SEPTEMBER 2006 :: CONSUMER ED

Money in the Bank
Understand Different Types of Accounts Before Choosing One

Banks come in a number of varieties: nationally and state chartered, commercial, community, federal, merchant, thrifts, savings and loans, bank and trusts, credit unions-the list goes on.

Whatever they're called, the basic business of banking is universal: Banks take in your deposits and, in return, pay you some rate of interest. They then turn around and take the money you deposited, combine it with deposits from other people, and lend the money to your neighbor, charging that borrower a higher rate of interest than the bank pays you. The difference between those two interest rates-called the "spread"-is where banks generally make their profits.

Almost all banks offer a standard choice of financial accounts, but each bank puts its own spin on what bells and whistles each product features and charges a different set of fees. Thus, it pays to understand the basic types of accounts, and then spend a little time researching the various offerings available at the banks in your town. With so many types of banks all competing for retail clients, you're bound to find an account that fits your needs quite well.

Savings Accounts

Savings accounts are the most basic banking accounts-a place to park your cash and draw interest. Minimum account balances are typically low, sometimes just $5, and the interest rate is equally low, often the lowest among all savings products. But the accounts are FDIC-insured and, therefore, "safe"-meaning the U.S. government protects your account against the loss of even a single penny, up to the federal limit of $100,000, if anything should happen to the bank or your account. Savings accounts, in their various forms, are where you want to park money if you expect to need it relatively soon-like when buying a house-or when you cannot afford to risk losing any of the cash.

Aside from the old-fashioned passbook account, other types of savings accounts include money-market accounts and certificates of deposit. Money-market accounts are like savings accounts on mild steroids. Your money is invested in what is literally known as the "money market"-a vast market of very short-term, relatively safe bonds.

Money-market accounts are FDIC-protected and pay slightly higher interest rates than standard savings accounts, but the rate is still relatively low. Minimum balances, however, are often high-$2,500 or more. And if the balance slips below that, you'll typically pay a service charge of around $10 a month.

While you can deposit money into these accounts as often as you like, withdrawals are usually limited to three to six per month. Banks will cut you some slack the first time you exceed the limit, but beyond that they'll start imposing fees for each transaction over the limit. A better approach is to withdraw the money in person or go online and transfer the cash from your money-market account to your savings; those types of withdrawals usually don't count toward the monthly maximum.

CDs, or "certificates of deposit," are time deposits. That is, you deposit your money with a bank and promise not to touch the cash for a certain period of time-anywhere from three months to several years. In return for that promise, the bank gives you what are usually the best interest rates it offers on savings products. Banks do this because they know you won't demand this money for several months to several years, which gives them a chance to lend the money and earn a bit of profit on your deposit.

Three-month CDs carry the lowest rates, often only marginally better than a money-market account. That's because the bank doesn't have a lot of time to invest your deposit and make money off it. Five-year CDs provide far better rates, usually several percentage points higher than savings accounts.

CDs generally impose early-withdrawal penalties if you reclaim your money before the time period expires. So carefully evaluate your near-term cash needs before opting to lock up your money for a long period. Long-term CDs can be a fine way to boost the overall return on your money, but not if you think there is a chance you might need to break the contract before the CD matures.

Typically, the best interest rates are found online by searching Web sites such as bankrate.com.

Checking Accounts

Checking accounts are known as demand-deposit accounts because account holders-those who own a checkbook-can write a check that gives the payee the right to present that check to your bank and "demand" money from your account.

Of course, these days the pizzeria owner to whom you wrote a check for $19.36 doesn't need to appear physically at your bank to claim the money. The owner just deposits your check at her own bank and all the money she's due ends up in her account within days. This happens because checks carry a variety of numbers along the bottom that route each check through the national banking system and back to its home.

The nine digits farthest to the left are the ABA routing numbers that specify which branch of what particular banking company this check is drawn on. To the right of that is the account number, signifying whose account at that branch is to be debited.

Regular checking accounts generally pay no interest. Checking accounts known as NOW accounts often do pay interest. But NOW accounts frequently require higher minimum balances or charge higher fees than a regular checking account.

Whether you bank at a savings and loan, a building society, or a credit union, you'll need to track your checks and balance your checkbook occasionally, or you risk being overdrawn, for which the bank will impose a charge of about $25, an unnecessary drain on your finances. If you can begin to track your checkbook accurately, you'll gain a better grasp on your spending since you'll be more aware of how debit-card purchases, ATM transactions and the checks you write are really affecting your finances. If nothing else, balance your checkbook to save money. Banks make mistakes, and you want to catch those mistakes in the event they erroneously reduce your account balance.

What is the best place to do your banking? That depends entirely on how you bank and what services you demand. For instance, if you write a lot of checks, you want to find a bank that has an account that allows for unlimited check writing each month without imposing a charge. If you rely on the ATM for your cash supply, then search for a bank with an abundance of local machines. You can easily compare fees and services on the Web sites that all banks maintain.