can get a preferable rate at the expense of convenience. You can have the better rate, but you must maintain a relatively high balance (usually around $5000) and you can only make 6 monthly withdrawals without penalty.
My advice in this area is to just look at what the account type offers you. Don't worry whether it is called a money market or savings account.
Certificates of Deposit (CDs)
CDs are, in most cases, going to be your largest return on a sure thing when it comes to short term savings. They can be purchased from banks or brokerages. The term length is anywhere from 3 months to 5 years.
CDs are great because:
CDs suck because:
Once you purchase the CD, your money is locked in. In most cases you can get it back early, but there is a penalty. The penalty can in some cases eat into the initial principal. Your rate is locked in to, that can be good or bad.
My Take On CDs:
They are great for your short term savings. Can't beat guaranteed (insured) money for you depend on.
They are also great for midrange savings, if the economy looks like it will be taking a dive. Not that you need a crystal ball or anything to know when the economy is looking bad. When the Fed starts slashing rates like Freddy Krugrer, it's time to lock into a CD. Usually the old school banks are about a week or two behind the online banks to change rates. When you see that your online savings account is cut in half over night, lock in a CD with an old school bank right away.
Because we all can be smarter with our money.