Internet Safety

I found a very interesting video online that matched the theme of my last post on password security.  We all access information online nowadays and it is important to keep vigilant when connecting to important financial accounts.    Always be on the safe side when browsing the internet and make sure you have up to date security.  I  use Microsoft Security Essentials but just make sure that whatever software protection you use  is up to date.

Protecting Your Passwords and PINs

There is a surprising (or perhaps unsurprising) lack of sophistication with how many people set PINs and passwords.  A study done by Data Genetics analyzed passwords from released or exposed password tables and found that the most common 4 digit password was "1234."  "1111," "0000," and other strings of the same number were also very common.  A list of most common passwords published by SplashData include "password" and "123456."  Others on the list that might be slightly more sophisticated include "qwerty" and "qazwsx" for passwords and "2580" for PINs.  You can easily see that these just have to deal with the placement of the characters on the keypad or keyboard to help people remember them easily.  However, this makes it extremely easy for someone to just guess what your secret code is if you lose your ATM or credit card.

International Access to Money

Roughly 60% of Americans do not have a passport according to the State Department as of January 2012.  If you belong in that majority and plan on staying in it, this post will probably not be very relevant.  However, for those of us who do have a passport and plan on using it, we have to prepare before going abroad.  Especially within my age group, many students study abroad, backpack across a different continent over the summer, or even attend college in a different country.  For those of us who haven't, learning how to get access to money is the first step.

Online Savings Accounts

I haven't blogged about one critical tool almost everyone has for their personal finances: the savings account. I've introduced bank accounts before and analyzed what are the important features to look for in a bank account, but I don't think I've specifically addressed which are the best bank accounts to have.  In a savings account, you really only care about 3 things: convenience, security, and returns.  You want it to be easy to use when checking your balance or making transfers, you want to make sure that your money is safe, and you want to make sure that you are earning as much as you can on your savings.

Banks Rethinking Debit Card Fees

A few posts back when I mentioned Bank of America's plans to introduce a $5 debit card usage fee, a huge consumer backlash came about.  People across the country were talking about closing their Bank of America checking accounts and it seemed as if there was a mass exodus from national banks to more local credit unions.  J.P. Morgan Chase has been testing a similar $3 debit card fee in a few states but plans on abandoning the idea.  Wells Fargo had been implementing an almost identical $3 fee that it has also decided to cancel.  TD Bank conducted a customer survey and found that about 75% use debit cards for convenience and that almost all of them would discontinue their account if a fee was imposed.  U.S. Bank has also come out saying that they do not plan on adding any fees.

New Debit Card Fees

Anyone with a Bank of America account should already be aware that the company is planning to institute a $5 monthly debit card fee starting in 2012.  They will roll it out slowly, selecting a few states at a time but no specific information is available yet.  This fee does not include use of ATMs but whether you use your card at the cashier once or 100 times, you will be charged $5 for that month.  This is essentially a $60 fee assuming you use your debit card at least once a month.  Wells Fargo and Chase are already testing debit card fees in certain locations and this may prompt them to also institute a global debit card fee for their own cards too.  However, I believe there will always be some banks offering free use of their debit cards and the promotion of this feature will become more prominent in the years to come.

Taking Advantage of Bonuses

Often times, there are a lot of great deals you can take advantage of as a new customer.  I wanted to specifically look at some of the bonuses you can get at banks.  There are often lots of incentives if you open a new checking account or a credit card.  While lucrative, you often have to pay attention to the fine print.  For credit cards, make sure you aren't getting a card with an annual fee.  I can't even count how many offers I get from airline credit cards every year, but all of them have annual fees.  There are options out there that don't have an annual fee, but still give great introductory bonuses.  Some of them depend on fulfilling another criteria.  For example, the Chase Freedom card has several promotions floating about.  You can either get $50 with the card after your first purchase or $200 if you spend $500+ on it within the first 3 months.  If you plan on spending $500 in the next 3 months, why not get the card and get 40% of that back?  Bank of America also has a $50 cash back offer (after spending $100 within 60 days) with one of their new cards which also gives 2% back on groceries and 3% back on gas.  Of course, this all assumes that you are responsible with credit cards already and you won't be tempted to overspend.

