Banking
Banking is the largest sector within the financial services industry. Banks use the funds they receive from depositors (i.e., checking and savings accounts) to make loans and mortgages to individuals and businesses, seeking to earn more money on their loan interest rates than it costs them pay interest to their depositors. Many banks have expanded into selling insurance and investments, so don't be surprised if your bank tries to sell you these financial products.
Banks are in business to make a profit. With so many banks to choose from, compare your bank's interest rates and fees to other banks to get the best products. This section compares banking products, please visit the Investments and Insurance sections of this website for comparisons of these financial products.
1) Before you do business with any bank, make sure your bank is FDIC insured and safe.
- The Federal Depository Insurance Corporation (FDIC) was created in 1933 to restore confidence in the banking system following the collapse of thousands of banks during the Great Depression. The FDIC, which is an independent agency within the federal government, protects you against a loss if an FDIC-insured bank fails up to $100,000 per depositor per insured bank. This amount was raised to $250,000 as part of the federal government’s 2008 rescue program for the banking industry. The base amount is set to return to $100,000 per depositor for all account categories in 2014, with the exception of certain retirement accounts, which will remain at $250,000 per depositor.
- During the savings and loan crisis of the late 1980s and early 1990s, over 1,000 banks failed, leading to restructuring of the industry. The recent economic downturn saw an increase in bank failures with 25 banks failing in 2008 and over 100 failing in 2009. This contrasts with only 10 bank failures during the previous five years.
- So, make sure your bank is FDIC insured by clicking here
2) Next, look at your net worth statement (created in financial planning section). The only banking products listed under your assets that I recommend is a checking and a savings account.
- Checking Account - This type of bank account is where you want to have your employer do a direct deposit of your paycheck. Most banks offer free online bill pay where you can setup automatic bill payments right out of checking account for most bills. Since most checking accounts pay very low interest rates, if any, this account should only maintain enough money to pay your most common bills.
- Never buy checks and deposit slips from the bank, they're expensive. Use the starter checks and deposit slips your bank gives you, then save a few bucks by ordering the rest from one of these check and deposit slip ordering websites.
- Savings Account (also called a Money Market Account) - This type of bank account is where you want to keep your emergency fund (about 3-6 months of living expenses in the event you need money for an emergency). Never keep anymore than this amount in a savings account because savings accounts are not a good investment due to historically low interest rates, typically 1-4% (nterest rates offered depends on the economy). When comparing savings accounts, look for the highest annual percentage yield (APY).
- To determine how much emergency savings you need, use this free calculator
- Certificates of Deposits (CDs) - CDs are not a very good investment due to historically low interest rates, typically ranging between only 2-6% (nterest rates offered depends on the economy). Unfortunately, too many people don’t know what to do with their savings or are afraid of the stock market’s volatility, so they buy CDs. Interest rates go up and down with the economy. When interest rates are rising, CDs are especially not a good investment because you could lock in a lower rate today, when rates could be higher tomorrow. When comparing CDs, look for the highest annual percentage yield (APY), however I never recommend putting money into CDs. Instead, see the Investments section for other higher returning investment options.
3) Be aware of bank fees you are paying. There are many fees banks charge, these include:
- Monthly Maintenance Fees (also called Monthly Service Charges)
- Overdraft and NSF Fees
- Overdraft Protection Transfer Fees
- Automatic Teller Machine (ATM) Fees
- Savings Excess Withdrawal Fees
- For an explaination of these common bank fees, see this link: Facts About Fees.
4) Before taking out a loan from a bank, understand your credit score and your credit report. Credit scores are designed to measure the risk of you defaulting on a loan by taking into account various factors in your financial history. Fair Isaac Corporation (FICO) has disclosed the following components and approx. weighted contribution of each:
- 35% - punctuality of payments made in the past
- 30% - the amount of loans you have
- 15% - length of credit history
- 10% - types of credit used
- 10% - recent search for credit and / or amount of credit obtained recently
- Get your FICO credit score for FREE by clicking here
- Get free and unbiased information to improve your credit score by clicking here
- Get your credit reports from the 3 credit reporting agencies for FREE by clicking here
- Get a credit monitoring service to protect against identity theft (<$5/mo) by clicking here
5) Look at your net worth statement (created in financial planning section), this time look at the balances you owe on your loans and credit cards (under liabilities).
- Borrowing money using loans and credit cards gives you leverage to buy cars, a home, an education and vacations for example, when you don't have the money available to pay for them outright. Tax-deductible loans (home mortgages and home equity loans) are better than non tax-deductible loans (credit cards, auto loans and personal loans) because you can deduct the interest amount paid on these loans on your tax return.
6) Review your credit cards and be aware of bank credit card fees, these include:
- Transaction Fees & Annual Percentage Rates (APRs)
- Late Payment Fees
- Overlimit Fees
- Balance Transfer Fees
- Foreign Transaction Fees
- With 100’s of credit cards to choose from, you can compare credit card offers by the type of card (low interest rate, balance transfers, rewards, airline miles, cash back rewards, small business and student). You can also compare card offers by your credit score (excellent, good, fair, bad, limited or no credit history). The best credit cards have no annual fee, a low interest rate and a good rewards program.
- You can compare credit card offers online for free, by clicking here.
7) Before taking out a loan [i.e., auto, home, home equity, personal or student loan], compare your bank's interest rate and fees to the lowest current loans available in the table above. You should also compare all loans to ELOAN.com.
8) When buying a home or re-financing an existing home loan (i.e., to get a lower interest rate), you also have to pay closing costs to a title company. These articles show the importance of comparing closing costs when purchasing a home: Article #1 and Article #2
- Excellent home loan educational website: The Mortgage Professor
- Home loan and closing costs comparison worksheet #1, click here
- Closing cost comparison worksheet #2, click here
- Good Faith Estimates (GFE) explained, click here
- New HUD-1 form, click here
Buyers and sellers historically each pay a 2.5-3% commission to real estate agents. But with the Internet, discount brokers and fee-for-service real estate agents now available, this 5-6% commission structure that stood so long in the residential property industry has cracked and eroded. You can now save yourself $1,000s in real estate commissions by by-passing full-service, full-commission real estate agents and dealing directly with a discount broker, fee-for-service real estate agents and/or homeowner through “for sale by owner” websites.
9) A reverse mortgage is a loan against the value of your home. The cash you get from a reverse mortgage can be paid to you all at once, in a single lump sum of cash, as a regular monthly cash advance, as a "credit line" account that lets you decide when and how much of your available cash is paid to you; or as a combination of these payment methods. However, there are documented sales abuses of these products, so BE CAREFUL.
- Compare bank's reverse mortgage loan interest rate and fees, click here