Checking accounts

Investing and Financial Management

CHECKING ACCOUNTS :

DEFINITION:

An investment that enables you write checks or use a debit card to access the money you've deposited. Can be used to pay bills or transfer funds to other investments.

PROS:

Shows how much you have & how much you're spending; vehicle for paying bills

CONS:

Pays little or no interest; mismanagement can lead to fees, charges, & damaged credit

Overview

There’s a very old joke about a guy who couldn’t believe his checking account was overdrawn, because he still had checks. It’s no joke, though, if you don’t have enough money in your account to cover the checks you’ve written.

A checking account may be your first lesson in accounting, because you learn:

That your deposits need to be more than your withdrawals
How important it is to balance your books

A recent survey found that almost 20 percent of Americans don’t balance their checkbooks. This is a terrible mistake to make.

Why Check accounts are important.

Aside from being a lesson in accounting, checking accounts teach you the basic principles of managing your money. Here are some other reasons why checking accounts are so important:

You have a convenient way to pay your bills.
You are able to monitor your expenses and spending habits.
You develop a relationship with a financial institution.
You can use the account as a springboard to other investments, such as by arranging an electronic transfer from your checking account to a mutual fund.
You build a track record that demonstrates your ability to handle money.

Impact on Credit Rating

The simple checking account can complicate your life if you don’t pay attention. Your credit rating is based in part on how well you’ve handled your checking account. All of the following may be reported:

Bounced checks (checks returned because there are insufficient funds in your account to cover them)
Late bill payments
Missed bill payments

In addition, you’ll have big problems with your landlord or car insurer if you bounce a check or make late payments. Aside from the damage done to your credit rating, passing bad checks can cause you legal problems.

Getting Started

A good way to get started is to look at the banks in your neighborhood to see if they offer a checking account that meets your needs. Quite often, convenience is much more important than a few cents more in interest, especially if you can walk to the bank. Your life may also be a little easier if your checking account is at a bank where everybody knows your name.

You can also open an account online and monitor your finances regularly. Before opening any account, though, make sure you understand all of the terms and conditions.

Online Banking

The ability to bank online is appealing for a number of reasons:

It is convenient and you can do your banking in your pajamas.
Once you establish an account, you’ll save time, effort and gas.
You can arrange for some of your monthly bills to be paid automatically.

There are drawbacks, however. If you type in a wrong number when paying a bill online, you can wreak havoc with your account. In addition, you may have concerns about Internet privacy and security. Although you don’t receive copies of checks for your records, you do get documentation to show a bill was paid. Ask the financial institution what security measures are in place to protect your privacy and your account.