How To Open A Bank Account & Recommendations

If only I could find a bank where something like this community chest card event actually happens...  But more realistically, on to the actual point of this post.

So let's say you've done some research and you've found a bank that looks like a good match with your goals (and if not, I have recommendations throughout).  How do you go about opening one?  You can either open an account online or in person.  I would recommend opening one in person if it is your first time since you can ask any questions you may have.  Just make sure that you have brought enough money with you for the minimum opening balance or you have a check you can use to deposit.

When you open an account online, you simply go to the bank's website and find where to apply for the checking account.  You can usually use the website's search engine or Google it.  I would try to find student accounts if you are a student, particularly because banks are usually more lenient with maintenance fees if they do have any. Then you go fill out some personal information as well as a method to make the opening deposit and then you're done.

In terms good banks, I know that Bank of America often has a lot of maintenance fees and you have to jump through a lot of hoops to waive it (such as only use the ATM to deposit and withdraw AND sign up for online statements).  I would also make sure to keep an eye out for opening offers (some banks offer money when you open an account with them).  Just Google searching checking account offers leads me to see an ING Direct Checking offer of $50.  I got a $50 bonus when I opened my U.S. Bank Checking account and a free iPod Touch when opening my Bank of the West checking account (I actually opened Bank of the West solely for the iPod Touch, but their service has been great).  So make sure you stay on the lookout for these offers since it can be some easy money in your pocket (or your new bank account).  Another quick note is that these offers I got were over the summer so I'm not sure how time sensitive these things are.

Also make sure that you get your first order of checks for free with a checking account.  This was the case for U.S. Bank, Bank of the West, and PNC Bank, but I'm not sure if it is standard for all banks.  These three are the only banks where I have experience with their checking accounts.  I have also looked at Bank of America, but their fees usually persuade my to look elsewhere.  I have heard good recommendations for Wells Fargo though.

In terms of savings accounts, I like Discover Bank because I have their credit card and because it pays the highest interest rate I know of.  The thing about Discover Bank though is that it is solely an online savings account so there is no physical bank for you to go to.  This means that you must have a checking account or savings account at another bank in order to withdraw your money (I only use the ACH transfer to my checking account but I believe you can wire transfer as well for a fee).  They have no monthly minimum balance and no fee and the APY is 1.15% currently.  It isn't that much but it's higher than most of the other savings accounts I have seen so when interest rates do go back up, I expect Discover to stay on top.  A close second, however, is Capital One which has a 1.1% APY and a bonus 10% on interest you have earned in the quarter if you have their credit card or maintain a $10K balance.  I would recommend these online savings accounts, especially for students and young adults in my generation since we are usually more comfortable with handling money online.  If you aren't, then a normal savings account at a bank is fine as well, but I generally don't find too many with a leading interest rate on the account.

What To Look For In A Bank Account

Now that you know a little bit about how banks work, let's go over the key features you want to pay attention to when selecting a bank account.  You can use Google's site to compare some popular checking and savings accounts.

Like credit cards, you will have to pay attention to a certain rate when looking at savings accounts (although some checking accounts have one at times too).  This is your interest rate that you will be earning on your balance with the bank.  It is called an APY (annual percentage yield), similar to the APR (annual percentage rate) on credit cards.  This number is typically around 1% for savings (but there are some banks who offer something like 0.35%) and next to nothing for checking accounts nowadays.  Normally, the savings interest rate is much higher, but the government is currently keeping interest rates low to encourage consumer spending.  And obviously, the higher the APY on your account, the better since you will earn more interest.

One minor thing to keep in mind is how often your interest is compounded if the bank you are looking at is advertising a higher interest rate but does not specify that it is the APY.  Compounding is the magical way of earning money exponentially since your interest earns interest, then your interest's interest earns interest, and then... well you get the idea.  Of course, it takes a while for this effect to become significant and almost all banks compound interest daily.  The APY is calculated as the effective rate using a compounding period of one year, so it should be a good comparison tool across banks.  You may be interested, however, in how often the the bank pays out interest as well (most pay out monthly I believe).

