Saving accounts

SAVING ACCOUNTS :

DEFINITION:

A liquid investment that earns higher interest than a checking account. Differ among financial institutions.

PROS:

Good place to accumulate money you'll need soon; easy access to money without penalty

CONS:

Interest rate is low; may not keep up with inflation; typically cannot write checks on your account

Overview

Most financial institutions use your money to make money. They do this by:

Investing your money
Lending money

Through the process, financial institutions hope to bring in more money than they’re paying you. In exchange for the use of your money, the financial institution pays you interest.

The simple savings account is a pumped-up version of your piggy bank, except that the savings account pays interest and is safe, since the bank is insured by the Federal Deposit Insurance Corporation (FDIC), a government agency. Even if the bank becomes insolvent, the government guarantees the return of your money up to $100,000 in most cases. The Savings Association Insurance Fund (SAIF) is part of the FDIC and insures savings and loans.

With a savings account, you have easy access to your money. Usually, however, you may not access your savings account with a debit card or a check.

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.