In Part 2 of the “Choosing a Bank” series (My Money Blog – Choosing a Bank – Part 2), I discussed the four basic options for savings accounts available on the financial markets today.
However, what I did not address was 1) how to decide if a checking account or savings account is right for your needs and 2) how to choose the correct checking account (if that is the route you decide to take). These topics will be what we’ll investigate together in today’s posting.
Let’s get started! This is definitely an exciting topic because there seem to be new options available every day.
Deciding Between a Checking Account or Savings Account
At a high level, whatever banking instrument you choose needs to be able to fulfill four basic requirements – 1) allow unlimited transactions for daily living expenses with no fees, 2) have checking writing capability (for paying bills, and unexpected expenses directly to people who cannot take credit cards), 3) have an ATM card tied to the account / have ATM access capability, and 4) offer a competitive interest rate of return on your cash savings.
Please always keep these requirements in mind as you are exploring your options. Now that we know what is required, let’s take a look at our options:
Savings Accounts – In general, traditional savings accounts:
- Do not allow check writing.
- Do not feature ATM cards.
- Have restrictions on maximum numbers and quantities of transactions per month.
- Do offer competitive interest rates on your account’s cash balance.
Clearly, traditional savings accounts at brick-and-mortar banks are not a good sole choice for your banking needs.
Non-traditional savings options come a little closer to fulfilling some of the requirements, but still fall short. For example, Vanguard.com – Money Market Mutual Fund Accounts offer check writing capability on your taxable money market mutual fund balance, but do not offer ATM cards.
My two favorite online savings accounts (at the links shown below) offer no fees and unlimited transfer each month, but do not offer checking or ATM card capability.
IngDirect.com Savings Account
DollarSavingsDirect.com Savings Account
Note: if you are looking to open up a savings account with IngDirect.com, email me your name and email address at irwin.jacob@gmail.com, and I’ll send you a code to give you $25 of free money, when you open the account with a $250 minimum opening balance.
Checking Accounts – Traditional checking accounts offer:
- Unlimited transactions/transfers of money
- Checking writing
- ATM/debit card capability.
- The only pitfall is that traditional checking accounts do not offer any interest rate on the money kept in the account. Recently, interest bearing checking accounts have been created (see information on this below). However, the interest rate offered on these products is significantly lower than for savings accounts with the same minimum balance requirements.
Summary – As it turns out, it looks like a multi-account system of checking and savings accounts are required in order to manage your money most effectively. Since we already explored choosing a savings account in Part 2 of this series, let’s look at our options for checking accounts.
Choosing a Checking Account
To recap what was stated previously, we are looking for a checking account that meets the following requirements:
- No fees / unlimited transactions.
- ATM/Debit card capability
- Check writing capability
Please note that having a competitive interest rate is not required for a checking account since we will use a savings account to grow our cash savings.
Step 1-
The first step to choosing a checking account is to decide between a local bank or a national/online bank (an online bank has almost the same pluses and minuses as a national bank when it comes to choosing a checking account). Take a look at Part 1 of this series for more information on that topic at the following link – Choosing a Bank – Part 1 – Local vs. National.
Step 2 –
Once you have decided between a local or national/online bank, the next step is to decide what type of account you want to open. For this, you basically have two choices: interest bearing checking accounts and regular checking accounts.
Choosing between an interest bearing account and a normal checking account can be a little tricky. All else being equal, you will want to lean towards the interest bearing account. However, if there is a monthly maintenance fee associated with the account or other restrictions, you would want to revert to the normal checking account.
For example, click on the link below to look at Bank of America’s checking account options. In doing this, we see that the normal My Access Checking account is totally free if opened online. We also see that Bank of America offers an interest bearing checking account. When we click on the details for the interest bearing instrument, we see that they are offering a 0.05% interest rate. However, we also can see that if the balance is under $10,000, there is a monthly maintenance fee associated with the account. In this case, we would want to go with the normal checking account.
Bank of America Checking Accounts
On the other hand, interest bearing checking accounts from online banks are an AMAZING DEAL. Just take a look at the link below for INGDirect’s checking account!
IngDirect.com – Electric Orange Checking Account w/ Interest
This account offers:
- No fees
- An ATM/Debit Card
- Free checks
- An interest rate of 0.24%. Awesome right?!
Note: if you are looking to open up an interest bearing checking account with IngDirect.com, email me your name and email address at irwin.jacob@gmail.com, and I’ll send you a code to give you $25 of free money, when you open the account with a $250 minimum opening balance.
As it turns out, other online banks offer interest bearing accounts similar to ING’s. Take a look at the link below for more details about those.
Bankrate.com – Checking Accounts with Interest
What works best for me
For my personal needs, the following system works best for me:
- I have a MyAccess Checking Account with Bank of America (no fees, free checks, free ATM/debit card access). I use Bank of America because I tend to move/vacation around a lot, and they have branches everywhere. Additionally, many of my friends and family have their checking accounts with Bank of America, and therefore, we can do instant money transfers between our accounts.
- I only keep around $700-$800 in this checking account at any one time because I do not earn interest on my balance.
- Any additional money I transfer out to either my stock equity accounts or my high yield savings account with Dollarsavingsdirect.com
Out of curiosity, let’s just take a look at how much more money I would be earning if I used an interest bearing checking account (INGDirect). Assuming that I maintain $800 in the account throughout the year and earn 0.24% interest, this equates to $2.92 per year. It’s probably not enough to outweigh the benefits I enjoy with Bank of America. But, if all else is equal in your situation, it is something to consider!
Please let me know if you have any questions.
Keep on learning!
Jacob
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