Fair Housing Act (1968)
Prohibits discrimination in the extension of housing credit on the basis of race, color, religion, national origin, sex, handicap, or family status.
Truth in Lending Act (1968)
Requires uniform methods for computing the cost of credit and for disclosing credit terms. Gives borrowers the right to cancel, within three days, certain loans secured by their residences. Prohibits the unsolicited issuance of credit cards and limits cardholder liability for unauthorized use. Also imposes limitations on home equity loans with interest rates or fees above a specified threshold.
Fair Credit Reporting Act (1970)
Protects consumers against inaccurate or misleading information in credit files maintained by credit-reporting agencies; requires credit-reporting agencies to allow credit applicants to correct erroneous reports.
Flood Disaster Protection Act of 1973
Requires flood insurance on property in a flood hazard area that comes under the National Flood Insurance Program.
Fair Credit Billing Act (1974)
Specifies how creditors must respond to billing-error complaints from consumers; imposes requirements to ensure that creditors handle accounts fairly and promptly. Applies primarily to credit and charge card accounts (for example, store card and bank card accounts). Amended the Truth in Lending Act.
Equal Credit Opportunity Act (1974)
Prohibits discrimination in credit transactions on several bases, including sex, marital status, age, race, religion, color, national origin, the receipt of public assistance funds, or the exercise of any right under the Consumer Credit Protection Act. Requires creditors to grant credit to qualified individuals without requiring cosignature by spouses, to inform unsuccessful applicants in writing of the reasons credit was denied, and to allow married individuals to have credit histories on jointly held accounts maintained in the names of both spouses. Also entitles a borrower to a copy of a real estate appraisal report.
Real Estate Settlement Procedures Act of 1974
Requires that the nature and costs of real estate settlements be disclosed to borrowers. Also protects borrowers against abusive practices, such as kickbacks, and limits the use of escrow accounts.
Home Mortgage Disclosure Act of 1975
Requires mortgage lenders to annually disclose to the public data about the geographic distribution of their applications, originations, and purchases of home-purchase and home-improvement loans and refinancings. Requires lenders to report data on the ethnicity, race, sex, income of applicants and borrowers, and other data. Also directs the Federal Financial Institutions Examination Council, of which the Federal Reserve is a member, to make summaries of the data available to the public.
Consumer Leasing Act of 1976
Requires that institutions disclose the cost and terms of consumer leases, such as automobile leases.
Fair Debt Collection Practices Act (1977)
Prohibits abusive debt collection practices. Applies to banks that function as debt collectors for other entities.
Community Reinvestment Act of 1977
Encourages financial institutions to help meet the credit needs of their entire communities, particularly low- and moderate-income neighborhoods.
Right to Financial Privacy Act of 1978
Protects bank customers from the unlawful scrutiny of their financial records by federal agencies and specifies procedures that government authorities must follow when they seek information about a customer’s financial records from a financial institution.
Electronic Fund Transfer Act (1978)
Establishes the basic rights, liabilities, and responsibilities of consumers who use electronic fund transfer services and of financial institutions that offer these services. Covers transactions conducted at automated teller machines, at point-of-sale terminals in stores, and through telephone bill-payment plans and preauthorized transfers to and from a customer’s account, such as direct deposit of salary or Social Security payments.
Federal Trade Commission Improvement Act (1980)
Authorizes the Federal Reserve to identify unfair or deceptive acts or practices by banks and to issue regulations to prohibit them. Using this authority, the Federal Reserve has adopted rules substantially similar to those adopted by the FTC that restrict certain practices in the collection of delinquent consumer debt, for example, practices related to late charges, responsibilities of cosigners, and wage assignments.
Expedited Funds Availability Act (1987)
Specifies when depository institutions must make funds deposited by check into a checking account or other transaction account available to depositors for withdrawal. Requires institutions to disclose to customers their policies on funds availability.
Women’s Business Ownership Act of 1988
Extends to applicants for business credit certain protections afforded consumer credit applicants, such as the right to an explanation for credit denial. Amended the Equal Credit Opportunity Act.
Fair Credit and Charge Card Disclosure Act of 1988
Requires that applications for credit cards that are sent through the mail, solicited by telephone, or made available to the public (for example, at counters in retail stores or through catalogs) contain information about key terms of the account. Amended the Truth in Lending Act.
Home Equity Loan Consumer Protection Act of 1988
Requires creditors to provide consumers with detailed information about open-end credit plans secured by the consumer’s dwelling. Also regulates advertising of home equity loans and restricts the terms of hone equity loan plans.
Truth in Savings Act (1991)
Requires that depository institutions disclose to depositors certain account information about their accounts—including the annual percentage yield, which must be calculated in a uniform manner—and prohibits certain methods of calculating interest. Regulates advertising of savings accounts.
Home Ownership and Equity Protection Act of 1994
Provides additional disclosure requirements and substantive limitations on home-equity loans with rates or fees above a certain percentage or amount. Amended the Truth in Lending Act.
Gramm-Leach-Bliley Act, title V, subpart A, Disclosure of Nonpublic Personal Information (1999)
Describes the conditions under which a financial institution may disclose nonpublic personal information about consumers to nonaffiliated third parties, provides a method for consumers to opt out of information sharing with nonaffiliated third parties, and requires a financial institution to notify consumers about its privacy policies and practices.
Fair and Accurate Credit Transaction Act of 2003
Enhances consumers’ ability to combat identity theft, increases the accuracy of consumer reports, allows consumers to exercise greater control over the type and amount of marketing solicitations they receive, restricts the use and disclosure of sensitive medical information, and establishes uniform national standards in the regulation of consumer reporting. Amended the Fair Credit Reporting Act.
The Federal Reserve plays an important role in the U.S. payments system. The twelve Federal Reserve Banks provide banking services to depository institutions and to the federal government. For depository institutions, they maintain accounts and provide various payment services, including collecting checks, electronically transferring funds, and distributing and receiving currency and coin. For the federal government, the Reserve Banks act as fiscal agents, paying Treasury checks; processing electronic payments; and issuing, transferring, and redeeming U.S. government securities.
By creating the Federal Reserve System, Congress intended to eliminate the severe financial crises that had periodically swept the nation, especially the sort of financial panic that occurred in 1907. During that episode, payments were disrupted throughout the country because many banks and clearinghouses refused to clear checks drawn on certain other banks, a practice that contributed to the failure of otherwise solvent banks. To address these problems, Congress gave the Federal Reserve System the authority to establish a nationwide check-clearing system. The System, then, was to provide not only an elastic currency—that is, a currency that would expand or shrink in amount as economic conditions warranted— but also an efficient and equitable check-collection system.
Congress was also concerned about some banks’ paying less than the full amount of checks deposited by their customers because some paying banks charged fees to presenting banks to pay checks. To avoid paying presentment fees, many collecting banks routed checks through banks that were not charged presentment fees by paying banks. This practice, called circuitous routing, resulted in extensive delays and inefficiencies in the check-collection system. In 1917, Congress amended the Federal Reserve Act to prohibit banks from charging the Reserve Banks presentment fees and to authorize nonmember banks as well as member banks to collect checks through the Federal Reserve System.
In passing the Monetary Control Act of 1980, Congress reaffirmed its intention that the Federal Reserve should promote an efficient nationwide payments system. The act subjects all depository institutions, not just member commercial banks, to reserve requirements and grants them equal access to Reserve Bank payment services. It also encourages competition between the Reserve Banks and private-sector providers of payment services by requiring the Reserve Banks to charge fees for certain payments services listed in the act and to recover the costs of providing these services over the long run.
More recent congressional action has focused increasingly on improving the efficiency of the payments system by encouraging increased use of technology. In 1987, Congress enacted the Expedited Funds Availability Act (EFAA), which gave the Board, for the first time, the authority to regulate the payments system in general, not just those payments made through the Reserve Banks. The Board used its authority under the EFAA to revamp the check-return system, improve the presentment rights of private-sector banks, and establish rules governing the time that banks can hold funds from checks deposited into customer accounts before making the funds available for withdrawal. In 2003, Congress enacted the Check Clearing for the 21st Century Act, which further enhanced the efficiency of the payments system by reducing legal and practical impediments to check truncation and the electronic collection of checks, services that speed up check collection and reduce associated costs.
The U.S. payments system is the largest in the world. Each day, millions of transactions, valued in the trillions of dollars, are conducted between sellers and purchasers of goods, services, or financial assets. Most of the payments underlying those transactions f low between depository institutions and banks, a large number of which maintain accounts with the Reserve Banks. The Federal Reserve therefore performs an important role as an intermediary in clearing and settling interbank payments. The Reserve Banks settle payment transactions efficiently by debiting the accounts of the depository institutions making payments and by crediting the accounts of depository institutions receiving payments. Moreover, as the U.S. central bank, the Federal Reserve is immune from liquidity problems—not having sufficient funds to complete payment transactions—and credit problems that could disrupt its clearing and settlement activities.
The Federal Reserve plays a vital role in both the nation’s retail and wholesale payments systems, providing a variety of financial services to depository institutions. Retail payments are generally for relatively small-dollar amounts and often involve a depository institution’s retail clients— individuals and smaller businesses. Reserve Banks’ retail services include distributing currency and coin, collecting checks, and electronically transferring funds through the automated clearinghouse system. In contrast, wholesale payments are generally for large-dollar amounts and often involve a depository institution’s large corporate customers or counterparties, including other financial institutions. The Reserve Banks’ wholesale services include electronically transferring funds through the Fedwire Funds Service and transferring securities issued by the U.S. government, its agencies, and certain other entities through the Fedwire Securities Service. Because of the large amounts of funds that move through the Reserve Banks every day, the System has policies and procedures to limit the risk to the Reserve Banks from a depository institution’s failure to make or settle its payments.
Federal Reserve Currency and Coin Services
An important function of the Federal Reserve is ensuring that enough cash—that is, currency and coin—is in circulation to meet the public’s demand. When Congress established the Federal Reserve, it recognized that the public’s demand for cash is variable. This demand increases or decreases seasonally and as the level of economic activity changes. For example, in the weeks leading up to a holiday season, depository institutions increase their orders of currency and coin from Reserve Banks to meet their customers’ demand. Following the holiday season, depository institutions ship excess currency and coin back to the Reserve Banks, where it is credited to their accounts.
Each of the twelve Reserve Banks is authorized by the Federal Reserve Act to issue currency, and the Department of Treasury is authorized to issue coin. The Secretary of the Treasury approves currency designs, and the Treasury’s Bureau of Engraving and Printing prints the notes. The Federal Reserve Board places an annual printing order with the bureau and pays the bureau for the cost of printing. The Federal Reserve Board coordinates shipments of currency to the Reserve Banks around the country. The Reserve Banks, in turn, issue the notes to the public through depository institutions. Federal Reserve notes are obligations of the Reserve Banks. The Reserve Banks secure the currency they issue with legally authorized collateral, most of which is in the form of U.S. Treasury securities held by the Reserve Banks. Coin, unlike currency, is issued by the Treasury, not the Reserve Banks. The Reserve Banks order coin from the Treasury’s Bureau of the Mint and pay the Mint the full face value of coin, rather than the cost to produce it. The Reserve Banks then distribute coin to the public through depository institutions.
Although the issuance of paper money in this country dates back to 1690, the U.S. government did not issue paper currency with the intent that it circulate as money until 1861, when Congress approved the issuance of demand Treasury notes. All currency issued by the U.S. government since then remains legal tender, including silver certificates, which have a blue seal for the Department of the Treasury; United States notes, which have a red seal; and national bank notes, which have a brown seal. Today, nearly all currency in circulation is in the form of Federal Reserve notes, which were first issued in 1914 and have a green Treasury seal. Currency is redesigned periodically to incorporate new anti-counterfeiting features. When currency is redesigned, all previous Federal Reserve notes remain valid.
When currency flows back to the Reserve Banks, each deposit is counted, verified, and authenticated. Notes that are too worn for recirculation (unfit notes) and those that are suspected of being counterfeit are culled out. Suspect notes are forwarded to the United States Secret Service, and unfit notes are destroyed at the Reserve Banks on behalf of the Treasury. Notes that can be recirculated to the public are held in Reserve Bank vaults, along with new notes, until they are needed to meet demand. Coin that is received by Reserve Banks is verified by weight rather than piece-counted, as currency is.
Today, currency and coin are used primarily for small-dollar transactions and thus account for only a small proportion of the total dollar value of all monetary transactions. During 2003, Reserve Banks delivered to depository institutions about 36.6 billion notes having a value of $633.4 billion and received from depository institutions about 35.7 billion notes having a value of $596.9 billion. Of the total received by Reserve Banks, 7.4 billion notes, with a face value of $101.3 billion, were deemed to be unfit to continue to circulate and were destroyed. The difference between the amount of currency paid to depository institutions and the amount of currency received from circulation equals the change in demand for currency resulting from economic activity. In 2003, the increase in demand was $36.5 billion.
Over the past five decades, the value of currency and coin in circulation has risen dramatically—from $31.2 billion in 1955 to $724.2 billion in 2003. The total number of notes in circulation (24.8 billion at the end of 2003) and the demand for larger denominations ($20, $50, and $100 notes) has also increased. In 1960, these larger denominations accounted for 64 percent of the total value of currency in circulation; by the end of 2003, they accounted for 95 percent. Because the U.S. dollar is highly regarded throughout the world as a stable and readily negotiable currency, much of the increased demand for larger-denomination notes has arisen outside of the United States. Although the exact value of U.S. currency held outside the country is unknown, Federal Reserve economists estimate that from one-half to two-thirds of all U.S. currency circulates abroad.
While cash is convenient for small-dollar transactions, for larger-value transactions individuals, businesses, and governments generally use checks or electronic funds transfers. Measured by the number used, checks continue to be the preferred noncash payment method; however, their use has begun to decline in favor of electronic methods. In 2001, the Federal Reserve conducted an extensive survey on the use of checks and other noncash payment instruments in the United States and compared the results with a 1979 study of noncash payments and similar data collected in 1995. The survey results indicated that check usage peaked sometime during the mid-1990s and has declined since then. For example, the survey found that checks represented 59.5 percent of retail noncash payments in 2000, compared with 77.1 percent just five years earlier and 85.7 percent in 1979. The total value of checks paid declined from an estimated $50.7 trillion in 1979 to $39.3 trillion in 2000 (both in 2000 dollars).
In 2004, the Federal Reserve conducted another study to determine the changes in noncash payments from 2000 to 2003. That study found that the number of noncash payments had grown since 2000 and that checks were the only payment instrument being used less frequently than in 2000.
Of the estimated 36.7 billion checks paid in 2003, approximately 8.7 billion were “on-us checks,” that is, checks deposited in the same institution on which they were drawn. In 2003, the Reserve Banks processed more than 58 percent of interbank checks, checks not drawn on the institution at which they were deposited. Depository institutions cleared the remaining checks through private arrangements among themselves. These private arrangements include sending checks directly to the depository institution on which they are drawn, depositing the checks for collection with a correspondent bank, or delivering the checks to a clearinghouse for exchange. Processing interbank checks requires a mechanism for exchanging the checks as well as for the related movement of funds, or settlement, among the depository institutions involved.
For checks collected through the Reserve Banks, the account of the collecting institution is credited for the value of the deposited checks in accordance with the availability schedules maintained by the Reserve Banks. These schedules reflect the time normally needed for the Reserve Banks to receive payments from the institutions on which the checks are drawn. Credit is usually given on the day of deposit or the next business day. In 2003, the Reserve Banks collected 16 billion checks with a value of $15.8 trillion.
Since it was established, the Federal Reserve has worked with the private sector to improve the efficiency and cost-effectiveness of the check-collection system. Toward that end, the Federal Reserve and the banking industry developed bank routing numbers in the 1940s. These numbers are still printed on checks to identify the institution on which a check is drawn and to which the check must be presented for payment. In the 1950s, the magnetic ink character recognition (MICR) system for encoding pertinent data on checks was developed so that the data could be read electronically. The MICR system contributed significantly to the automation of check processing.
In the 1970s, the Federal Reserve introduced a regional check-processing program to further improve the efficiency of check clearing, which resulted in an increase in the number of check-processing facilities throughout the country. In response to the recent decline in overall check usage, the Reserve Banks began an initiative to better align Reserve Bank check-processing operations with the changing demand for those services. As part of the initiative, the Reserve Banks standardized check processing, consolidated some operations, and reduced the overall number of their check-processing sites.
Other improvements in check collection have focused on when a customer has access to funds deposited in a bank. Until the late 1980s, depository institutions were not required to make funds from check deposits available for withdrawal within specific time frames. In 1988, the Federal Reserve Board adopted Regulation CC, Availability of Funds and Collection of Checks, which implemented the Expedited Funds Availability Act. Regulation CC established maximum permissible hold periods for checks and other deposits, after which banks must make funds available for withdrawal. It also established rules to speed the return of unpaid checks. In late 1992, the Federal Reserve Board amended Regulation CC to permit all depository institutions to demand settlement in same-day funds from paying banks without paying presentment fees, provided presenting banks meet certain conditions.