Another major feature to pay attention to is a monthly fee.  Sometimes, banks charge a monthly fee on your account unless you maintain a certain minimum balance.  If you are about to open an account and they mention that there is a monthly fee,  I would ask first if there are student accounts available.  Most of the time, these accounts don't have any monthly fee or any requirements.  One such bank I know this case applies to is Bank of America.  Make sure to avoid paying monthly fees on either your checking or savings accounts, simply because there are alternatives out there which don't have such a fee.  There may be other fees such as an overdraft fee and other fees that you should look out for so make sure you read through the fine print.

The last feature to pay attention to is the minimum amount to open an account.  For checking accounts, this is usually either $1 or $100, but it can vary.  Savings accounts usually have slightly higher minimums to open, either $100 or $500.  Obviously, you have to make sure that you have enough money to put into the account to open it.

I will mention some of my recommendations for checking and savings accounts in the next post.

Introduction to Bank Accounts

Now that we've learned a lot about budgeting, where should you put your money?  Hopefully, you have decided to save at least 20% of your income (may be less depending on how large your income is and how much your needs take up), but where should you put those savings?  The most common place is the bank.

I don't think I have ever met someone who wasn't familiar with what a bank is, but there may be some of the smaller details you have never thought about.  So for those of you who are starting to become fully financially independent, a bank is probably one of the best places to store your money when you are not going to be using it in the near future.  There are two specific types of bank accounts: checking and savings.  A checking account is used for a lot of transactions (when you need to withdraw money from an ATM or write a check to pay your bills) and savings accounts are used to put away money for long periods of time so that you can earn interest.  Interest is essentially the bank paying you to leave their money with them and the main motivation for why you should save money: your money will be making money for you.  Also, with a checking account, you usually get a debit card and a checkbook with a set of free checks.

I will go over the nitty-gritty details about how to choose a bank and what features to look out for next time, but for now let's just talk about how commercial banks work.  The typical bank makes money by lending it out to people so it plays both the role of the borrower and the lender.  For people who need to take out a mortgage loan or any other type of loan, a bank assesses their credit risk and offers them the loan at a specified interest rate.  Where does the bank get this money?  There are a lot of technical details with how banks manage money with each other and the government, but essentially a lot of their holdings come from people like us who deposit our hard earned money into the bank.  Usually, loan interest rates are much higher than savings account interest rate because the bank earns money on this difference.  What determines interest rates?  That takes a couple economics courses worth of material that will probably put you to sleep, but in general it is determined by how much money is available in the economy which is determined by the government to some extent.

One important thing to note is that banks do not hold all the money they receive from us.  It was implied by the fact that banks lend out money but banks normally only have a percentage of our deposits in cash with them.  If we theoretically all went to the banks and demanded all the money in our accounts at once, the bank would be unable to give it to us because they don't have enough cash on hand to satisfy all the liabilities.  These circumstances have happened in the past, called bank runs, especially in times of crisis.  An important thing to look for when choosing a bank is to make sure that it is FDIC insured.  FDIC is the federal government agency that insures your account with the bank so that you will be guaranteed to get your money from the government if the bank ever fails.  The current insurance amount is $250,000 per depositor, per insured bank for each account ownership category, and most of the big banks are FDIC insured.  If your local bank is a little smaller, I would double-check to make sure that it is FDIC insured so that it will be one less worry on your mind.

One final thing to note about savings accounts is that there is a monthly limit on how many transfers you can make from the account.  The current limit is 6 outgoing transfers per month, and I don't believe it will change in the near future but it is possible it will change some time from now.  There is usually a fee charged if you go over this limit, but I usually just move the total sum of my credit card debt from my savings to a checking account in one transfer and then pay off each card separately.  Just keep in mind that with a savings account, there is a limit to how many times you can move money out of it (although not into it) while a checking account has no such restrictions.