Today, Paula and Jon are joined by Sue, a banking expert who will walk us through the different types of bank accounts. We start with an explanation of FDIC insurance, and what that means (given recent events in the news).
To find out more about the coverage in your accounts, you can visit the "Edie" tool on the FDIC website here: https://edie.fdic.gov/
Many banks offer the same products, but Sue says if you want to have a more personal relationship with your institution, you should consider a community bank instead of a larger one.
In terms of fees, there are fees for not keeping a minimum balance on some accounts, and of course overdraft fees. Paula, Sue, and Jon discuss where overdraft protection comes in and when/where that might be appropriate for you. Ideally, you never want to overdraft your account, but it can happen.
Next, we talk about the differences between savings and money market accounts. Savings accounts typically have a lower balance requirement, but don't pay as high an interest rate. One idea is to keep one of each - and try to leave the money market account separate from your savings. Even if it is liquid and accessible, you'd ideally like to leave the money that's earning more interest alone!
There are also CDs or certificates of deposit. CDs typically pay a higher interest rate than money market and savings accounts, but you committed to a predetermined time period. Withdrawing funds early can result in a penalty.
Finally, we talk about credit vs debit cards. Credit cards are easier to recover from fraudulent use, and can earn perks like airline miles, but you need to be able to pay off the balance every month.
Need help with your financial future? Learn more about Paula and her work at PaulaChristine.com or send her an email: Paula@PaualChristine.com
Paula: Welcome to Beyond the Paycheck. I'm Paula Christine. Today our guest is a banking expert. Her name is Sue. So we're gonna talk about just some of the basics regarding banking. So welcome, Sue.
Sue: Hi there. Thank you for having me.
Paula: Okay, so we know that in the news, and I don't wanna get into the whole banking stuff that's going on, but I do want to quickly talk about what is F D I C insurance.
Sue: F D I C is the Federal Deposit Insurance Corporation, and that ensures your deposits that you have with institutions. It's up to 250,000. There's all kinds of ways to calculate and figure out how you're covered. And there's a really neat little system.
It's called Edie, and it's on the F D I C. So you can go and pull up Edie and you put in all your accounts from everywhere and it'll tell you if you are covered or you're not covered, or how you could possibly move things around.
Paula: Oh, that's interesting. I didn't know about Edie. If you have a money at a credit union and at a bank, that's totally two different things, correct?
Sue: Correct.
Paula: Okay. So if I'm thinking about, augmenting my first bank account, how do I choose a bank?. What should I consider when I'm looking at a for a bank?
Sue: All banks pretty much offer the same products. It really comes down to the service that you receive. And if you're looking for some kind of personal service where they know you when you walk in, you're not just a number. you wanna go more with a smaller community bank as opposed to one of the larger banks that are out there. Because you're gonna get better service from the people, and it's just a much better way to go.
Paula: It's like Cheers where everybody knows your name when you walk in the door.
Sue: Exactly.
Paula: Do some banks have fees and others don't?
Because I know sometimes I hear about, people pay fees for their checking accounts and different things.
Sue: Yes. There are different types of accounts, different levels. There's accounts where you have to keep a minimum balance. Then there are also accounts that you don't have to worry about any kind of balance requirement.
It's mainly if you're overdrafting, writing checks or taking money out and the money's not in the account, you're gonna get charged a fee for that.
Paula: First of all, you shouldn't do that. So let's talk about that for a second, overdraft protection. Is that something that comes on an account normally or is that something you have to add to an account?
Sue: That is something that you would need to apply for and have it put on your account.
Not all places offer it. Some offer a grace period to get the money in there, but overdraft protection, it's like a little small line of credit on the side of your account. If you're overdrafted, they'll just transfer the money immediately into your account to cover it, as long as you have enough there.
Paula: And why would somebody wanna have, I guess in my mind that doesn't make sense why you would overdraft anyway, right?
Sue: People do make errors. They can. Sometimes they do it on purpose because they just have to do it. And go ahead and overdraw their account.
Jon: I'm gonna jump in here for a second because Paula, you make an interesting point about, yes, in theory, none of us would ever overdraft our accounts, but I think back to maybe when I was a little younger into my twenties, and I think, just like Sue said, there were times where I just flat out didn't have the money to pay my bills cuz I didn't plan well, and there were times when I forgot about this auto debit coming out of my checking account that month for whatever bill it was. And it happens. And I think for some people, probably, especially before they can really get on a budget and learn it and stick to it, it's not a bad fail safe in certain situations.
Paula: Yeah. I hear what you're saying. I know, I remember. My son's gonna kick my butt for saying this, but when he got his, one of his first jobs, they made him do that automatic deposit into a checking account and gave him a debit card. And boy, he just had fee after fee for not, looking, just cuz you have a balance doesn't mean that's your true balance.
So I guess in that circumstance it would give you some sort of protection, but at some point I think you have to learn from that and get to where you don't need that overdraft protection anymore. Because I'd imagine you can you get yourself in a hole?
Sue: Oh, easily. And then you've gotta dig yourself back out. Typically, if it doesn't happen all the time, you may get some kind of a waiver from your institution that you're with. If you're a regular, that is constantly overdrawn, that's a little bit different.
Paula: So let's move on to a different subject. So I know there's a savings account and a money market.
What are the big differences between the two?
Sue: A savings account is typically going to have a lower balance requirement, and at this point in time, interest rates are not very good on any of that, so you don't really earn a lot of money on the savings account. A money market requires a higher balance, and depending on how high you keep, the balance would depend on what kind of rate you were able to get.