In addition to processing paper checks more efficiently, the Federal Reserve has also encouraged check truncation, which improves efficiency by eliminating the need to transfer paper checks physically between institutions. To that end, the Federal Reserve worked with Congress on the Check Clearing for the 21st Century Act, commonly known as Check 21, which became effective October 28, 2004. Check 21 facilitates check truncation by creating a new negotiable instrument called a substitute check, which is the legal equivalent of an original check. A substitute check is a paper reproduction of an original check that contains an image of the front and back of the original check and is suitable for automated processing, just as the original check is. Check 21 allows depository institutions to truncate original checks, process check information electronically, and deliver substitute checks to depository institutions if they require paper checks. In 2004, the Board amended Regulation CC to implement Check 21.
The Automated Clearinghouse
The automated clearinghouse (ACH) is an electronic payment system, developed jointly by the private sector and the Federal Reserve in the early 1970s as a more-efficient alternative to checks. Since then, the ACH has evolved into a nationwide mechanism that processes credit and debit transfers electronically. ACH credit transfers are used to make direct deposit payroll payments and corporate payments to vendors. ACH debit transfers are used by consumers to authorize the payment of insurance premiums, mortgages, loans, and other bills from their account. The ACH is also used by businesses to concentrate funds at a primary bank and to make payments to other businesses. In 2003, the Reserve Banks processed 6.5 billion ACH payments with a value of $16.8 trillion.
The use of the ACH has evolved over time. The ACH is now used to make certain payments initiated by telephone or over the Internet. In addition, merchants that receive checks at the point of sale and banks that receive bill-payment checks in the mail are increasingly converting those checks into ACH payments.
In 2001, the Reserve Banks began a cross-border ACH service. Legal and operational differences between countries have presented challenges to the rapid growth of the cross-border service; however, the Reserve Banks are continuing to work with financial institutions and ACH operators in other nations to address these challenges.
Depository institutions transmit ACH payments to the Reserve Banks in batches, rather than individually. ACH funds transfers are generally processed within one to two days, according to designated schedules, and are delivered to receiving institutions several times a day, as they are processed. The Reserve Banks offer ACH operator services to all depository institutions. A private-sector processor also provides ACH operator services in competition with the Reserve Banks. The Reserve Banks and the private-sector operator deliver ACH payments to participants in each other’s system in order to maintain a national ACH payment system.
Both the government and the commercial sectors use ACH payments. Compared with checks, ACH transfers are less costly to process and provide greater certainty of payment to the receiver. Initially, the federal government was the dominant user of the ACH and promoted its use for Social Security and payroll payments. Since the early 1980s, commercial ACH volume has grown rapidly, and in 2003 it accounted for 86 percent of total ACH volume.
Fedwire Funds Service
The Fedwire Funds Service provides a real-time gross settlement system in which more than 9,500 participants are able to initiate electronic funds transfers that are immediate, final, and irrevocable. Banks and other depository institutions that maintain an account with a Reserve Bank are eligible to use the service to send payments directly to, or receive payments from, other participants. Depository institutions can also use a correspondent relationship with a Fedwire participant to make or receive transfers indirectly through the system. Participants generally use Fedwire to handle large-value, time-critical payments, such as payments to settle interbank purchases and sales of federal funds; to purchase, sell, or finance securities transactions; to disburse or repay large loans; and to settle real estate transactions. The Department of the Treasury, other federal agencies, and government-sponsored enterprises also use the Fedwire Funds Service to disburse and collect funds. In 2003, the Reserve Banks processed 123 million Fed-wire payments having a total value of $436.7 trillion.
Fedwire funds transfers are processed individually, rather than in batches as ACH transfers are. The Federal Reserve uses secure, sophisticated data-communications and data-processing systems to ensure that each transfer is authorized by the sender and that it is not altered while it is under the control of a Reserve Bank. Although a few depository institutions use the telephone to initiate Fedwire payments, more than 99 percent of all Fedwire funds transfers are initiated electronically. The Federal Reserve processes Fedwire funds transfers in seconds, electronically debiting the account of the sending institution and crediting the account of the receiving institution. The Federal Reserve guarantees the payment, assuming any risk that the institution sending the payment has insufficient funds in its Federal Reserve account to complete the transfer.
Fedwire Securities Service
The Fedwire Securities Service provides safekeeping, transfer, and settlement services for securities issued by the Treasury, federal agencies, government-sponsored enterprises, and certain international organizations. The Reserve Banks perform these services as fiscal agents for these entities. Securities are safekept in the form of electronic records of securities held in custody accounts. Securities are transferred according to instructions provided by parties with access to the system. Access to the Fed-wire Securities Service is limited to depository institutions that maintain accounts with a Reserve Bank, and a few other organizations, such as federal agencies, government-sponsored enterprises, and state government treasurer’s offices (which are designated by the U.S. Treasury to hold securities accounts). Other parties, specifically brokers and dealers, typically hold and transfer securities through depository institutions that are Fedwire participants and that provide specialized government securities clearing services. In 2003, the Fedwire Securities Service processed 20.4 million securities transfers with a value of $267.6 trillion.
Fedwire securities are processed individually, in much the same way that Fedwire funds transfers are processed, and participants initiate securities transfers in the same manner, using either a computer connection or the telephone. When the Federal Reserve receives a request to transfer a security, for example as a result of the sale of securities, it determines that the security is held in safekeeping for the institution requesting the transfer and withdraws the security from the institution’s safekeeping account. It then electronically credits the proceeds of the sale to the account of the depository institution, deposits the book-entry security into the safekeeping account of the receiving institution, and electronically debits that institution’s account for the purchase price. Most securities transfers involve the delivery of securities and the simultaneous exchange of payment, which is referred to as delivery versus payment. The transfer of securities ownership and related funds is final at the time of transfer, and the Federal Reserve guarantees payment to institutions that initiate such securities transfers.
National Settlement Service
The National Settlement Service allows participants in private-sector clearing arrangements to do multilateral funds settlements on a net basis using balances in their Federal Reserve accounts. The service provides an automated mechanism for submitting settlement information to the Reserve Banks. It improves operational efficiency and controls for this process and reduces settlement risk to participants by granting settlement finality for movements of funds on settlement day. The service also enables the Federal Reserve to manage and limit the financial risk posed by these arrangements because it incorporates risk controls that are as stringent as those used in the Fedwire Funds Service. Approximately seventy arrangements use the National Settlement Service—primarily check clearinghouse associations, but also other types of arrangements.
As fiscal agents of the United States, the Federal Reserve Banks function as the U.S. government’s bank and perform a variety of services for the Treasury, other government agencies, government-sponsored enterprises, and some international organizations. Often the fiscal agent services performed by the Reserve Banks are the same, or similar to, services that the Reserve Banks provide to the banking system. Services performed for the Treasury include maintaining the Treasury’s bank account; processing payments; and issuing, safekeeping, and transferring securities. Fiscal services performed for other entities are generally securities-related. The Treasury and other entities reimburse the Reserve Banks for the expenses incurred in providing these services.
One of the unique fiscal agency functions that the Reserve Banks provide to the Treasury is a program through which the Reserve Banks invest Treasury monies until needed to fund the government’s operations. The Treasury receives funds from two principal sources: tax receipts and borrowings. The funds that flow into and out of the government’s account vary in amount throughout the year; for example, the account balance tends to be relatively high during the April tax season. The Treasury directs the Reserve Banks to invest funds in excess of a previously agreed-upon minimum amount in special collateralized accounts at banks and depository institutions nationwide. The Federal Reserve monitors these balances for compliance with collateral requirements and returns the funds to the Treasury when they are needed.
This investment facility, in which excess funds are invested in accounts at depository institutions, also facilitates the implementation of monetary policy. When funds flow from depository institutions into the Treasury’s account at the Federal Reserve, the supply of Federal Reserve balances to depository institutions decreases. The reverse occurs when funds flow from the Treasury’s Federal Reserve account to the Treasury’s accounts at depository institutions. A stable balance in the Treasury’s account at the Federal Reserve mitigates the effect of Treasury’s receipts and disbursements on the supply of Federal Reserve balances to depository institutions.
The Reserve Banks make disbursements from the government’s account through Fedwire funds transfers or ACH payments, or to a limited extent, by check. Fedwire disbursements are typically associated with, but not limited to, the redemption of Treasury securities. Certain recurring transactions, such as Social Security benefit payments and government employee salary payments, are processed mainly by the ACH and electronically deposited directly to the recipients’ accounts at their depository institutions. Other government payments may be made using Treasury checks drawn on the government’s account at the Reserve Banks. The Treasury continues to work to move the remaining government payments away from Treasury checks toward electronic payments, primarily the ACH, in an effort to improve efficiency and reduce the costs associated with government payments.
The Federal Reserve plays an important role when the Treasury needs to raise money to finance the government or to refinance maturing Treasury securities. The Reserve Banks handle weekly, monthly, and quarterly auctions of Treasury securities, accepting bids, communicating them to the Treasury, issuing the securities in book-entry form to the winning bidders, and collecting payment for the securities. Over the past several years, the auction process has become increasingly automated, which further ensures a smooth borrowing process. For example, automation has reduced to only minutes the time between the close of bidding and the announcement of the results of a Treasury securities auction.
Treasury securities are maintained in book-entry form in either the Reserve Banks’ Fedwire Securities Service or the Treasury’s TreasuryDirect system, which is also operated by the Reserve Banks. Even though TreasuryDirect holds less than 2 percent of all outstanding Treasury securities, it provides a convenient way for individuals to hold their securities directly, rather than with a third party such as a depository institution. Individuals purchase Treasury securities either directly from the Treasury when they are issued or on the secondary market, and they instruct their broker that the securities be delivered to their TreasuryDirect account. Once the securities are deposited there, the ACH directly deposits any interest or principal payments owed to the account holder to the account holder’s account at a depository institution. A Reserve Bank, if requested, will sell securities held in TreasuryDirect for a fee on the secondary market, even though this is a service intended for individuals who hold Treasury securities to maturity.
The Federal Reserve also provides support for the Treasury’s savings bonds program. Although savings bonds represent less than 5 percent of the federal debt, they are a means for individuals to invest in government securities with a small initial investment, currently $25. The Reserve Banks issue, service, and redeem tens of millions of U.S. savings bonds each year on behalf of the Treasury. As authorized by the Treasury, the Reserve Banks also qualify depository institutions and corporations to serve as issuing agents and paying agents for savings bonds.
As the central bank of the United States, the Federal Reserve performs services for foreign central banks and for international organizations such as the International Monetary Fund and the International Bank for Reconstruction and Development. The Reserve Banks provide several types of services to these organizations, including maintaining non-interest-bearing deposit bank accounts (in U.S. dollars), securities safekeeping accounts, and accounts for safekeeping gold. Some foreign official institutions direct a portion of their daily receipts and payments in U.S. dollars through their funds accounts at the Federal Reserve. If an account contains excess funds, the foreign official institution may request that these funds be invested overnight in repurchase agreements with the Reserve Banks. If investments are needed for longer periods, the foreign official institution may provide instructions to buy securities to be held in safekeeping. Conversely, the foreign institution may provide instructions to sell securities held in safekeeping, with the proceeds deposited in its account. The Reserve Banks charge foreign official institutions for these services.
Each day, the Reserve Banks that are part of the Federal Reserve System process a large number of payment transactions resulting from the Reserve Banks’ role in providing payment services to banks and depository institutions. Because depository institutions in the aggregate generally hold a relatively small amount of funds overnight in their Reserve Bank accounts, the Reserve Banks extend intraday credit, commonly referred to as daylight credit or daylight-overdraft credit, to facilitate the settlement of payment transactions and to ensure the smooth functioning of the U.S. payments system. To address the risk of providing this credit, the Federal Reserve has developed a policy that balances the goals of ensuring smooth functioning of the payments system and managing the Federal Reserve’s direct credit risk from institutions’ use of Federal Reserve intraday credit.
Institutions incur daylight overdrafts in their Reserve Bank accounts because of the mismatch in timing between the settlement of payments owed and the settlement of payments due. The Federal Reserve uses a schedule of rules, referred to as daylight-overdraft posting rules, to determine whether a daylight overdraft has occurred in an institution’s account. The daylight-overdraft posting rules define the time of day that debits and credits for transactions processed by the Reserve Banks will be posted to an institution’s account. The Federal Reserve relies on an automated system to measure an institution’s intraday account activity, to monitor its compliance with the Federal Reserve’s policy, and to calculate the institution’s daylight-overdraft charges. The Reserve Banks’ daylight-overdraft exposure can be significant. For example, in 2003 daylight overdrafts across banks and depository institutions peaked at levels over $100 billion per day.
The Federal Reserve’s policy establishes various measures to control the risks associated with daylight overdrafts. Beginning in 1985, the policy set a maximum limit, or net debit cap, on depository institutions and banks’ daylight-overdraft positions. In order to adopt a net debit cap greater than zero, an institution must be in sound financial condition. Certain institutions may be eligible to obtain additional daylight-overdraft capacity above their net debit caps by pledging collateral, subject to Reserve Bank approval. Institutions must have regular access to the Federal Reserve’s discount window so that they can borrow overnight from their Reserve Bank to cover any daylight overdrafts that are not eliminated before the end of the day. Those that lack regular access to the discount window are prohibited from incurring daylight overdrafts in their Reserve Bank accounts and are subject to additional risk controls. Beginning in 1994, the Reserve Banks also began charging fees to depository institutions for their use of daylight overdrafts as an economic incentive to reduce the overdrafts, thereby reducing direct Federal Reserve credit risk and contributing to economic efficiency.
Federal Reserve policy allows Reserve Banks to apply additional risk controls to an account holder’s payment activity, if necessary to limit risk. These risk controls include unilaterally reducing an account holder’s net debit cap, placing real-time controls on the account holder’s payment activity so that requested payments are rejected, or requiring the account holder to pledge collateral to cover its daylight overdrafts.
Not so long ago if people knew they were about to be coming into some money yet they needed to pay a bill right now, they could do what is known as “floating” a check. This involves writing a check when there actually isn’t enough money to cover the balance, at least at the time that it is written. Since it normally took the bank a couple of business days to process the funds, most floaters never got into any trouble because their money would be able to go through in time. Of course this meant that they were intentionally writing a check that didn’t have adequate funds before the check cleared the bank and they would deposit the appropriate amount to cover the check. However, things have changed and this little trick is now much riskier with the passage of the Clearing for the 21st Century Act, also known as Check 21. Established in 2004 this legislation allows banks to use a substitute check in the process of clearing the checks they received.
What is a substitute check? It is simply a printed or electronic copy of a check that can be used instead of a real check when it comes to clearing. Through the substitute check banks are able to debit funds immediately, in some cases right when the check is received. The substitute check is an electronic copy of the actual check. The purpose is to use this check to process the check faster. Prior to the passage of Check 21, your check was cleared the old fashioned way with the original being transported to the regional bank and then to the customer’s bank for clearing. The concept of the substitute check being used for rapid clearing is also used by merchants, who can make sure real funds are used at the time merchandise is purchased. Sometimes the merchant may not even keep the check, even if the funds are legitimately there. They simply give it back to their customer so they can have it for their own personal financial records.
So, what happens now if a person still tries to float a check? Sometimes they may get away with it, but it’s not because of the bank. If there is a delay in processing it’s only because the receiver of the check has not yet deposited it into their accounts. And oddly enough even big companies may take a few days before they actually deposit the check. However, check writers should not rely on that, since there’s really no way of knowing when an individual or an enterprise will finally do what is necessary to get that check into their own account.
If a person does float a check and the funds do not come in time, several things can happen. First, the bank can charge overdraft fees on each check that bounces. Although most overdraft fees will be less than $50, it’s still money that could’ve been used for something else such as a grocery bill or a credit card bill. And even small amounts can add up to larger amounts that get very hard to pay.
However, overdraft fees are the least of people’s problems, since they hit only once the check goes through. There will be ramifications from the recipient of the check, who expected the funds to be in place. The bank and the recipient of the check will now add fees and expenses for their cost involved. If the matter is not settled quickly this may very well cause damage to your credit rating. The repercussions can carry dire consequences both financially and legally for the person affected. At worst the original payee will sue to get a judgment forcing the account holder on the bad check to pay what they owe. And, if the bank has a cause for check fraud, a person could actually go to jail.
All in all, when it comes to floating a check it is best that a person doesn’t do it. If a purchase is that urgent it is better to use a credit card, since the whole concept behind that form of payment is to be able to send funds later. Additionally, a person should not expect their overdraft protection to cover their fees since each time this is used, a fee is charged. Most of all a person needs to learn in advance how to properly budget their money so these types of things don’t happen.
A Certificate of Deposit or CD is normally a fixed-rate, fixed-term investment that is insured for up to $100, 000 by the FDIC, a department in the Federal government.
