Personal Finance Essentials
Building a Sound Cash Management System
Most Americans Are Losing Money to Bank Fees, Low Rates and
Accounts That Work Against Them
Your day-to-day finances rest on three pillars: checking accounts, savings accounts and credit cards. A cash management system that works well means your money earns interest whenever possible, your credit card balances are paid off in full each month, you know roughly what’s in your checking account at any given time and you are not losing money to bank fees.
Checking Accounts
Your checking account is the hub of your financial life, because most of your money flows through it. Checking accounts come in several varieties. Student accounts require small deposits and carry small monthly fees, though banks typically limit the number of checks you can write each month without a charge. Regular accounts assess a monthly fee, sometimes tied to the number of checks written. Interest-earning accounts – often called NOW accounts – pay interest when your balance stays above a minimum, but charge fees when it falls below. Special accounts charge no monthly fee but bill you for each deposit and check, with no minimum balance required.
Banks use one of two methods to determine whether you meet their minimum balance requirement. The minimum daily balance method charges a service fee if your balance drops below the required amount even once during the month. The average daily balance method calculates your daily balances over the course of the month and takes the average; no fee is charged if that average stays above the threshold.
Debit Cards
Debit cards look like credit cards but work very differently. When you use one, your checking account is debited immediately. You need a PIN – a personal identification number – to use it. When selecting a PIN, avoid your birth date, address or any part of your Social Security Number, and never write your PIN anywhere.
The rules around lost or stolen debit cards are strict. If you report the card missing within 48 hours, your liability is capped at $50. Between two days and sixty days after the theft, your liability rises to $500. Beyond sixty days, your liability is unlimited – meaning a thief could drain not just your checking account but your savings account as well, if it provides overdraft protection. If you also have a home equity loan tied to your checking account, the exposure is even greater. Report a lost or stolen card immediately.
Savings Accounts
Savings accounts are appropriate for holding cash reserves because they are safe and accessible, but they carry three risks worth understanding. First, inflation: if the interest rate your account pays is lower than the rate of inflation, you are effectively losing purchasing power. Second, taxation: the interest you earn in a savings account is taxable income. Third, deposit insurance covers accounts only up to $100,000 per depositor.
The Annual Percentage Yield, or APY, makes it easy to compare savings rates across institutions. It reveals how much $100 would earn in interest over one full year. Always check the APY when evaluating where to keep your savings.
Credit Unions
Credit unions are frequently overlooked but often offer better terms than commercial banks. As non-profit organizations, credit unions typically pay higher rates on checking and savings accounts while charging lower rates on loans. If you don’t belong to a credit union, contact America’s Credit Unions to find out whether you are eligible to join one in your area.
When placing your cash reserves with any financial institution, look for banks and credit unions insured by either the FDIC (Federal Deposit Insurance Corporation) for banks or the NCUA (National Credit Union Administration) for credit unions. Both provide protection up to $250,000 per depositor.