Paula: Do you recommend a money market? I do for people's emergency accounts, cuz moves it out of their savings. So that they don't see it. But do you recommend having a savings account and a money market?
Sue: Sure. You can do that. You can just have a little, your savings you just throw money into.
And then the money market, like you said, you keep it for more rainy day things that happen and then you can pull out of there, but you try to not use that one.
Jon: I can say from experience as a solopreneur business owner, I just opened up a money market account because I keep my tax money, the money that revenue comes in from clients, it has to be put away for taxes.
I put that away and for the longest time I was putting a into a savings account and not seeing any results on it. So I opened up a money market account and I just move all that money into the money market account, let it sit there, and then once a quarter to pay estimated taxes, I pull it outta that account.
Paula: Yeah. How much money do you have in that account? Just kidding. So we have a savings account we've talked about in money market checking accounts. Some checking accounts pay interest too, don't they?
Sue: Yes, they do. Some of them will pay interest as long as you have a certain balance. As I said before, right now interest rates are not very good, so you're not gonna earn a lot.
If you have a lot, you'd be better off to put it into the money market instead of having it sit there in your checking.
Paula: Yeah. So the money market is liquid, which means I can get at added at any time.
Sue: Correct.
Paula: Okay. So we have savings account, checking account money. And then a CD. So what is a CD?
Sue: A CD is a certificate of deposit, and you take a certain amount of money and put it in, and you are guaranteed a rate for a certain amount of time.
You can do 30 days, 90 days, one year. There's all different terms. Banks typically, depending on their needs, they'll offer specials on different terms, and that's a great way to go. If you don't need the money for 12 months, throw it into a CD. You're gonna get a lot more than you do on a money market account or savings account.
Paula: So let's say that I do put it in a 12 month CD and I'm into the ninth or 10th month and I need the money. Can I get it back out?
Sue: You can get it out, but you will lose some interest and pay a penalty for taking it out. Early withdrawal.
Paula: Is a penalty extensive is it gonna make me hurt, that penalty?
Sue: It depends on how much is in there, how much interest you've already earned. A lot of times the penalty will take from your interest, and then if that's not enough, then they will take it from your principal amount.
Paula: Oh yeah. Okay. So let's recap really quickly. So checking account. If you are a new checking account that pays interest, you have to keep a minimum balance. But you're saying it's probably best to just use your savings account instead of a checking account that pays an interest.
But if you want more saving or more interest, you wanna use a money market. Correct?
Sue: Correct.
Paula: And then an alternative to a money market on a short-term basis for emergencies would be a short-term cd, but if you're gonna keep it in there a little bit longer, Then you would wanna compare the money market to the CD rates.
Did I get that all right?
Sue: That's correct.
Paula: Yay. One last thing I wanna talk to you about, and I hear this often is about debit cards and credit cards. People talk about that your debit card doesn't have the same protections, if it was stolen, then a credit card. Is that correct?
Sue: That is correct. To some extent, each institution has their own rules on how you're protected and what's protected.
A lot of times, people use their credit card because they have some kind of a rewards program on the credit card.
Paula: Yeah. Points are awesome. Yeah.
Sue: They use it that way instead of their debit card. And that minimizes exposure to your account where with the debit card, you swipe it in the store, whatever, and then you know, you hear about people, having fraud on it, and they have to go file a claim and take care of it that way. And ultimately, as long as you're honest, you're gonna get your money back. It just takes time.
Paula: The credit card's a little bit simpler cuz I know that I had to dispute a charge that couple months ago and it was pretty instant that I got the funds back.
Sue: Yeah, that's why the credit card is, if you can do it, it's a better way to go.
Paula: Yeah, I know I use my debit card only if I need to make an ATM withdrawal or somebody doesn't take credit cards, which is very rare today. But yes. But I use my credit card for everything because I get points. Yes. And then I use those points to buy airline tickets to travel all over the world.
Sue: That's a fantastic way.
Paula: I know. They're awesome. I don't, everybody should use them, of course, but make sure that you're able to pay your credit card bill off at the end of the month. But it is a great way to get some perks.
Sue: Absolutely. You hold your money and let the credit card have that balance and then you just pay 'em at the end of the month.
Paula: Yeah. The key is paying them off at the end of the month because if not, you get into trouble. And that's actually what we're talking about next week, is we're talking about with Carolyn, who's works for Nationwide Credit counseling, I think is the name. She's gonna talk about us, talk about how to get out of debt. So yeah, we don't wanna get into debt. It just leads you down a bad path. And it's hard to get out of.
Sue: Yeah. So it can be a very difficult situation to try and get out of that once you start rolling and just keep swiping your card. Then at the end of the month it's oh my God, what did I do?
Paula: I've been there, done that. Learned from it. . I know a lot of people that have done it, some have learned from it, others haven't. And it's just something that if you gotta get control of, if you've got that problem, you need to get out of it and then, and learn how to not get back into that situation again.
Sue: Yes, that's correct.
Paula: Anyway, I appreciate you spending some time with me today.
Sue: Absolutely. It was my pleasure.
Paula: So if you have any banking questions, feel free to reach out to me at Paula@PaulaChristine.com And I will forward them off to Sue and get those answered for you. If you'd like to talk to me about anything else you can email me or check out my website at paulachristine.com. Thanks again, Sue.
Sue: Thank you for having me.