Because the investment in a CD is for a longer period of time than a savings account of checking account, it pays a rate that is higher than a checking or savings account where the money can be withdrawn with little to no advance notice to the financial institution. On the other hand, it does not pay a higher rate that reflects risk taken by the investor. Since these accounts are federally guaranteed up to limit there is little risk of uncertainty over the return of interest and principal. So, it is a safe, middle of the road investment.
In the larger sense, rates on CDs are affected by other rates, and tend to go up and down with the general cost of money in the investment world. When the Federal Reserve Board cuts the Federal Funds rate, for example, all rates tend to be effected in a downward direction. Similarly, when there is a lot of volatility in the marketplace rates tend to go down because banks are much more reluctant to lend money, and therefore they do not need to attract deposits by offering high rates.
On the local level CD rates are affected by competition. If there are two banks across the street from one another they advertise rates that compete with one another. So, if the Federal Funds rate goes down and one bank reduces the interest rate you will receive on an investment in a CD, the other bank temporarily will be offering a higher rate. If they decide that they are eager to compete for your deposit in a CD they may keep their higher rate.
This also means that a smaller bank is more likely to pay a higher rate on a CD than a larger bank. If a bank wishes to grow they must attract more deposits. The more deposits they have, the more money they are able to lend to consumers in the form of business loans, car loans, mortgages, and other loans. If a bank wants to grow they will typically offer better terms on a CD.
Rates of return on CDs are most noticeably affected by two factors. One is the length of time you are willing to invest the money. The other is the amount of money you invest. A CD that matures in two years will pay a higher rate than a CD that matures in a month. A larger investment will pay a higher rate of interest than a smaller one.
Here are four examples from a financial institution’s offerings in the second half of 2007 of how the term of the CD and the amount of the CD affect interest.
1 Month $15,000 2.47%
24 Months $15,000 3.94%
1 Months $2,000 2.23%
24 Months $2,000 3.70%
As you see the rate is significantly higher for a 24 month investment of $15, 000 than for a one month investment of $2000. Longer-term instruments in investments generally always pay a higher rate of return. Larger investments are not impacted as much but the larger the investment, as a rule, the rate of return will be slightly greater. A financial institution would prefer less paperwork and customer service required with a smaller quantity of significantly large accounts as opposed to lots of small accounts.
All of these guidelines apply only to the traditional Certificate of Deposit. Different rates will be offered for the growing variety of CDs that have non-standard features. For example, a bank may offer a higher rate of interest for what is called a “Callable CD,” meaning that if they do not like how the investment is turning out for them they can terminate it before it matures and pay you the principal and whatever interest has accrued to date.
In the current investment environment banks and other institutions are offering many more complex versions of the CD. Make sure that you know the exact terms and conditions of your investment before you invest. Go over all of the details on the CD offer regarding term, rate any fees or penalties before deciding how you would like to invest your funds.
I Bonds are a low-risk savings product sold by the U.S. Treasury as either a paper bond at a financial institution or as an electronic product in the TreasuryDirect section of savingsbonds.gov website. The bonds are similar to other Treasury bonds but these bonds are inflation linked savings bonds and the interest rate paid will vary over the life or term of the bond.
I Bonds are named after their design as an inflation fighting investment. In addition to earning a fixed interest rate, which remains the same during the entire life of the bond, it also earns a variable semiannual inflation rate based on changes in the Consumer Price Index for all Urban Consumers (CPI-U). The Bureau of the Public Debt announces the rates each May and November. The semiannual inflation rate announced in May is the change between the CPI-U figures from the preceding September and March; the inflation rate announced in November is the change between the CPI-U figures from the preceding March and September.
They are an accrual-type security. Interest is added to the bond monthly and is paid when you cash the bond. I Bonds increase in value on the first day of each month, and interest is compounded semiannually based on each I Bond’s issue date. Bonds are dated by month and year.
All I Bonds are sold at face value. You pay $100 for a $100 bond. In one calendar year you cannot buy more than $30,000 worth of I Bonds. The only difference between online I Bonds and paper I Bonds is that of denomination. Online I Bonds can be purchased in any amount of $25 or more, down to the penny. Paper I Bonds are purchased in increments of $50, $75, $100, $200, $500, $1,000, $5,000, and $10,000.
The interest-earning period of an I Bond is thirty years, but you don’t have to hold an I Bond that long. You can actually cash the bond anytime after one year, but there is a penalty to do so. If you cash the bond anytime between one and five years, you lose the three most recent months of interest. After five years you can redeem the bond with no penalty.
Like all investments, I Bonds have particular tax ramifications. Your interest earnings from an I Bond are exempt from State and local income taxes, but you must pay State and local estate, inheritance, gift, and other excise taxes.
You must pay Federal income tax when the time comes to redeem the bond, but interest earnings may be excluded from Federal income tax when used to finance education.
Under the Education Savings Bond Program you might be able to completely or partially exclude savings bond interest from Federal income tax. This can occur when you pay qualified higher education expenses at an eligible institution or state tuition plan in the same calendar year you redeem eligible I Bonds and EE Bonds issued January 1990 and later. You aren’t required to indicate that you intend to use the bonds for educational purposes when you buy them, but you must make sure the program’s requirements are met.
If you’re a wise financial consumer, you have money in three places – your checking account to pay bills, your intermediate savings account for short-term goals and emergencies, and your long-term portfolio for retirement and other savings goals longer than five years. Your checking account should be minimal with only enough cushion to prevent fees, and your intermediate savings should be kept somewhere other than your checking account. You have your choice of savings instruments although some are better than others.
Statement savings accounts are a step up from passbook savings accounts. In days of old, banks gave customers a passbook to keep track of deposits and balances. Now the banks send a virtual or paper statement to help customers keep track. At one time, the federal government set the interest rate that was paid on these accounts.
When the banks deregulated, the interest rate began to fall. And it kept falling until it has landed at about 1-2%. This means that money kept in a statement savings account is not keeping up with the rate of inflation and is doing very little for you. Currently low-interest statement savings accounts are the primary savings vehicle in the United States. Your money is easily accessible and insured, however.
Money Market Accounts (MMA) and Funds (MMF)
At the present time, money market account pays between 2.5-4% and a money market fund pays around 4-5%. The two sound similar, at least in name, but are actually very different forms of savings. A money market account is a savings account offered by a bank much like statement savings. These accounts pay a bit more because they require a bit more to open. The main difference between the bank money market account and the savings account is access to the funds. Generally, money market accounts allow a limited amount of checks to be drawn or funds transferred. There may also be additional fees for writing checks or dropping below a minimum balance. It may be possible to find a money market account paying 4% or higher. The Federal Deposit Insurance Corporation (FDIC) also insures these accounts.
A money market fund, on the other hand, is not a savings account in the traditional sense. It is not protected by the Federal Deposit Insurance Corporation (FDIC) because it is actually a type of investment. Money market funds are considered very safe, however. A MMF is a mutual fund where the managing bank is required to invest in high-quality, short-term investments such as loans to other government agencies or the US treasury. Rates vary, but most average around 5%.
Certificates of Deposit (CD)
A final form of short-term savings is a certificate of deposit or CD. When you purchase a CD you are tying up your money for three months to six years. The longer the investment period, the higher the rate of return you can expect to earn. It may not be wise to invest all of your savings in CDs as you must pay a penalty fee to take the money out earlier than the maturity date, but CDs can be a profitable savings vehicle you’re your short term money or in times or of uncertainty and high risk. CDs generally pay more than 4% but remember, the longer the term the higher the rate offered but you incur a certain opportunity risk if rates rise and your funds are already tied up in long term CD.
Understanding Your Savings
The interest rate advertised by the bank is most likely the annual percentage yield. The annual percentage yield (APY) is the amount you actually make with a savings account. By contrast, annual percentage rate (APR) is the rate charged on an account and takes into consideration the interest rate and fees associated with borrowing money. The difference is in the computation.
Two savings instruments (or credit cards for that matter) can have the same interest rate. But if one of the accounts is computed daily and the other monthly, the annual percentage yield can be very different indeed. The APY takes the interest earned per period and adds it to the existing balance so on the next period of interest calculations, you are earning interest on the principal pus the interest already earned. The more frequently an account is computed, the higher the yield (or the higher the interest paid.) This means you earn more with a savings account with a higher APY. When you’re shopping for savings instruments be sure to obtain the APY for all of your options from different establishments to truly compare accounts correctly. Comparing APY to the nominal interest rate will give you no insight into how much you really stand to make.
And don’t forget to include any fees. The highest yielding accounts also tend to come with a few extra fees, watch for maintenance fees or annual fees and early termination fees. If there are these fees and those fees are more than the extra yield, you would be better off with a lower interest rate and fewer fees. Only when you properly research your options will you discover the best savings vehicle for your personal situation.
Banks, like credit cards and brokers before them, are hoping their customers stay safely unaware of what the financial industry actually entails. Fortunately for banks, most customers are living up to the industries very low expectations. The vast majority of banks, especially those with large downtown offices and football stadiums, don’t operate with the customer in mind – despite marketing to the contrary. Banks are business, pure and simple. The more money they can squeeze out of customers, the better the business and the more profit the shareholders and owners of that business make.
Considering most of us are customers of those banks, this scenario does not paint a pretty picture for us. You and your checking account are the means of income for some of the biggest and most profitable companies in the world. Do you have any idea how much the banks hope you’ll never figure out about your accounts?
One of the worst things you can do with your money is save it. Money should be utilized for productive investments whether they are interest-bearing accounts, bonds, stocks, commodities or real estate. Restated, the worst thing you can do is stockpile your money in a place where it won’t incur any interest or will incur so little that you’re losing money in the long run. And ironically, this is exactly what most people do. Banks hope that we keep on doing it and smiling all the way, well, to the bank.
More than $1 trillion dollars is being kept in checking accounts that pay little or no interest and in savings accounts that cost more in fees than they make in interest. Banks make more than $2 billion from ATM transactions alone every year– consider that next time you blissfully agree to pay the “small” fee for service. The most popular way to save money is in a savings account that pays less than 2%. That doesn’t even keep up with inflation, not to mention you can find the same account paying twice as much with just a minimum of research.
Most consumers with statement savings accounts and too much money at the bottom of their checking account don’t even realize they are doing anything wrong. The bank certainly isn’t going to tell them that keeping money in these two places helps to make the financial institution a greater profit by paying you almost nothing. Only by doing your homework and understanding your options when it comes to checking, savings and loans can you navigate the murky waters of banks and their financial games.
Banks are in business to make money. They make money by charging as much as possible for your dedicated patronage and paying you as little as possible while you’re hard-earned money is stashed away in their accounts. They shave nickels and dimes off expenses every time you use an ATM, not to mention they earn a considerable chunk from the fees they charge. They offer you “free” checking that costs more than you’d think possible. They let you open a savings account with 2% interest and offer an alternative as the market changes and rates rise.
Banks are not all bad. Yes, they have to make money, but you don’t have to let them rip you off to do it. Some banks are definitely better than others, and often the larger a bank, the more effort they will put into keeping customers in the dark. After all, large banks need more profits to grow and maintain operations.
Traditionally, banks use the same tactics as Wall Street and credit card industries to help keep customers pacified and completely unaware they are being taken for a ride. If your bank is guilty of the following, it’s likely you’re dealing with a highly skilled industry of illusion and you need to stop and pull the wool back off your eyes. You’ll know you’re in trouble if your banks is paying you significantly less interest than those marketed online, offers free services for programs that are of little value anyway, are charging you excess fees for ATM use and minimum balances.
Small, local banks, online financial institutions and credit unions may offer the services you need for far less than large banks. You may be able to put your money in savings at higher rates, and have a more positive overall experience. But you’ll never know what options are available to you without spending time learning how traditional banks work. You need to know at least the fundamentals of the industry to determine the best way to make your money (and bank) work for you. Search the top rates paid in the various short term investment categories. Maximize the use of your hard earned dollars by allocating to the proper accounts. Now more than ever is the time to research and utilize your money in the most advantageous manner.
The first step to budgeting your money is to fully understand how you spend your money today. The best method to get a handle on your expenses is to write down every purchase you make for two weeks or a month if you can. This may sound annoying to do, but you will come away from this exercise having learned something about your spending habits. Chances are you will also realize that there is a considerable amount of cash that just disappears out of your wallet each month. Just like a dieter writing down everything he or she eats each day in order to eat less, when you become more aware of what you are really doing, you will tend to be more careful with your money.
If you have a high school-age child, who is beginning to manage his or her own earnings and/or allowance you may want to make this a family activity. If your teenager is constantly looking to you for a handout since they tend to blow through whatever money they have, start the lesson today. After all, there will come a day you hope to stop being their private automatic teller.
The trick to this is to make the process work for you. If you tend to use a lot of cash, you will need to save receipts. If you use a debit card for pretty much all you do, this may be easier. Keep this record in a notebook or an excel document to make the math easier. It is up to you.
At the start of a pay period, enter in your take home pay on one page. Next list all of the following expenses that you will have before the next paycheck.
Saving – Pay yourself first. What amount will you place n savings? If you do not know this role be sure to read Savings 101.
Fixed Expenses – Things like rent (could be half of the total if you get paid twice a month, car payment, insurance, utilities, your cell phone, gas or bus fare – whatever monthly obligations you have.
Variable Expenses – Here we get to the real point of this exercise. These are the expenses that you choose to make. Each day write everything down, no matter how small. Lunch with a co-worker, drinks with friends after volleyball, coffee on the way to work, or those new shoes you could not resist. Enter each expense with some kind of description like meals out, clothes, groceries, cash at an ATM, etc.
Just before your next paycheck, total things up and see how you are doing. Compare your expenses with your income. Be honest with yourself. Did something surprise you? You may never have added up that those trips for bottled water at the fitness club or work, amounts to over $10 a week. Add that to $40 on fast food for lunch each week and you may see why some of you co-workers pack a lunch most days. Convenience is great but it comes at a price. If you spent more than you had, you can try to tighten your belt for the rest of the month.
If you have a considerable gap with cash that was spent and not recorded, you can see that you may need to change a few habits. It is so very easy to go back to an ATM to get cash when you find yourself short. You may need to budget your cash for each pay period and watch that you do not overspend.
Rather than think of this as a punishment, think of this as freedom of choice. Perhaps in hindsight, you would have skipped picking up a burger or sub sandwich for lunch three times this week so you could have enjoyed a nice meal with a friend on Friday night – without feeling guilty. Or you would rather spend all that money on bottled water (and the packaging you toss out) on a hobby. If you followed directions and put money in savings at the start of each pay period, at the very least, your long-term financial savings goals are not completely derailed.
After you have managed to keep a money diary, you are ready to build a budget – and make it one you can live with. Check out How to Make a Budget.
Banks are places that take your money, keep it safe and let you use a debit card or checks to take care of day-to-day purchases. A depository for your day-to-day funds and short-term savings is the main features most consumers use the local bank for. And there is a good likelihood that your bank is a large one located very near your home or office. Of course, it might be a bank that ran a good special a while ago, or even just the first bank you found when you were ready to cash your first paycheck. But looking beyond your own bank accounts, banks do have a purpose – making money.
Banks are a safe place to store your money every month when the paycheck comes through. They are insured up to $100,000 and you can get to your money any time you need it. Of course, while your money is sitting in your savings account waiting for use, it is earning a bit of interest and keeping your checking account safe from overdraft fees – at least in theory.
But while your money is sitting in the savings account, it is doing something else as well. It is making the bank money. The interest earned on your savings account is a pittance compared with how much is earned by the bank each time it makes financial deals in the money marketplace.
While your money is sitting there, your bank probably lends it out to others at high rates of interest. Of course if you were to walk into the bank and demand your money, they could easily give you the right amount of cash – all the investments and earnings are done with virtual numbers that include the deposits and savings of every member of the bank.
Banks also make money through the fees charged on various accounts. These fees might be maintenance fees, overdrawn fees, returned check fees, failure to maintain a minimum balance fee, etc… Added together these fees can seriously add up not just for you and your fledgling account, but for the bank, too. After all, the bank is the big winner with all of that additional money coming through the doors.
Finding the Right Bank
While all banks make money from your business (and your money), there are some banks that offer more agreeable terms than others. Most of the large banking centers, however, have high overhead costs due to the number of retail establishments and storefront locations. These banks, which are often the best known in the financial community, tend to charge more and offer less to customers.
Smaller banks that do not have to maintain a great number of locations, or possibly even any at all, often offer customers higher rates of return on their money and charge fewer fees. This means you might just get a better return on your money from a bank that operates from a single location or online. But how can you know for sure?
Take the time to actually compare what banks offer. Also examine your needs in regard to physical location. How often do you actually visit the bank? Do you use ATMs or can you get by with just a debit card? If you haven’t set foot in a physical bank location for months, you might be paying fees or accepting lower interest rates on your savings simply to help maintain the centers you’re not using.
Of course the only way to tell that is to look at the minimum dollar amounts required to open and maintain checking and savings accounts at each bank. Check out the savings rate as well as the frequency and amount of any fees. Do both banks offer free checking and online bill pay? Only when you’ve come to a decision about which bank is best for your specific needs should you open an account.
Your banking accounts are your business, of course, but you should also be aware of what experts advise you to do. Your savings account will have a small rate of interest. Leave only the amount in the account that is required to keep it free of fees and to cushion your checking account if the two are linked. Your checking account should be used to pay bills and for spending money, but not as a savings account. Keep it cushioned, but don’t let large amounts accumulate there.
Save money every month, and when you’ve reached the minimum opening amount, invest the money in a more suitable vehicle than a standard savings account. That doesn’t mean you must invest it in the stock market or in mutual funds, rather look at money market accounts your bank may offer. These often have a high minimum balance, but will earn you considerably more interest than a standard savings account. And that’s putting your money to work for you – not just the bank.
Prime rate is a term applied to a reference an interest rate that is utilized by banks and financial institutions for lending purposes.
The prime rate was a term originally used to identify the rate at which banks lend to their best and most favored customers, though this is no longer the case in general. The prime rate is a rate that is determined by each individual bank or financial institution. Though the rate will vary by only small increments between different banks, each institution nonetheless establishes the rate independently. The government or the various agencies that regulate financial institutions do not establish or set the prime rate.
Financial products that are based on the prime rate are usually based on an index that takes an average of a number of banks established prime rate. The single most generally accepted measure of the prime rate is the Wall Street Journal Prime Rate. The Wall Street Journal surveys largest banks and publishes the consensus prime rate. The Wall Street Journal looks at a certain number of the largest banks, and when three-quarters of them change their rate, the Wall Street Journal changes its rate, effective on the day the Journal publishes the new rate.
More often the prime rate is set at approximately 300 basis points above the Federal Funds Target Rate set by the Federal Reserve, the central bank of the United States. Other institutions base the Prime Rate on the movements of the London Inter-bank Offer Rate, or LIBOR. The prime rate will move up and down with the general direction of overall lending rates. The Fed Funds Rate and LIBOR rate are merely other lending rates which indicate the overall direction or position of short term borrowing.
So, the Prime Rate isn’t one thing for all institutions, but it does not differ much from one to another.
The prime rate is used often as an index in calculating rate changes to adjustable rate mortgages (ARM) and other variable rate short-term loans. It is used in the calculation of some private student loans. Many credit cards with variable interest rates have their rate specified as the prime rate (index) plus a fixed value commonly called the spread. Some variable interest rates may be expressed as a percentage above or below prime rate.
Many adjustable rate mortgages and other consumer debts are tied directly to the rate as quoted in the Wall Stret Journal because the Wall Street Journal is readily available to most people on a daily basis by purchase or in a library or office.
So, on a variable rate mortgage where the payment is due on the first of each month, the rate for that month may be determined by the change in the prime rate as quoted in the Wall Street Journal on some arbitrary date set forth in the mortgage agreement, for example, the third Thursday of each month. If the Journal reports a drop in the prime rate between the third Thursday of April and the third Thursday of May, for example, the mortgage payment due on June 1st will drop a similar percentage rate.
The same kind of adjustments are also made on the rates for credit card balances, for example, although it is important to note that in all cases the rate is seldom the prime rate itself, but the prime rate plus or minus some other percentage. So, if the prime rate drops one-half of one percent in response to a drop in the Federal Funds Rate, your credit card rate may drop too.
More specifically, if the Federal Funds rate drops from 4.5% to $4.0% the Prime will likely drop from 7.5% to 7.0%, and your credit card interest rate may drop from 12.5% to 12.0% if your credit card balance is charged at a rate that is 5.0% above Prime. Please note that banks and credit cards are not obligated by law to change their rates, but generally do so for competitive or other strategic reasons. The rate changes may not correspond 1 to 1 with the other rates changes and the time between changes may be lengthy.
While a drop in the prime rate may be good for adjustable rate mortgage payers and credit card holders, interest rate sensitive investments will also be affected. If you are about to roll over a Certificate of Deposit or make a change in some other money investment, check to see what direction rates are moving. You may receive a better interest rate on a Wednesday than you do on a Thursday if the Wall Street Journal reports a drop in the Prime Rate.
Before the ATM cash had to be withdrawn either at the bank or through cash back arrangements at the store. Both were annoying and inconvenient. However, the process of obtaining cash became revolutionized when the ATM came into existence. With the ATM customers can get the cash they need without having to stand in a long line. They can also do other things such as check their account balances, transfer money to another account or depositing more money.
Yet, just because ATMs are extremely convenient doesn’t mean consumers should go crazy in using it. This is because each time an ATM not associated with their bank is used, a person will acquire fees. And although these fees are low initially (usually ranging from $1.50 to $4.00), they can add up over time if the ATM is used too much. More importantly, when you are accessing only a small amount of money, the fee relative to the amount of money is significant and turns into a costly transaction.
So, why do banks charge ATM fees in the first place? Well, as already stated, they do not charge their own customers who use their ATMs. They only charge if ATMs outside of their institution are used. The reason why this is done is because the bank has to pay transaction fees from the outside bank’s ATM. The other bank must also pay a surcharge fee, since the transaction is being done from an individual who is not a member of their institution. Of course, the consumer ends up paying this cost, not their bank.
Another reason why fees are charged is because running ATMs are expensive. This is especially the case if the ATM is placed in a major metropolitan area. In these situations the ATM fee, which normally ranges $1.50 to $2.00 can nearly double in price, making a person pay an amount that is the equivalent to a fast-food lunch. If a person uses these types of ATMs often, little by little they are depleting their bank account. One might be able to handle this if they hold high balances, but for others who live closely, too many ATM fees could cause them to get the infamous NSF (Nonsufficient Funds Fee).
Fortunately, with a little planning it is possible to limit usage of the ATM. This process starts when one initially determines the institution they want to bank with. For example, determine where you use the ATM the most frequently. Does your bank have more ATM’s in that region is or is there a bank with a larger network in its place. This way you are more likely to find ATMs they can use in which there would be no fees.
However, if banking with a major institution is not possible, one will have to take out as much at one time as they can when they are withdrawing from the ATM. There are also cash back options at stores, where customers are given a certain amount back on their purchases. The amount is simply added onto the store bill, so no extra fees are required.
If none of these alternatives are suiting, then a person should consider using a credit card, debit card or checking more often. Very few places nowadays require cash only. In fact, even most fast food places will accept checking or electronic forms of payment. The only thing that a person needs to keep in mind is that if they’re using a debit card, they should always make sure the cashier rings up the purchase as ‘credit’. The money will still get deducted as if it were debit, except there won’t be any additional fees. Otherwise, if a person chooses ‘debit’, they will get charged extra for the transaction.
The Federal Funds Rate is the interest rate at which private financial institutions such as banks lend their reserves held at the Federal Reserve to other financial institutions overnight for short term needs.
A bank or other financial institution lends out most of the money deposited with it but also is obligated by law to keep reserves with the Federal Reserve, the central banking system of the United States. Normally the Federal Reserve expects a bank to keep approximately ten percent of their deposits in reserve to cover unforeseen circumstances. Excess amounts of rserves over the required reserve amount are often loaned on a short term basis to other banks.
For example, when a bank makes a loan to an individual or a business in the normal course of operations, that bank’s reserves are depleted because money is dispensed on its balance sheet. If the bank’s reserve level falls below the legally required level it must add to its reserves to remain compliant with Federal Reserve regulations. The bank will borrow that money from another bank that has a surplus in its Federal Reserve account. The interest rate that the first bank will pay to the second bank in return for borrowing the funds is negotiated between the two banks, and the weighted average of this rate across all banks is the effective federal funds rate. This negotiated effective rate is determined in large part by the actions of the Federal Reserve itself.
The nominal rate is a target set by the governors of the Federal Reserve, which they enforce primarily by open market operations, usually the buying and selling of money in different forms. The most common action is the purchasing or selling of Treasury bills and notes. These acgtions can provide more liquidity to the banks in the Federal Reserve System and with added liquidity the funds rate will generally move down when liquidity is reduced, demand for funds increases and the rate goes up. When the media refer to the Federal Reserve “changing interest rates,” this nominal rate is almost always meant. The target is generally a range, as the Federal Reserve cannot set an exact value through open market operations.
The federal funds target rate is decided eight times each year by the Federal Open Market Committee of the Federal Reserve. Depending on their agenda and economic conditions in the U.S., the committee members will increase the rate, decrease it, or leave the rate unchanged.
This brings us to the question of how the Fed Funds Rate is used in the larger economy.
The Fed Funds Rate is the primary tool that the Federal Open Market Committee uses to influence interest rates and the economy.
Changes in the Fed Funds Rate have far-reaching effects by influencing the borrowing cost of banks in the overnight lending market, and subsequently the returns offered on bank deposit products such as certificates of deposit, savings accounts, and money market accounts. Changes in the Fed Funds Rate and the discount rate also dictate changes in the Prime Rate, which is of interest to borrowers. The Prime Rate is the underlying index for most credit cards, home equity loans and lines of credit, auto loans, and personal loans. Many small business loans are also indexed to the Prime Rate. Normally the Prime Rate has hovered approximately 300 basis points higher than the Federal Funds Rate. So, if the Federal Funds rate is 4.5%, the Prime Rate will be 7.5%.
Many people hear the term FDIC during an economics class or perhaps when reading brochures at their local bank, but do they really know what the organization does? In fact, is the average person even aware of what the acronym stands for? Well, in response to both questions, the FDIC, (which stands for the Federal Deposit Insurance Corporation), is a governmental entity that insures banks and other types of financial institutions. The amounts that are covered are $100,000 for individual customer accounts or businesses and up to $250,000 for retirement accounts.
In either case the money is reserved in the event the bank fails. However, not all types of banking accounts or situations are covered. This article will discuss these elements along with those that are covered by the organization.
Things Not Covered by the FDIC
1. Investment Accounts
The FDIC does not provide protection for losses associated with mutual funds, stocks or bonds. The organization also does not cover investments originating from the U.S. government. Examples could be savings bonds or Treasury securities. If a person wants protection from any of these types of investment accounts, they will need to transfer the funds into accounts that are protected.
2. Safe Deposit Box Contents
Ironically enough, safe deposit boxes are not legally considered real deposits. This is despite having deposit as part of its namesake. In the eyes of the government it is simply a secure place where funds or other things can be held. However, if something does happen that could jeopardize what is held in a safe deposit box, bankers are not necessarily left out in the dusk. This is because many homeowner’s insurance policies or renter’s policies cover safe deposit boxes if the contents within are stolen or destroyed.
3. Financial Loss Due to Theft or Fraud
If a person robs a bank, the FDIC would not protect the funds stolen. In these situations, banks are covered through their own insurance, allowing the financial interests of both themselves and their customers to be protected.
4. Account Errors
FDIC does not cover errors made in one’s account, however, banks and other financial entities are usually more than willing to work with their customers if there is a dispute or a discrepancy. The best way to address possible account errors is to keep good records and immediately report the discrepancies to the financial institution.
Insurance products cannot be covered unless they are liquidated and put into an account that is coverable. This includes annuities as well as standard home, life and health insurance policies.
Accounts and Funds that are Covered by the FDIC
1. Savings Accounts
Savings accounts held on the bank are all insured. These accounts allow one to have free access to their funds, including deposit and withdrawal, and are covered by the FDIC.
2. Checking Accounts
Checking accounts hold monies to allow for electronic withdrawal and/or withdrawal through a check. Most checking accounts simply act as a virtual piggybank, but there are some that allow a person to collect interest. Examples are NOW (Negotiable Order of Withdraw) accounts or Money Market Deposit Accounts. All these depository accounts are FDIC insured.
3. Certificate of Deposit
Many Certificate of Deposits, (also known as CDs), are covered by the FDIC. These are financial instruments that accrue interest over a certain period of time. Of course, the keyword is ‘many’, since there are some types of CDs that are not eligible for FDIC coverage. The non-eligible CD’s still have insurance based on the principal amount of the CD but in some cases the interest or income derived on the CD will not be insured. To find out if an individual CD is covered, it is best that a person makes an inquiry of the financial institution they are working with.
It may surprise you to know that ATM machines were not popular when they first appeared. Consumers were wary of letting a machine handle their money, and they greatly preferred face-to-face interactions. But ATMs are much more profitable for banks as they don’t require paying a friendly smiling face to greet customers. So to help consumers discover the advantages of ATMs banks initially made them free to use and charged for using a teller. Charging for the teller did turn out to be a well received idea, nevertheless ATM use skyrocketed.
Those days are long gone, although there are still some ATMs or banks that offer free service. Often this is a promotional move on the part of the bank – don’t worry, they make their money somewhere else. While there may be a handful of free banks in your area, it is more likely you’re using the ATM that is most convenient. It’s also very likely you’re paying dearly for the privilege.
It is estimated that banks make more than $1 to 2 billion on ATM transactions each year. It costs a bank slightly more than a quarter for a customer to use an ATM, but when that customer comes inside to speak to a representative, the bank must pay significantly more for the same transaction. So to discourage consumers from actually visiting with bankers, some banks started to charge a fee for a face-to-face encounter. Others simply make their ATMs too prevalent to pass up. These are the ATMs on every street corner and inside your favorite institutions.
There are two kinds of ATM fees. If you use an ATM offered by your own bank, you most likely won’t pay a fee, though some banks have instituted fees irregardless of the transaction origin. But for most the fee for these bank owned ATM is nothing, after all, you are a customer of that bank. In the cases in which banks are starting to charge their own customers to utilize the ATM, the fee is similar to the fee charged by a bank that is not your own when you use their ATM machine.
Those ATMs not owned by your bank will most assuredly have a fee. If you are a customer of Bank A, but use Bank B’s ATM machine, Bank B will charge you a fee. The fee is usually $1.50-$3, and Bank B will tell you upfront that you will be paying this extra fee to use the machine. But there is another fee that is not upfront. If you go outside of its network, it is likely that Bank A will charge you a fee, too. That means you might be paying $3-$5 every time you visit an ATM not owned by your own bank. Even if you visit an ATM of your own bank, you may be paying $1.
Free ATM Service
There are banks that offer free use of ATMs to their customers. This is important if you visit ATMs frequently that are not owned by your own bank and especially important if you use online banking. After all, online banks won’t have any ATMs or friendly retail establishments, so you must consider how much you’ll pay in ATM fees to access your money.
The banks that offer free ATM use to their customers are not charging their own fee and some go so far as to refund the fee charged by the other bank. This service is generally offered by smaller banks, online banks or credit unions. Other free ATMs are offered by convenience stores looking to get customers in the door. Be sure to see if these free ATMs are eliminating both fees or just the initial fee to determine just how free it truly is.
T-Bills, T-Notes, and T-Bonds are three forms of bonds issued by the U.S. Treasury.
The Treasury issues these bonds in order to raise money for the operations of the government of the United States. Since the U.S. federal government is the issuer of these bonds, they are some of the safest investments you can find. However, the sureness of the bond comes at a price. These investments have a low yield. On the risk/reward scale, investments in Treasury bonds are low on risk and low on return.
These different Treasury bonds share a few simple characteristics.
One added benefit is that they are exempt from state and local taxes, though federal taxes are still payable.
They cannot be redeemed prior to maturity, and in most cases they do not have call provisions. A call provision would allow the Treasury to pay off the bond early if it is to their advantage.
You can buy the bonds directly from the Treasury, or you can buy them through a broker. If you buy then from a broker it is possible to resell them prior to maturity in a secondary market.
Treasury Bonds, Bills, and Notes are all issued in face values of $1,000, though there are different purchase minimums for each type of security.
The three types of bonds are differentiated by their securities.
Treasury Bills have maturities of one year or less.
Treasury Notes have maturities of two to ten years.
Treasury Bonds have maturities greater than ten years.
Now for the specific characteristics of each of the three types of bond.
Treasury Bills are issued in three maturities. Bills with 91-day and 182-day maturities are auctioned by the Treasury each Monday. 364-day Bills are auctioned every four weeks on Thursday, 13 times a year. The interest rate of T-Bills is determined at each auction, depending on what bidders are willing to pay. T-Bills do not make interest payments, however. Instead, they are purchased at a discount to face value. They are the only Treasury securities that sell at a discount.
U.S. Treasury Notes are issued in two, five, and ten year maturities. The two year and five year Notes are auctioned each month, while ten year Notes are auctioned eight times a year. All Notes pay interest twice a year, and expire at par value.
Treasury Bonds are usually issued in thirty-year maturities, and pay interest twice a year.
As an investor you can reduce your costs by buying direct from the Treasury, and it is easier to do with the advent of the internet. At TreasuryDirect.gov you can purchase Bills, Notes, and Bonds, and track their progress to maturity.
Each type of bond offers a high degree of safety, but the return on this investment is significantly lower over time than investments in stocks, for example. For the sake of diversity with an emphasis on safety, Treasury bonds are worthy of consideration for your portfolio.
There is no question that you need short term savings. The next logical question is exactly how much you need to have in your short-term savings accounts. The answer varies by the individual.
Your Age and Family Situation
Your age and family is a large factor in your savings plan. Young, single individuals need considerably less than families of four sending children off to college. Short term savings should cover three to six months worth of living expenses as well as any planned major expenses in the next three to seven years.
A young, single individual with bills of $1200 a month who just graduated from school with a new car gifted to her by her parents can save $3600 and be fine – at least until she gets married, decides to buy a condo, plans a month long vacation to Europe or any number of other planned expenses. As situations change, your savings plan changes as well, so always be reassessing your needs.
By contrast, a married couple about to send their child away to college and looking at a career in a declining industry after decades of hard work need a full six months of living expenses in short term savings as well as the cost of college tuition. There is a greater likelihood of losing a job, and despite years of experience, it may take longer to find a new one. If the couple lives in an aging house, they must also be saving for major improvements such as a new roof or foundation work.
Your age also determines the best way to invest your entire portfolio. The older you are, the more you should have in liquid assets. The stock market is inherently more risky than CDs or money market accounts. Money invested in stocks can grow at a much faster rate than money in liquid assets, but that same growth can spiral down in a moment and take years to recover.
The older you are, the more money you need invested in your short-term savings accounts to protect yourself from the fluctuating stock market. Young people need less in liquid assets for short term savings as they can afford to take a long view of the stock market. It may be that a young person or couple has only three months worth of expenses in short-term savings with the remainder of their savings in stocks. An individual approaching retirement needs six or seven months of living expenses and planned expenditures in short term savings for adequate protection.
At the most basic level, the amount you need in short term savings is tied directly to how much you spend every month. Your short term savings account should contain three to six months worth of living expenses. If your living expenses are $2000 a month, your short-term savings needs to contain $6,000-$12,000 at the minimum.
These savings are designed to cover your household expenses should you lose your job or encounter a situation where you are unable to work for a short time. Your account must also include funds to protect you from other, smaller emergencies such as car repairs, emergency home maintenance and medical emergencies. Remember that the more dependents you have, the more likely you’ll encounter an expensive emergency.
Finally, your short-term savings needs to include any planned expenses you foresee in the next three to seven years. New cars, new homes, travel, and college tuition all can fall under planned expenses. And with the continual addition of new trips, procedures and large ticket items to a household, the need for planned expenses is ever changing. Be sure to review your savings plans periodically to ensure you are saving adequately for the future.
Short term savings refers to money that you keep out of your checking account and stash away somewhere close in case of an emergency or a planned expense in the not too distant future.
This may be a fund for something unexpectedly unhappy like car repairs, or it may be for something like college tuition in the fall when it’s only April.
It’s difficult to set aside money and just pretend it’s not there, so your short term savings fund may need a little fence around it that you’ll only leap over in case of emergency. Some accounts are more liquid than others. Liquidity refers to how available your money is when you want it. In a checking account it is almost instantly liquid, and in a savings account associated with your checking account your money is nearly as available. If you feel you need more of a wall around your money so that it doesn’t tempt you when you see a plasma television on sale, try a certificate of deposit, or a money market account, or short term Treasury bonds. There is just enough pain associated with liquidating funds from those investments that you may just wait for a real emergency.
You probably recognize that it’s a good idea to set some money away for the proverbial rainy day, but let’s talk about some of the dire circumstances that can result if we don’t.
Let’s say that you need $3000 for home repairs or some other unexpected and annoying circumstance. You may have a credit card in your possession that has that amount available, but a credit card can be a real weight on your monthly expenses for months and months if you aren’t able to pay it off quickly. Money in effect borrowed on a credit card is one of the most painfully expensive ways to borrow money and we should do it under only the most dire circumstances.
Or you may have a stock that you wanted to sell but have been holding until it went just a bit higher. Disaster strikes and you suddenly need $5000, so you reluctantly decide to sell the stock at its current price but before you can do so the market plummets and your stock is worth considerably less than it was the week before.
Neither of these scenarios marks you as a savvy handler of money.
So, decide to set some money aside into an account that suits you. If you have an iron will and can keep your hands off, put the money in a savings account. You may want to open the account in another bank or a credit union or an online bank so that you can’t access it on a whim.
If you need more of a fence around it, short term Treasury bills are bonds that mature in as little as weeks or months. This investment is good for an expense that you see in the future and can afford to put the money away in for awhile. Or maybe a certificate of deposit is right for you. CDs also can have maturities of just a few months and you can withdraw the money before the investment reaches full term if you are willing to pay a penalty.
Perhaps the best option is to invest in a money market account (not a money market fund, which is something else) which is a good way to invest and make interest but allows you to write a small number of rainy day checks.
Review the many options available for short term savings. Compare the rates and terms and see which investment program pays the highest and works with your saving and spending profile. They may have just the thing to keep you out of the rain.
Savings Bonds are modest, safe investments.
These are not marketable securities, so the ups and downs of the economy do not affect them. They are securities issued by the U.S. Treasury and are backed, as they say, by the full faith and credit of the U.S. government.
Tens of millions of Americans have purchased US Savings Bonds. These individuals are loaning money to the government of the United States.
There are three primary forms of savings bonds now issued by United States Department of the Treasury.
The I bond is a savings bond that pays interest based a fixed annual rate and a semiannual inflation rate. Interest is added to the bond monthly and is paid when you cash the bond. These bonds are sold at face value; i.e. you pay $100.00 for a $100.00 bond. Interest on these bonds is compounded semiannually for 30 years. Series I bonds accrue interest based on a combination of the fixed interest rate and the semiannual inflation rate. The composite rate is announced by the Treasury each May and November. These bonds may be redeemed after a period of 12 months from issuance.
Series EE bonds are pay a predetermined fixed interest rate that is set in advance by the U.S. Treasury. When these bonds are purchased in paper format the face value of the bond is twice what you have to pay for it, but it is only worth its face value years after you purchase it. So, if you purchase a $2000 savings bond you only have to pay $1000. When purchased electronically, the bonds are sold at face value. The interest rate is fixed and is also compounded semiannually for 30 years. The series EE bonds may be redeemed after a period of 12 months from time of issuance.
The Patriot Bond rounds out the present offering of savings bonds by the U.S. Treasury. These bonds are almost identical to series EE bonds; they differ in that they have the phrase “ Patriot Bond” inscribed on the bond. These bonds are sold in paper form and therefore are sold at ½ the face value. The interest rate is fixed and is also compounded semiannually for 30 years.
However, there are more varieties of savings bonds that have been issued previously and are still in circulation. Some of these bonds have long maturities of up to 30 years. Others compound your interest at different rates, but typically the interest is compounded at glacial rates of twice each year.
The purchase of savings bonds is considered by many to be an act of patriotism. This goes back to World War II when civilians purchased bonds to support the war effort. Today, savings bonds make up a very small percentage of the total US debt, perhaps 3%.
Unlike most investments today, the savings bond is still primarily sold as an actual piece paper. In 2004 the US Treasury began a program of electronic bonds that eliminated the physical paper, and today they have a program that allows investors to transfer their paper bonds to electronic bonds. Tradition holds sway, however, and most bonds purchased today are still paper bonds.
If paper bonds are lost, stolen, or damaged, no worries. US savings bonds are registered securities, meaning that your investment is on record with the US government. You can’t lose.
Do you dream of buying that first home, a cottage on a lake, sending your kids to college – or all of these? Unless you have a rich relative who will leave you lots of money, the only way to achieve your financial goals in life is to set aside savings on a regular basis. As unexciting as this sounds, successful savers live by a simple rule: pay yourself first.
What this means is that savings is not what you may or may not have at the end of the month after you pay all your bills. Putting money into savings should be the first expense you consider. Think of it as another bill and pay yourself first. Taxes, social security, health insurance and a host of other deductions come out of your take-home pay before you receive the net amount. Think of money into your savings as one of those automatic deductions. In fact if your employer offers the option for direct deposit, see if you can have a portion of your check transferred into savings. You can’t spend what you don’t have and you may never miss it.
But I never have enough to save now? How will this work? If you are not yet in the habit of saving, start small. Small amounts can add up faster than you may realize. You can save $20 a week can’t you? It may mean a few less $4 cups of coffee, $2 bottles of sport water or fast food, but most anyone can find $20 each week. That adds up to $1,040 per year. Do that for 10 years in a low interest earning savings account and you will have just over $12,000. Not bad.
Here is a second rule for successful saving: The miracle of compound interest is time. The earlier you start, the less you need to set aside to get to the same result. So if you double your savings – $40 per week you will get to the same amount in about 5 years. Consider what happens if you put the money in a higher-yield money market fund. Your annual contribution of $2,080 at 4.48% for 10 years will yield $26,679. Maybe it is worth a few less cups of coffee.
This simple rule of paying yourself first should make contributing something to a 401(k) or similar retirement plan an easy decision to make. If your employer matches your contributions, contribute at least to the limit to obtain the match. If not you are leaving money on the table. Many Americans do not save for retirement, thinking that other expenses are more important. Look back to the second rule. Time is on your side. If you start saving in your 20’s, you can set aside a smaller amount to reach the same goal, as someone who does not get started until years later. And since the contribution comes out before taxes and before you can get your hands on it, you will never miss it.
Separate Your Savings
If you are new to saving, try saving your money according to what you want to do with it. Having real goals in mind will make the choice to forgo some spending and set aside money for your future that much easier.
The Unexpected – Have an emergency fund.
Financial advisors tell us to save 6 months salary and keep it in reserve. This may sound impossible to achieve but this money can be critical if the worst happens – you lose your job or a health crisis racks up huge bills. Yet this money can cover the smaller crises of life – you can get new brakes on your car or replace a stolen cell phone or bicycle – without having to use a credit card. You spend a bit and then replenish the account. Credit card debt is how most of us see our monthly expenses creep up, making sticking to a savings program even harder.
Once you have the emergency fund in place, then you can separate your savings according to your goals. Saving money is much easier when you have a reason to set it aside.
Short Term Savings
Short-term purchases are the type of things you know you will want to do in the near future. If you save up for the purchase there will be no need to rack up a credit card bill. Short-term needs can include saving for holiday gifts, tuition, weekend getaways or hitting the sales for new work clothes.
Long Term Saving Goals
Big-ticket items require more time to save. It takes planning to save enough for a down payment on that first house or that vacation cabin. Other examples are planning ahead to replace a car or saving to remodel a bathroom.
And one final rule: Get a raise in salary? Give yourself a true raise. Put the extra money in savings before you get used to having the increase and spending it. Again, you won’t miss it.
Still think you can’t save? Read about keeping a money diary and get started.
If a person does not have overdraft protection, each time a check is bounced, they must pay an NSF (Nonsufficient Funds Fee). This is usually $35 per check, an amount that can significantly add up if the bouncing is done numerous amounts of times. And this happens whether the check bounced is $1,000 or $10, though it should be noted that most banks would clear larger checks first, since they figure those are the payments that are the most important. Either way, a person will want to consider using overdraft protection to lessen the amount of NSF fees charged.
What is overdraft protection? Overdraft protection is when the bank uses another source of funding when a check happens to bounce. The best forms of overdraft protection will be the ones that draw upon accounts that are likely to have larger balances, such as a credit card or savings account. Funds can also be drawn from a home equity line of credit. Customers will still have to pay a fee, but it won’t be as high as what they would have to pay with an NSF. To get this form of overdraft protection, customers must ask for it from their bank.
Often banks will provide some level of overdraft protection as privilege not tied to another account. Although convenient, this protection could cause problems in the long run, particularly with chronic check floaters. With this form the bank will cover the amount bounced by a check. However, not only does a person have to pay for the amount the bank paid, but they must also cover the NSF, (which is charged only once through this arrangement).
Indeed, this is all well and fine with people who only have to use such a service occasionally. But there are many others who may live so closely, that they decide to ‘borrow’ from the bank when their funds are too low. This is not hard to do since many institutions will allow overdraft protection of several hundred a day. If a person relies too much on their ‘overdraft privilege’ they could not only get themselves laden down with debt but they may even be held criminally liable for the amount the bank covers. Intentionally writing checks that do not have sufficient funds may be construed as a form of fraud.
Overdraft protection whether it’s from one’s own personal accounts or from the bank directly, can be a great way to ensure a person doesn’t have to go through the embarrassment or the fees associated with a bounced check. However, caution needs to be taken with overdraft protection issued by a bank, since some may be more tempted to bounce more often. The main key with this form of protection is to only use it in case of emergency. And when it is used, one must make sure to pay the balance and the NSF fee as soon as possible.
The Internet is a convenient destination for consumers, general surfers, and for investors. Online banking and online investing has become increasingly popular for both the investor and for the financial institutions. Lower overheads for the banks, in particular, mean that they can pass some of these cost savings onto their potential customers. Subsequently, shopping around for a bank or savings account online can yield some of the better interest rates and a broader range of offers.
While the Internet offers ease, improved investment opportunities, and better rates, it also breeds a degree of skepticism in investors. Handled properly there is no reason not to use the Internet to conduct your banking and investing. You should certainly be sure, however, that you are using a legitimate and trusted bank, and you should always do your utmost to only submit personal details online when using a safe, online environment.
Check The Bank Details
Checking the bank itself should be your first step. The FDIC insures each depositor to an FDIC insured bank up to the value of $100,000. This means that should the bank go bankrupt and you have money invested in an account with that bank you should still see the return of that capital.
Banks that are FDIC insured know that this is a selling point. As such, they display an FDIC logo on their site. These logos can be copied and pasted to any website so its mere existence on a site does not necessarily mean that the bank is a legitimate one.
Fortunately the FDIC also provides an online service called Bank Find, (http://www2.fdic.gov/idasp/main_bankfind.asp). Enter the name of the bank into the Bank Find system and click Find. This will, in the case of a legitimate site, present you with details of the bank that you can check against the details on site. If the details match then you can proceed, safe in the knowledge that the bank is at least FDIC insured.
Signing Up For A New Account
Signing up for an account, as well as processing any transactions, needs to be completed on a secure section of the bank’s website. SSL (Secure Socket Layers) encryption is the standard for online secure payments and data transmission. Again, many websites include an SSL logo, but the account sign-up page and any other page that requires the input of personal information should begin with https: rather than just http:. Information you submit on these pages will be submitted securely.
If you don’t feel comfortable signing up online, then look for contact details. A toll-free number is obviously preferable and using this number guarantees that your information will be kept secure from prying eyes. As long as you use a securely encrypted web page or sign up for an account offline then your details should be kept safe.
Choosing A Secure User Name And Password
Online security is paramount. Choose an account and password combination that you will remember but will not be easily guessed by others. Ensure that the two are not too similar, and that your account name isn’t the same as your real name. T he most secure of account passwords include numbers, letters, uppercase, lowercase, and special characters and are changed on a regular basis.
Looking After Your Banking
Keeping your details and your money secure is important. By using a bank that is FDIC insured you can rest easy knowing that should something untoward happen to the bank you use, the money you have invested or saved will be returned to you. Only submit personal information on a web page that offers SSL security (indicated by the prefix https: in the domain name) and use an account name and password that are highly secure and regularly changed. This way you can protect your money and yourself while you enjoy the convenience that the Internet offers.
Online banking offers savers and investors some excellent benefits. Ease-of-use, 24 hour access, and even improved interest rates and offers are just some of those benefits. Comparison-shopping makes it possible to pick the very best account for your needs, whatever those needs might be. The first step to opening an account online is to determine what you will use the account for. You should also research as many banks as is feasible, and compare those that meet your needs. Once you have come to a decision you will be ready to make the application and start your foray into online banking.
What type of account do you want? Internet banks usually offer a good selection of banking and savings accounts as well as some investment accounts such as CD accounts. Consider what you intend to use your account for.
How often will you access your money and will you leave some capital in your account? There is a vast range of different account types and various offers, some of which are dependent on the way you manage the money within your account.
It’s impossible to be completely prepared for the unexpected, but bear in mind that circumstances can change. Try to plan ahead so that you have a better understanding of whether you will always use your account in the same way.
The Internet offers consumers a dizzying wealth of information and resources on every conceivable topic. Internet banking is no exception, but by shopping around you can gain access to the best offers from the best banks. Use comparison sites, forums, and informational sites to build a list of the possibilities.
Bearing in mind the plan you drew up earlier, discard any accounts that don’t offer the options you require. Regardless of how good an offer is, if it’s not what you’re looking for, then it won’t offer the advantages you expect.
Also discard any online banks that aren’t FDIC insured. This provides cover for the money you have in your account – details of FDIC insured banks can be found on the FDIC website. Check contact details and, if you require 24 hour banking or telephone banking, make sure the banks you consider offer these.
There may come a time when you want to use other online banking products or facilities. Choosing a bank that only offers one type, or a very slim selection of accounts and products may limit you in the future. Look for those with a good selection of products that interest you.
Compare, Contrast, And Collate
Finally, you should have a short list of the most appropriate accounts with the most legitimate banks. Compare the ones that are left to find the best rates, those that provide the greater range of services, and consider any other favorable factors. Eventually, you should be able to whittle your list down to just one bank.
The online application process is fairly simple one. There are many online banks that do not operate street branches, saving them and their customer’s money. In these cases you will have to send them some form of sufficient identification by fax or mail. You will be advised of this during the process and it is unavoidable because they need to see proof of your identification and that proof needs to arrive in a certain format – an emailed copy is often not enough.
Online Banking Benefits
Online banking has grown in technology, security, stature, and popularity. It offers access to rates that are more favorable to those offered by high street banks because of the reduced overheads and costs. Carefully consider what you need from your account before comparing those accounts that are appropriate. Once you find the account that is most suitable for your requirements, complete the simple online application process to get your account up and running.
Online banking is a great way to save the bank money. You won’t be pestering their tellers with gripes, complaints, and questions, and if you really want to be contemporary, progressive, and “green,” you’ll forego the printed monthly statement that costs the bank a lot to produce and mail. You’re so good to help out in that way.
On the other hand, you do derive benefits from online banking. You can check up on your money 24/7/365 by connecting from home and work. You can transfer money from account to account, and if your Cousin Larry who is always out of money has an account at the same bank, you may be able to transfer a few bucks to him too. While you are doing that, check to see if the payments you schedule through online bill pay have reached the phone, cable, and electric companies yet. You work hard to get the money; you shouldn’t have to work hard to spend it too.
There are some things about online banking that cause concern.
Getting started with online banking can be tedious. You have to provide all kinds of information online to prove who you are, and then you need to come up with a special username and password that have letters and numbers, and of course all of your other online passwords are already impossible to remember, and you don’t want to write them down and make them available to prying eyes.
Once you do sign up and have a regular routine, you need to continue to protect your privacy by making sure that you don’t sign on at work or in a public place and then leave your computer unattended without signing off and closing your browser completely. And of course you are urged never to allow your browser to remember your password. That’s just inviting trouble especially if you lose your laptop in an airport or a hotel room.
Online banking also has a steep learning curve, especially for people who haven’t done a lot of financial transactions on the internet. If you’ve used Amazon or Ebay you may already be familiar with what is expected in terms of progressing from screen to screen in a payment process, but if you are new it can be unnerving. Stick with it. Most people learn.
Of course, once you learn they’ll revamp the site “to improve your online banking experience,” and then you’ll never again be able to find the link to your credit card balance or the way to see the online version of last month’s checks.
Some things will happen at the online version of your bank that will infuriate you, and they may not be the fault of the bank. If your internet connection crashes you may not know if that “Pay Bill Now” command that you pressed really went though. Or you may not have enough memory on your computer to run the online process with its Flash and Java programming and at the same time listen to music, word process, write email, and surf for vacation deals. Why won’t that screen come up? Maybe it isn’t the bank’s fault, but it certainly makes the banking experience less enjoyable.
One of the biggest concerns about online banking involves the security of your information. By following the bank’s instructions you should be able to have a safe and secure online experience, but much of the burden falls on you. You really do need a complex password that isn’t the name of the street you live on. You need to make sure that you sign out each time that you log on, and don’t have a written record of your password where others can find it. Try to bank only from a computer that belongs to you, or is only used by you. Use your home computer rather than the computer at work.
You should also be aware of a scam called phishing where crooks send out e-mails that might look exactly like e-mails from your bank. These e-mails often claim that some account or personal information is needed. You’re asked to click on a link and fill in the information. As a hard-and-fast rule, never click on a link in an e-mail and then divulge account information. Call your bank — don’t use a phone number supplied in the e-mail — and ask if the e-mail is legitimate.
A Money Market Fund is a mutual fund that is required by the US Securities and Exchange Commission to invest in low-risk, high quality securities. Unlike a Money Market Account, a Money Market Fund is not insured by the FDIC (Federal Deposit Insurance Corporation.) However, the underlying investments that make up the fund are of relatively low risk. Investment losses in money market funds have been uncommon but they are in deed possible.
Money market funds typically invest in government securities, certificates of deposit, commercial paper of companies, and other highly liquid and low-risk securities. They attempt to keep their price or net asset value at a constant $1.00 per share: therefore only the yield paid out will go up and down. But a money market’s per share price may fall below $1.00 if the investments perform poorly. While investor losses in money market funds are rare, they are possible.
Investors use Money Market Funds for a variety of reasons. Like other mutual funds, money market fund shares can be bought or sold at any time. However, money market funds also often provide check-writing privileges for shareholders. Some investors use money market funds as a “parking place” for cash between investments because money fund yields are competitive with those of most savings accounts.
Money Market Funds are regulated by the U.S. Securities and Exchange Commission (SEC). SEC rules include conditions intended to stabilize a fund’s $1.00 value. These conditions limit risk in a money market fund’s portfolio by governing the credit quality, diversification, and maturity of money market fund investments.
Only securities with elevated credit quality make it into Money Market Funds. Under SEC rules Money Market Funds may invest only in securities that have been rated in the top two categories of creditworthiness.
In addition to requiring that Money Market Funds invest only in high-quality securities, these funds must maintain a diversified portfolio. This requirement limits a fund’s economic exposure to any single component of the fund. For instance, Money Market Funds may not invest more than 5 percent of assets in the securities of any single issuer, with the exception of securities issued by the federal government.
Money Market Funds must invest in securities that are considered “short-term.” Fund portfolios must have an average maturity of 90 days or less. In fact, most funds’ actual maturity is shorter.
Money Market Funds are issued in two markets, institutional for corporations and other institutions, and retail for individual consumers.
Institutional money funds are high minimum, low expense investments which are marketed to corporations, governments, or fiduciaries. They are often set up so that money is swept to them overnight from a company’s main operating accounts. This is a way for large institutions to quickly get their money into interest bearing accounts.
Retail money funds are offered primarily to individual investors. Their primary use is as temporary holding funds at stock brokerage firms. Retail money market funds hold roughly 40% of all money market fund assets.
Retail money funds invest in short-term debt like US Treasury bills and commercial paper, come in a few different breeds: government-only funds, non-government funds and tax-free funds. You will get a slightly higher yield in the non-government variety, which will invest in high-quality commercial paper and other instruments. Money funds for individuals in mid-2007 are yielding just over 5.0%. However, instruments of the United States Government are usually exempt from state income taxes.
Typically, tax-exempt money market funds, which seek to pay dividends that are exempt from federal income tax and/or state income tax, invest in instruments issued by state and local governments.
Taxable money market fund investments include U.S. Treasury securities, federal agency notes, certificates of deposit, and commercial paper.
Commercial paper consists of short-term notes issued by a wide variety of corporations, such as domestic and foreign firms, banks, and finance companies. About 85 percent of outstanding commercial paper has received the highest short-term rating by at least one credit rating agency. Asset-backed commercial paper, which is a type of commercial paper backed by a pool of assets, accounts for about half of the total commercial paper outstanding. Money market funds hold less than 30 percent of outstanding commercial paper.
Often money market funds are referred to cash equivalent investments because of the ability to redeem the funds quickly and the general level of safety of the principal in the funds.
A money market account is a savings account offered by banks that normally earns a higher rate of interest than a normal savings account. These accounts go by the acronym MMA, but also are referred to as Money Market Demand Accounts (MMDA) or Money Market Deposit Accounts (also MMDA.)
It pays a higher rate in part because you have limited access to these funds. You are generally limited to six transfers or withdrawals per month with no more than three transactions as checks written against the account. Banks are required to discourage customers from exceeding these limits, either by imposing high fees on customers who do so, or by closing their accounts. Significant fees can accrue if you have additional transactions.
Money market accounts also have a minimum balance requirement. Some banks require at least $500; others require a much higher balance. Typically, the higher the minimum balance, the higher the interest rate.
In theory these restrictions allow the bank to invest the money with more discretion, allowing a higher return.
The mid-2007 average rate of return on a basic money market account is 2.16 percent, compared to 0.49 percent on a passbook savings account and 0.48 percent on a statement savings account. These numbers are for comparison purposes only. Check current rates at the time you wish to open an account.
Like other savings accounts, money market accounts are insured by the Federal Deposit Insurance Corporation. These accounts are usually managed by banks or brokerages, and can be a convenient place to store money that is to be used for upcoming investments or has been received from the sale of recent investments. They are very safe and highly liquid investments, and while they pay more than a traditional savings account they offer a lower interest rate than many other investments.
For money that you plan to hold for a short period (three months to a year) and that needs to be liquid, a money market account is a good place to put it.
Because MMAs vary from one another significantly in the details, here are a number of things to look for when choosing a money market account.
Investors are sometimes confused about the difference between a Money Market Account and a Money Market Fund. While the names are similar these are very different types of investments.
A money market fund is a mutual fund that carries no FDIC insurance and is a collection of short-term debt. Money market investments are comprised of various financial debt instruments with maturities of 13 months or less. The SEC requires the average maturity of investments in a money market fund to be less than 90 days, which limits risk in these funds.
When you own shares in a mutual fund you own fractional interest in the investments held by the mutual fund. The value of a share of a money market fund is generally always $1.00. However, this price is not guaranteed. The investments that in the mutual fund that comprises the value may very well drop in value under extreme conditions. In a money market fund investment it is the interest rate that will normally fluctuates, not the share price.
Money market funds are classified by the type of debt they purchase. Government money funds invest in U.S. government and agency securities. Some government money funds are Treasury-only funds while others buy a full range of government and agency securities.
A certificate of deposit or CD is a time deposit, an investment of a specific amount of money over a specific time period for a specific rate of interest. Some variations on these basics are now offered but the standard investment remains available. Banks, savings and loans, and credit unions offer CDs in amounts of $1000 up to the maximum insurable amount of $100,000, and for terms ranging from one month to five years.
You can decide how long to invest by considering how long it will be before you need the money for some other purpose, or by studying interest rate trends. If you or an advisor believe that rates will rise in the future, a short term investment is best since you can reinvest at the higher rate you anticipate in the near future. If you believe rates may fall, buy for a longer term so that you can maintain today’s higher rate while others invest at the prevailing lower rate. It may not seem like a quarter of a percent is a tremendous difference maker but over a lifetime of investing those quarters of a percent can add up to a significant amount of money.
If it is unclear what rates will be in six months or a year, a strategy called laddering can be used to keep your money consistently invested for longer terms, which typically pay higher rates, with the most flexibility.
In ladder strategies the investor distributes the deposits over a period of several years with the goal of having all of your money deposited for a long term and therefore the higher rate, but in a way that part of it matures each year. In this way you receive the benefits of the longest-term rates while retaining the option to re-invest or withdraw the money in shorter-term intervals.
You start the ladder by buying several CDs at one time but with different maturity dates. Every year one of your CDs will mature and you can roll it over into a new CD with a longer term (if rates are high) and higher rate.
Each CD is like a rung on a ladder. When the one-year CD matures, roll it over into a new CD for whatever term you decide to use for your ladder. A five year term may pay a higher rate but you may be uncomfortable with tying the money up for that long, so you may choose three years. When the two-year CD matures, roll it over into a new CD for the longest term you feel is right for you. When the three-year CD matures, do the same thing for the same number of years. You can choose a shorter or longer term when you begin the ladder, but the key is to use the same term for each one once you start rolling them over at maturity.
At the end of five years you’ll have five CDs with one maturing every year so you’ll never have all of your money tied up long-term or at lower than market interest rates.
As an example, a three-year ladder strategy begins with a deposit of equal amounts of money into a 3-year CD, a 2-year CD, and a 1-year CD. From this point on a CD will reach maturity every year, at which time the investor would re-invest at a 3-year term. After two years of this cycle, the investor would have all money deposited at a high rate three-year rate, yet have one-third of the deposits mature every year, which can then be reinvested, changed in amount or type, or withdraw.
Responsibility for maintaining the ladder belongs to the depositor, not the financial institution. Because the ladder does not depend on the bank, depositors are free to distribute a ladder strategy across more than one bank, or savings and loan, or credit union. This can be advantageous as smaller banks may not offer the longer terms found at some larger banks but smaller banks may offer better rates, and institutions other than banks can offer higher rates too.
A credit union is a financial institution that is privately owned by its members or customers. Unlike a bank, a credit union operates as a non-profit entity and does not put profitability first. Like banks, credit unions must be concerned about its deposits and lending activities and provide stability and service. Credit unions are nonprofit organizations that provide sound financial services with products very similar to banks for their customer/owners.
Not just anyone can join a credit union. Normally credit unions are formed around a community, a workplace, a religion, or some other type of bond, and the members must share in this bond. If a credit union fails to limit membership in some substantial way they risk losing their status as a credit union. Check our list of local credit unions to see if you can share in the program.
A credit union is run by members who want a voice in how the institution is operated. At the top is a board of directors who make all of decisions concerning credit union operations. The board is made up of elected volunteers who receive no pay. Credit unions have personnel working for the board much like the personnel in a bank, paid employees who manage finances and provide service to credit union members.
In its simplest form, a credit union gets money from its customers in the form of deposits and loans that money out to other customers.
Credit unions typically offer the same products and services as banks. However, some credit unions will choose not to offer every product and service because credit unions do not do the same amount of volume that larger banks do. Banks have to do a lot of marketing and offer a vast array of products to stay competitive. Credit unions will more likely only offer the products and services that a large portion of the membership is likely to use. This keeps down overhead and still serves the community the credit union was established to serve.
Some credit union products have different names than their banking counterparts. Your deposits are called shares because they represent ownership (like shares of stock) in the institution.
Credit unions may not offer all of the products that a bank does, but that doesn’t mean they don’t have clear advantages. Because credit unions tend to focus on service over profitability, the rates can be better at a credit union. On the other hand, if you are a rate shopper you may not find the attractive CD rates that a bank uses to attract deposits. However, a long-term relationship with a good credit union can be profitable.
Credit union deposits are insured very much like your bank deposits. The organization that insures the two types of institutions is different. However, the quality of insurance is the same. The National Credit Union Administration (NCUA) is the federal agency that charters and supervises federal credit unions and insures savings in federal and most state-chartered credit unions across the country through the National Credit Union Share Insurance Fund (NCUSIF), a federal fund backed by the full faith and credit of the United States government.
Do you need short-term savings? Yes, you most certainly do. And it’s likely you need far more than you have stashed away somewhere. Short-term savings is more than the few hundred you stick in a statement savings account at your local bank to cover next year’s Christmas presents. True short-term savings is money for emergencies and planned expenses in the next three to seven years. And you definitely need to be planning and routinely putting money in accounts to build up this type of savings.
Why Short-Term Savings?
If you thought you were doing fine to pay your bills every month, you are doing well. You’re just not doing well enough. It’s not enough to get by from one paycheck to the next, although increasingly more Americans are doing exactly that. You need to be planning for the items life throws at you or that you want to do without the element of surprise, and to cover those, you need money sitting safely in an account. Lots of money. Otherwise, you can get caught in a nasty trap of credit card debt.
Consider this: You save a few hundred when you can (which is almost never), but the rest of your money goes to cover all the things you need to have a productive life. Then, one day, your car breaks down, you decide to get married, or your wife demands you take her on a vacation for the first time in fifteen years. Your $300 in savings isn’t going to cover it and the other options involve borrowing money from someone else.
And when you borrow money, you have to pay for the privilege. If you borrow it from a credit card company by using a handy Visa card, you’re going to pay dearly – possibly for the next five or six years. Not to mention the money you’re paying on something you did three years ago isn’t going into savings for the next round of emergencies.
But wait! Maybe you are a good financial citizen and are saving correctly. You’ve been investing for years in the stock market and you even own some real estate that is appreciating nicely despite the slowing market conditions. Yes, you’re doing well to be saving, however, the stock market and real estate are savings best for the long-term. Looking at the same above scenario, you need money now.
You have two options. You can sell stock, pay commissions and possibly even take a loss if the market is low, or you can sell real estate which will probably take two to four months to complete and you’ll waste a lot of money in commissions and closing costs. Not to mention your wife will be furious she’s had to wait that long for a lousy trip.
So it’s obvious you not only need money stashed away for the short-term, you also need those funds to be readily available the day you need them. The term for this sort of access is liquidity and your short-term savings need to be stored in a variety of short-term instruments ranging from CDs and money market funds to even something as generic as a traditional statement savings account.
Short-term savings is critical, and if you need helping figuring out where to begin or just want to pat yourself on the back for a job well done, you’re in the right section. You’ll find all of the information you need to make comprehensive (and correct) decisions about taking care of your investments so you’ll never have to worry about having cash when you need it.
Banks send them to their customers once a month through mail. Many customers, particularly those who use online banking, may throw them in the trash, but it’s best to give them at least one look-over for accuracy. Most consumers should keep their financial records, including bank statements, for a period of three years. The bank statement, the printed documents that detail all of the transactions one has made in a period of time, is a essential report that should be maintained and reviewed. Most statements will also include the canceled checks or copies of these checks, if checks were used during the month. This seemingly annoying piece of paper is most certainly worth a person’s while, at least when it comes to ensuring that their personal financial records match their banks.
The first portion of the bank statement will contain the dates of the period it is covering. This date is important, because if there are any discrepancies with electronic transactions, a person only has 60 days from this date to report the problems to the bank. If the discrepancies are not reported within this 60 day timeframe, the bank is not legally obligated to do an investigation. Discrepancies with check transactions should be resolved as soon as possible as well, though there is greater latitude in the amount of time a person has to report them. Bank errors may not be a common event, but errors in the amount of deposits, amount cleared on a check and the time transactions are recorded happen more frequently than you might expect.
The next section that is of importance on the bank statement is the summary. This is usually at the top on the first page of the statement. It stays true to its namesake, since it condenses pertinent information pertaining to one’s account. This could include the total amount of deposits, beginning and ending balances and withdrawal information. Through the summary a consumer can quickly get a picture of their financial outlook. For example, if the ending balance is significantly less than what they expected, they already know ahead of time that there might be some discrepancies that need resolving. In this section of the statement, don’t forget to review any costs or fees levied by the bank. Fees for bounced checks or for maintaining a required a minimum balance should show prominently. Any interest earned on the account will also be present in the summary section. At this time you will have the opportunity to check for accuracy, update your records and evaluate whether the account you have is the right bank account for your needs.
Finally, there is the transaction section. The transaction section shows all of the action that has occurred during the statement period on one’s bank account. This includes information about withdrawals, deposits or any extra fees associated with maintaining one’s account. With each of these transactions, customers see the name associated with it, the date it occurred and the total amount of money involved. Some transactions may even have additional information, such as phone numbers. This is a great resource to have if an individual creditor must be contacted to resolve any discrepancy.
When a person is finished with their banking statement, they should store it in an accessible yet secure location. After enough time has elapsed and the records are no longer needed, shred the statements before they hit the garbage bin. This is because occasionally thieves will search trashcans looking for any type of information they can use for creating their new identity. If the information is shredded up, they will not be able to do these things. Record-wise, consumers do not have to worry, at least if they have online banking. This is because with an online banking account, the bank will provide electronic copies of their statements.
Of course, if a person does not have an online banking account, they need to either consider getting one and/or scanning the bank statement into their computer before discarding it.
Online banking is one of the newest forms of banking, and it seems every traditional (and not so traditional) bank is offering online services or completely automating their activities on the internet. It may be that you have only a few bills to pay every month or that you’re still learning to navigate the web effectively. But if you are online and deal with financial matters on a semi regular basis, you’re probably ready for online banking.
Online banking is simply banking over the internet. The term can refer to online bill pay and traditional account services that can also be done at a banks store front location. Online banking can also mean loans, investments and other instruments are applied for, set up and managed online. With online banking, you can easily compare interest rates between loans and companies, and you’ll often finds rates are more favorable when you search online as you’re able to access small and large banks not in your local area as well as banks completely online.
If you already have an account at a local bank, be it large or small, there is a good possibility that you are only a step or two away from online banking. Increasingly banks are offering more services online not only as a convenience to customers but as a means of saving money. Transactions processed online cost less than transactions processed in a bank office as online transactions don’t require a teller’s assistance.
Another major advantage of online banking is the ease of use and the freedom it provides. If you keep unconventional hours or just like to pay bills in the middle of the night, you can. Having a burning itch for a new car at 2am? Compare rates and even arrange financing before the sun comes up. Online accounts are open twenty-four hours a day, seven days a week. And most online banking accounts allow you to transfer money between accounts, pay bills and take care of other small maintenance items at your convenience without ever setting foot near a bank or ATM.
Are You Ready for Online Banking?
There are a few signs that it may be time to move your banking online.
You’re interested in trying it out. Even if you’re not sure you want to give up your checkbook and face-to-face transactions entirely, you can try online banking and still have the option to switch back and forth as you decide if you like it. You can also easily close your online accounts if online banking proves to be bothersome. It is more likely, however, that you’ll find online banking far more convenient than you imagine.
You already know the internet. If you can navigate a few places online, you can probably handle the amount of web surfing required for online banking. If you have never heard of a modem, internet service providers or know how to pull up the internet, online banking may be better after you’ve learned the ropes. Chances are, however, that you’re reading this online, so you must know what you’re doing. You should also be comfortable discussing your finances online. If you still keep your money buried in the backyard, online banking might not be for you.
You pay lots of bills. If you just write one or two checks every month, the cost of postage isn’t daunting. But if you’re writing out ten or twenty checks every month complete with account numbers and pressing hard to make good carbon copies, the hand cramping and tedium may very well be enough to drive you online. Online bill pay can save you countless amounts of time once you invest the time initially to have it set up. You can also check your account balance at a whim to see which payments have processed.
You use money management software. If you’re already keeping track of your finances using Quicken or Microsoft Money, online banking is the next logical step. Many online banks will even export data to your hard drive easily or automatically when you log in to your online accounts. This makes money management a breeze – especially at tax time.
There are very few disadvantages to online banking. The most daunting is finding out how to get the service set up and then working through those steps to open your own online accounts. If you already have bank accounts, speak with your banker or visit your bank’s website to find out if online banking is just a matter of filling out a quick online form. Many banks only require existing customers to activate accounts which takes less than an hour. While this may be slightly longer than paying bills by hand, the initial time you invest setting up the service will pay off substantially down the road.
A Debit Card combines the utility of an ATM card and some of the functions of a credit card. Also called a check card, the card will often bear the logo of Visa or MasterCard, and those companies process the transactions that take place outside of an ATM machine, like retail stores, restaurants, or phone and internet purchases. Though a debit card looks like a credit card there is no credit involved.
The debit card is issued by your bank or other financial institution in conjunction with an account, and the amount you can spend on it is directly linked to the available balance in that account. Increasingly your transactions are debited in something close to real time from your bank account.
When using the debit card in a store the customer may swipe or insert their card into a terminal, or they may hand it to the merchant who will do so. The transaction is authorized and processed like a credit card is, and the customer verifies the transaction either by entering a personal identification number ( PIN ) or, occasionally, by signing a sales receipt.
When you present a debit card for use in a retail store the merchant will often as “debit or credit?” Your answer determines whether the store will process your transaction using a interbank account or a merchant account. A merchant account is one of the credit card companies like Visa or MasterCard. An interbank network is typically used for ATM processes. The interbank network is essentially a computer network that connects the transaction of various ATMs and therefore allowing access or account use even if the ATM is not owned by the financial institution that has issued the card of the consumer using that ATM.
If you choose the credit or merchant account option you will normally have to sign a receipt as you do with a credit card purchase, and there is probably a higher cost to the retail operation to process the transaction in this way.
If you choose to use the debit or interbank network method, you will probably be asked to put in your PIN number. Either method should have the same result for you.
Although debit cards are made to be used seamlessly in place of a credit card, they are not acceptable for some kinds of purchases, particularly if they are large purchases, or anticipated purchases. Even if you have $8000 in the associated account, the bank may only process purchases up to a smaller amount. Check the terms of your own account before trying to buy an expensive item. Debit cards are also sometimes rejected when they are used for purposes of establishing future payment. For example, a hotel stay in an upcoming week may ask for a credit card in order to establish the ability to pay. A debit card may not be accepted. Car rentals are often exclusively made on credit cards.
The use of debit cards has advantages and disadvantages.
Individuals who have poor personal credit and do not qualify for a credit card can enjoy many of the advantages of a credit card when using a debit card.
For individuals who have had problems with running up large credit card debts, a debit card is a more responsible way to enjoy the ease of plastic transactions.
Use of a debit card concludes any transaction on the spot. There is no credit card bill to pay later, and no check writing, a process that takes several days to complete.
Debit cards are actually better than debit cards for getting cash because you are accessing your own money, not borrowing money. A debit card transaction for cash at an ATM is quick and easy and inexpensive.
On the other hand, if you do not keep careful records of your check writing and debit card transactions, overdrafts can occur which bring along with them expensive bank fees.
Learn to always use credit and debit cards responsibly, and they both serve useful purposes.
Most people are aware of credit reporting bureaus, which are agencies that determine a person’s credit worthiness through a numerical score between 300 and 800, (with 300 being the worst and 800 being the best). However, few are knowledgeable of ChexSystems, an organization that has the same concept as credit reporting bureaus. They do not send a score, but they do let banks know whether or not a person has handled their bank accounts well. If a person gets a bad report from ChexSystems, they will have great difficulty in trying to acquire a new checking account.
ChexSystems is a consumer reporting agency that acts as a check verification service for participating institutions. ChexSystems provides information on a how a consumer has managed deposit accounts at banks. Some of the information that is aggregated into the database includes data regarding suspicious activity is included, bounced checks, abandoned accounts that have delinquent balances, and fraudulent activities.
What can a person do to prevent getting a negative report from ChexSystems? First, they should avoid ‘floating’ checks. This is the process of writing a check when a person does not have enough funds to cover the check in their bank account. Floating used to be a way of getting by for people who live financially close, but nowadays banks clear funds instantly, so it is no longer effective.
Secondly, a person should make sure that they are fully aware of all of the fees associated with their bank account, so they know how much they need to cover should something arise. Even a minor bounce from not being able to pay bank fees could result in a negative report from ChexSystems.
Thirdly, one needs to quickly clear any discrepancies on their statement with their bank. This is because unfortunately, ChexSystems cannot make any determinations based on transactions that are legitimate and those that aren’t until they are given further information from the bank. This is why any type of unwelcome transaction, even if it’s just one or two, needs to be addressed as soon as possible.
Finally, if there are any issues with bouncing, a person needs to pay the necessary fees as soon as possible. Even if ChexSystems reports the initial bouncing, banks may be more lenient if they feel that the bouncing occurred in error.
If a person does receive a negative report from ChexSystems, they can try to clear their banking reputation by going to checking school. The name of this special program is called Get Checking. Members attend just one six-hour class that teaches them how to properly manage their debt. If they do well on the test given at the end of the class, they will be able to open a checking account at the bank associated with the program. The price of this wonderful opportunity is less than $50.
What if a person has a bad ChexSystems reputation because of actual fraud? Well, real check fraud can be hard to define. Banks may not consider bounced checks for survival fraud, especially if the amount is small. If this is the situation, a person should try to explain themselves to the bank and make the necessary payment arrangements to clear their name.
On the other hand, if thousands of dollars have been bounced through check fraud, it will be significantly harder for a person to get themselves back together. In these situations, the person needs to talk to a lawyer about what the best course of action is. They may also want to consider counseling to address why they felt the need to commit fraud in the first place. Finally, they should also still try to make payment arrangements, if they weren’t already forced to through a legal proceeding.
Of course, none of these actions can ‘guarantee’ a person will be able to get placement within Get Checking, but it at least gives them a chance.
A checking account hold serves to let the bank know for sure that a deposit is legitimate.
In October of 2004 Congress passed what is called Check21 legislation that allows banks to process copies of your checks, not the checks themselves. This is intended to speed up the process of clearing payments out of one account and into another, but until it is fully implemented it creates a lot of uncertainty as to the length of time a check is processed.
There is also a tremendous amount of fraud associated with checks in the banking system. Forged checks, stolen checks and forged signatures, and “float” schemes where checks are written and then the funds are unavailable create hundreds of millions of dollars of losses for banks and consumers every year.
One of the ways a bank will attempt to limit losses due to checking fraud is by instituting check hold policies. Instead of immediately crediting your account, the bank “holds” your check until they are absolutely sure that it has cleared at the other end.
These hold periods are usually just a couple of days, but in some instances may last up to a week depending upon the circumstances. These policies have been updated in recent years as banks attempt to stem losses from fraud, and some customers are surprised to find that their funds are not available immediately.
Check with your bank to find out what their specific policies are. If you find your account overdrawn on Wednesday because a check you deposited on Monday will be held and unavailable until Friday, the bank may also charge you a fee for being overdrawn.
Banks will differ greatly on hold times, since the Federal Reserve Board sets the maximum days various types of checks can be help but does not set a minimum number of days. For instance; rules governing large out of state deposits allow the local bank to place a hold the availability of these funds for up to 11 business days.
Your check deposits may be subject to a hold based on a number of factors.
One may be the kind and location of the paying bank. If it is an out of state or distant bank, or a smaller bank that doesn’t yet participate in Check21 type processing, your deposit may be held.
Deposits made at an ATM may be subject to a hold.
The check cannot for any reason be verified at the financial institution from which it is drawn.
A check is being redeposited that was return unpaid.
You have overdrawn your account repeatedly in the last six months.
Checks deposited on a given day total more than $5,000, or a check may be from a foreign bank.
There is an emergency, such as failure of communication or computer equipment.
Your account has been recently opened. Because fraud often involves the opening of a new account, checks are sometimes held for as long as a week until a customer develops a track record. This period may last thirty to ninety days.
There are many reasons why an individual bank will hold deposited checks. When you open an account ask for the specific circumstances so you won’t be surprised.
If checks are held some banks will tell you how long they will be held at the time of the deposit. Some banks even supply a deposit receipt that tells you the exact date when the check will clear.
Typically, your bank will credit your account to show the deposited funds as part of your balance. However, you won’t see those dollars in your “available” funds until the hold is lifted. In other words, these funds aren’t available for you to take as cash, and a check written against those funds would bounce.
A Certificate of Deposit, more commonly referred to simply as a CD, is a stable and virtually risk free method of investing or saving money over a set period of time. The CD market offers investors a simple method of generating a profit and because the principle sum you invest is almost always FDIC insured, you do not stand to lose any of that sum unless you cash out very early on in the term.
What Is A Certificate Of Deposit?
A CD is similar to a bond – it is essentially a promissory note that is issued by a bank. Investors purchase a certificate for a given period of time and are offered a fixed annual interest rate. There is a good deal of flexibility available in the CD market with terms lasting from one month up to five years. The investor is also offered a choice of purchasing a small CD with a value of up to $100,000 or a jumbo CD of $100,000 or more.
Better Rates Than The Money Market
Because you are expected to hold your CD until the term of the certificate you should access rates that are more preferable than those of a liquid savings account. It is possible to withdraw your investment early, but there may be a substantial loss in the interest you have earned when you do sell. Before deciding on a term and value for any CD you should consider that for longer term certificates you will only receive the interest you have accrued, at the end of the term. You will, however, be required to make any necessary tax payments against the value of the annual interest every year.
Missing Out On Increased CD Rates
CD rates offered by the banks change regularly according to market conditions. This means that a CD may offer what looks a favorable interest rate now, but that interest rate may not look so good mid-term. There are methods of avoiding some of this disappointment – a bump-up CD usually enables you to bump up to a higher interest rate once during the term of the certificate. The price for a bump-up CD is that you receive a lower starting interest rate than is offered on a similar term, standard certificate for the same investment level.
Laddering Your Investment
Another method of avoiding missing out on an improved CD market is using an investment technique known as laddering. Rather than placing your entire principle sum in a single CD, laddering means purchasing CDs of varying lengths so that they come to term every three months, six months, or every year. As each rung of the CD ladder matures, you then reinvest the capital so that it makes up the longest term in your ladder, and so you continue to invest, and continue to reap the interest on a regular basis.
Getting Better Rates
A longer term CD offers the better interest rates. Similarly, the more you invest in a single CD the higher the interest rates are likely to be. By using an online bank rather than a high street branch you should be offered better rates. This is because the overheads of running a bank, or any business, over the Internet, are considerably lower. Do shop around for the best deals but always ensure that you are comfortable with your final choice. As well as standard Certificates of Deposit there are a number of specialist types.
Rolling Over Your Investment Capital
Once a CD reaches term, you will receive the interest that you have earned over that term. You can, of course, choose to take the capital as well, at that point. Most CD banks offer their certificates so that the initial capital can be rolled over for the same term at the current rates on fruition of the original agreement. This prevents you from having to manage your CD portfolio on such a close basis.
Is A CD Right For You?
A CD offers improved rates over the money market and in exchange you let the bank hold your money for a specific period of time. The capital you initially invest is FDIC insured but penalties are imposed for those that cash out early. If you hold a CD for the majority of the term then you will lose a percentage of the interest you have earned so far but none of the investment capital. In contrast, with some CDs, if you cash out very early on you may lose some of the interest that you have yet to earn, meaning that it will take a little of your initial capital away. The moral of the story? Only invest money you can live without over that period of time.
When individuals wish to guarantee payment to someone they think of these three types of checks but often don’t know one from another. Let’s attempt to set them straight.
A Certified Check is a type of check where the issuing bank guarantees the recipient of the check that there is enough cash available in the holder’s account to be transferred when the check is used and also that the account holder’s signature on the check is genuine.
Certified checks are typically used in situations where the recipient is unsure about the creditworthiness of the account holder and doesn’t want to the check to bounce. Because certified checks become the issuing bank’s liability, banks will typically set the amount of money listed on the certified check aside in the holder’s account so that there will always be money available to honor the check.
There are some downsides to using certified checks. Banks will usually charge a fee for certifying checks and the depositor usually cannot place a stop payment order on a certified check.
A Cashier’s Check is written by a financial institution on its own funds. It is then signed by a representative of the financial institution and made payable to a third party. A customer who purchases a cashier’s check pays for the full face value of the check and usually also pays a small premium for the service. These checks are secured by the funds of the issuer – usually a bank – and include the name of a payee (the entity to which the check is payable), and the name of the remitter (the entity that paid for the check).
An individual could use a cashier’s check instead of a personal check to guarantee that his or her funds for payment are available. A cashier’s check is secured because the amount of the check must first be deposited by the individual into the issuing institution’s own account. The person or entity to whom the check is made out is then guaranteed to receive the money when cashing the check.
Cashier’s checks differ from certified checks in that the funds owing on a cashier’s check are taken from the issuer’s account, while the funds owing on a certified check are taken from the remitter’s account.
Because a Certified Check and a Cashier’s Check are written on funds held in a financial institution, and because they are numbered and registered by that institution, both can be replaced if they are lost or stolen. However, this is often an arduous process and due care should be taken to insure that this does not happen.
A Money Order can also be issued by a bank or other financial institution, but they are also available in many other places like convenience stores or grocery stores. However, the largest issuer of money orders is the US Postal Service, which devised the money order as a relatively safe and easy way to send funds in the mail without resorting to cash.
A money order is a payment order for a pre-specified amount of money. It is a more trusted method of payment than a personal check, because it is required that the funds be prepaid for the amount shown on it. So, like a Cashier’s Check the money does not come directly from the payer, but from a third party. This inspires confidence even if the money order comes from a 7-11 store.
Unlike Certified Checks and Cashier’s Checks, Money Orders are limited in the amount of money they can represent. US Postal money orders have a maximum value of $1000, and International Postal money orders cannot be for more than $700.
You probably have noticed that many brokerage houses are expanding into areas other than investments. This is a natural expansion for many brokers as money and banking become more virtual, and the new revenue streams help to offset the discounted prices for trades. You’re already invested with your broker, should you use him for your banking, too?
The kind of banking offered by brokers is a bit different from traditional banks. It is more akin to online banking, but with a twist. Brokers offering banking services will allow you to write checks from your account – not your long-term investments, but a new checking account you’ll open with the company.
You’ll also get a debit card to use to access your funds in stores and withdraw cash from ATMs. It is also possible that the checking account will be a money market account which would offer you a higher rate of interest on your money than a traditional bank’s checking account. You may be limited to the amount of checks that are handled without a fee but the increased interest rate on these accounts may well offset any incremental charges.
A brokerage is already in the business of savings, so savings vehicles are a given – although minimum investments may be high. You may also be able to borrow against your holdings, but this is different than a traditional loan. If the value of your portfolio dips with a dropping stock market, you may be asked to sell shares or pay cash to make up any difference between what you have borrowed and the current value of your holdings. For this reason, it’s always wise to borrow against your holdings sparingly and limit funds to 10-15% of your total.
Another appealing aspect of banking with your broker is the simplicity of having all of your money in one place. All of your accounts are easily accessible and paper statements are reduced. If your broker keeps records online, having all of your information in one place is especially useful at tax time.
Drawbacks of Banking with your Broker
Brokerage banking is still in its infancy, and there are certainly some areas where the systems need to improve.
Most brokers don’t have ATMs which means you’ll be charged a hefty fee for using another bank’s ATM. Your own broker may also charge a fee despite the fact that you had no other option.
There are no branches. While there may be local offices of company brokers, those individuals aren’t waiting on you to drive by with a few checks to cash. You’ll also be out of luck if you need a cashier’s check or money order. Limited services in this area are hard to avoid.
Your broker was generally not be able to accept a third party check. So long as you are only depositing Social Security and paychecks this won’t be an issue, but when it comes time to deposit your birthday checks, you may need an alternative. Many brokers are changing this process and can handle most deposit types.
Automatic bill pay may not be available through the broker. If it is available, it may not be fully integrated online and you may have to pay bills using a touchtone phone. The service may also charge you a fee. Study the terms and you may want to use more than one account for electronic bill pay by transferring funds once a month from the high yield account to a lower interest bearing checking account that features electronic bill payment.
Canceled checks may not be returned, but you will most likely be given a carbon checkbook to help you keep track of spending and have copies of your checks for documentation purposes.
Minimums and fees may be challenging to understand. With brokers, your minimum balance may include both your checking and your investments. When these fall below a certain limit, you’ll most likely have to pay a fee. But not only will the fee vary, the minimum balance may be hard to track as the value of your portfolio is constantly fluctuating. The minimums can also be set very high to avoid fees. For example, one broker offering banking service has a minimum balance requirement of $100,000 to avoid paying fees for ATMs.
Compare the rates posted and the services provided. Look for the attributes of an account that best match your spending and investing profile. With a little research, you can maximize the benefits of these accounts and earn more money over time.
Even though they employ some of the most sophisticated and advanced software and machinery, banks are still known to make mistakes. Typically they’re a result of human error somewhere down the line, but the reason for the error is virtually irrelevant; the fact is that they do happen, more frequently than you probably imagine. The temptation when a bank error is in your favor is to do nothing, but once the bank finds out about an error (which they invariably do) you are legally required to repay the money. When you do discover an error, keep your records about the error, contact the bank and keep the records regarding any contact or resolution as well.
Possible Errors And Causes
Errors occur for a number of reasons and manifest themselves in various ways. Look for the obvious errors first. It could be that a company has made an slip-up and you have received a payment rather than somebody else. It is feasible, although the possibility is remote, that the bank themselves have your details mixed up with another account holder. Again, you would receive payments that you aren’t due to receive. Debiting errors are rare, but are more common if you debit cash, where human error becomes more of a possibility. Most errors and disputes are either the accounts being posted to the wrong customers or the amount being entered incorrectly. ATMs may also play a role in the miscalculations, registering a withdrawal incorrectly, with the result either finding in your favor or not. Extra charges or additional deposits that are not accounted for are the most glaring problems. Other problems that occur with some frequency include inaccurate deposit amounts and deposits not applied. Errors regarding the date and time posting payments and deposits are also commonplace but often don’t lead to a measurable financial loss and therefore often not disputed. A final error that may occur but is significantly harder to review is incorrect calculations on interest earned. The bank statement should include the interest rate and the amount the rate was paid on, again this is an error often overlooked.
Receipts And Records
You should always keep copies of banking receipts for a reasonable length of time. As long as you review your records not less than every other month, you should maintain all financial records for three years. This is especially important if you are responsible for dealing with your own taxes or accounts, but it is important for everybody to keep track of their finances and ensure nothing goes awry. Keeping receipts and documents lets you check information whenever you see fit and you should, at the very least, keep the receipt until the funds have cleared into your account. It is better to keep them for longer periods as opposed to quick reviews and off to the garbage, if needed, you can refer back to them during any time. The receipts help prove that a bill may have been paid and the time it tool place. It will also clearly verify the accurate amount. Many errors and disputes are either the accounts being posted to the wrong customers or the amount being entered incorrectly. In either case, the physical receipt will undoubtedly clear up the confusion.
When you dispose of bank records and receipts you should do so securely. Shredding is vital and using a shredder that cuts across and down the paper is the only secure way to shred a document that contains personal information such as your bank details. Identity theft is the number one registered complaint for fraud by the U.S. government. Identity theft is more difficult to repair and can be very costly. Always maintain your existing financial records securely and dispose of them securely.
The Quick Inquiry
Keeping debit and credit receipts accessible enables you to accurately question any mistakes. If you have deposited money into your account but that money has not cleared, then having a receipt or some other form of legitimate and verifiable document will make the inquiry process much smoother. When you do have a question regarding a possible error, start your inquiry on the telephone because in some instances the error may be identified and resolved through a quick account check. It may be necessary to either send documented proof (send copies and request a signature) however, it is uncommon that the dispute will require anyone to meet with a representative from the bank.
Why You Should Question The Banks Mistakes
If you spend any money that erroneously appears in your account then you are running a financial risk. The bank or the company responsible for making the error will inevitably discover it one way or another. When they do you are legally required to repay that money. When the financial institution causes the error, a quick remedy helps alleviate the distress or a chain of problems forced by a simple error. Keeping bank receipts and other documents helps to ensure that the inquiries are handled expeditiously and the resolution process runs as smoothly as possible. When you do handle your financial records, store them securely and dispose of them securely.
Banks make money by accepting money from you and paying you interest on the money and then loaning it out a higher rate of interest. That sounds like a good way to make money, but banking is competitive and there is a bank on every corner trying to do the same thing.
So, banks have to come up with other ways of raising money, and not all of them involve cutting costs or increasing the spread between the interest rates they pay on an account and the interest rate they return on loans and investments. Some of them have to do with getting you to pay more for services, and for problems like negative balances in your checking account. Here are some of the most common fees charged by banks.
You’ve probably never bounced a check, but lots of people do. Unless you are have the tenacity of an accountant it’s easy to forget that ATM withdrawal you made late Saturday night, or the online bill payment that comes due every 15th of the month, or the check card purchase you made at the mall. In your mind you still have $200 in your account, but in your bank you only have $14.62. That’s going to be a problem if you write a check for $80. Chances are that the bank is going to cover your check and not let it bounce. Aren’t they nice? Maybe, but that isn’t why they do it. They do it because they want to charge you between $20 and $35 each time your balance goes negative, and then they want to charge you $5 every day until you have a balance above $0. This is called Overdraft Protection and banks make a lot of money on it. They’re protecting you! Now pay up.
I have to pay my daughter’s college tuition bill tomorrow or she won’t be able to register for next semester’s classes. I can get the money into the school’s bank account on time if I do a wire transfer. There isn’t really any wire involved in a wire transfer, but there is a fee involved. Normally a bank will charge you between $10 and $30 to transfer funds from your account to someone else’s.
Many banks will charge you a monthly service fee just to have an open account at their bank. These fees vary from bank to bank but they are rarely less than $5 and rarely more than $15. Nevertheless, they build up from month to month and year to year. Some banks allow you to avoid the fee if you keep a minimum balance of $1000 or more. Bill Gates, why are you reading this article? The actual minimum balance requirement may be more, or less, but if you struggle before a payday to keep your balance above water, you may get socked with a minimum balance fee.
Some banks will charge you to use your ATM or check card. It’s so convenient in the grocery store or casino to want a little extra cash or to pay from your checking account instead of with cash, but if your bank charges a fee, be careful.
You may also have a credit card through your bank and they may charge you an annual fee just to see if you are paying attention. If you have good credit it isn’t difficult to find a card with no annual fee.
Banks also will sprinkle your financial life with unexpected fees in unexpected places. You may incur a fee for writing more than a specified number of checks per month, or for using a teller more than three times a month. You may pay extra to bank online.
Large and small banks lure you in with signs in the window where the word FREE is larger than any other word. When you go inside make sure that you understand what is FREE and what has a FEE so there won’t be any surprises. Look here at www.selectrates.com to compare the various savings vehicles available and choose the best savings for that maximizes return and reduces cost based on your financial lifestyle.
An ATM card is a plastic card that looks like a credit card. It allows you to do the same things at a bank machine or Automatic Teller Machine (ATM) as you would at the bank itself.
Most banks and other financial institutions like credit unions offer ATM cards. They are usually connected to your checking or savings account. When you go to a bank to open an account, you may be given an ATM card automatically. If you are not offered an ATM card, ask for one.
The ATM card allows you to do many of the things you would do at the bank but gives you round the clock access to funds and information about your account. The card also has benefits for the bank inasmuch as the machines replace human tellers.
You can get cash, deposit checks or cash, check account balances, and receive information about your account and transactions by using your ATM card and the password to your account. This password is called your Personal Identification Number, or PIN.
Because ATM machines are almost always part of an interbank network, an ATM card given to you by your bank can be used to receive cash at ATMs belonging to other banks. You can use ATMs that are located at all of your bank’s locations as well as those at other banks, grocery and drug stores, office buildings, and street corners across the United States and worldwide. However, there is often a service charge of $2.00 or more to use an ATM that does not belong to your bank.
You can also use your ATM card to make purchases at some retail stores. If a store, particularly a drug or grocery store, has an ATM machine, they may also accept an ATM card at the register. You simply swipe your card through the credit card processor and then will have to punch in your PIN. Often the machine will offer you the opportunity for cash back along with your purchase. This is a good way to avoid fees for using an ATM for cash that does not belong to your bank if you actually need to purchase something in the store.
Unlike a debit card, an ATM card can only be used for transactions in person (and not by telephone, fax or internet), as it requires authentication through your personal identification number or PIN. So, it cannot be used at merchants that only accept credit cards.
This leads us to the most important thing about an ATM card. ATM cards are not credit cards and can only be used for withdrawals or purchases that are covered by the amount of money that you have in your account. If you try to withdraw $60 from an ATM when you only have $30 remaining the transaction will be denied.
Annual Percentage Yield (APY) is the term used to express the annual rate of interest on an investment that takes into account the effect of compounding. Normally an investment is sold on the basis of a Nominal Interest Rate, but the nominal rate does not take into account the effect of earning interest on the interest that you earn as you go along.
Compound interest is the process of adding interest earned on an investment account back to the account so that interest is earned on the interest that accumulates plus the principal in the account. To measure compound interest you need to know what the interest rate is and how often the interest is compounded ( added to the account ).
Annual Percentage Yield is different from Annual Percentage Rate (APR.)
The Annual Percentage Rate is the percentage rate that you, a borrower, pay to a financial institution. That interest is paid by you on a monthly basis, and so is calculated differently.
An Annual Percentage Yield is paid to you, an investor, and is based on the concept that interest paid daily must be compounded daily. However, not all APY investments compound daily. Some are compounded monthly or quarterly. Always know how often the investment compounds before making any investment. Obviously, the more often the interest compounds, the higher the return will be since interest paid daily is added to the principal.
Any Annual Percentage Yield is based upon a nominal interest rate, which is the basis of the initial offer of investment.
Annual Percentage Yield is calculated using what is called the Effective Annual Rate formula. APY = (1 + r/n) n – 1 where r is the stated annual interest rate and n is the number of times you’ll compound per year.
You can insert your own variables for the nominal interest rate and the number of times the interest will compound, but as an example, a 6% nominal interest rate-compounding daily will result in an APY of 6.183%.
So, if two Certificates of Deposit (CDs) pay the same nominal interest rate, choose the one that compounds most often. If one CD compounds only at maturity, that CD will have a much lower APY than a CD that compounds daily, monthly, or even quarterly.
Remember also that in order to gain the full effect of compounding you must allow the daily or monthly compounding interest to remain in the investment. Some CD offerings allow you to take monthly payments of the interest earned on a CD. While this may be useful cash to have on hand, you no longer earn interest on that interest.
There are few banks today that don’t have an online presence. Almost all banks have recognized the simplicity and cost advantages of online banking and have begun offering some form of online banking and online bill pay to their customers. As these services evolve, online banking becomes increasingly easier to use and as many customers are finding out, online banking isn’t just easy, it’s cheaper, too.
If you’re like most people, you already have a few accounts open with a traditional bank. You might be a customer of a regional bank or a large nationwide chain. Even if you’re a member of a credit union, your accounts are most likely accessible in the same way as traditional banking accounts.
Your bank most likely offers some form of online banking already. But even if their online presence is still developing, there are ways to access your accounts easily over the internet to simplify your own record keeping and account options.
Pay Bills Online
There are several ways to pay bills online if your current bank does not offer the service directly. Websites such as Yahoo, Microsoft Money and CheckFree allow you to send payments to various companies and institutions and access your traditional accounts on your behalf. Some bill pay services require you to download software and install it, or you may be able to take care of your bills completely over the internet. There is often a fee for this service and that fee may be higher than some of your other options. Read the options and fees associated with any transaction before jumping into any of these programs.
If you use Quicken or Microsoft Money, many of the traditional banks allow you to connect that software to your bank account. Financial software such as these helps you keep track of your payments, deposits and other transactions. They allow you to compile information to develop budgets and keep track of your spending in various categories. By connecting the programs directly to your bank account, you can work with all of your data on your home computer.
You may also be able to pay bills through your software as Quicken connects to your bank using the same program, CheckFree, which you can use to pay bills independently. The major advantages of using a financial program setup, however, are that your bank charges less for the bill pay than independent services, and you’ll also have nicely consolidated information come tax time.
Increasingly, banks of all sizes are offering complete online banking. This means you can navigate to the bank’s website online and sign into your accounts without any software downloaded to your computer. This sort of internet banking can be done from any computer in the world as you need only a login id and password.
With full internet banking you can see your accounts in (almost) real-time, pay bills, transfer money and take care of any number of routine account maintenance items. While some banks are not completely online yet, it is likely they will offer a complete range of services shortly as online banking is not only simple and cost effective for customers; it’s cost effective for banks, too.