Picking the right bank account can be like staring down the counter of a convenience store. I stop in for a quick snack and there are forty different varieties of chocolate bars staring me down: caramel, nougat, peanut, crispy wafer. So many variations of the same thing that I don’t know what they all are anymore.
I get the same feeling when I look at my bank accounts…all five of them, and my other investments. What happened to the basic checking account? The type where you went to the bank, spoke to a person, and received a toaster.
But so many of us out there, at this time, are not necessarily trying to increase our wealth, we’re holding on to what we have its value…its purchasing power. To keep up with inflation, stagflation, or even deflation, consumers need to be educated as to what type of candy bar they are buying – or better yet, what type of account they are really putting their money. Most of us out there have a checking account but how many of us know what a checking account really is?
A traditional checking account is a demand account, meaning that the funds are always supposed to be available for withdrawal. This is as clear and dry as the federal rules can be. However, here is the wrench – demand accounts, because of Government Regulation Q, are required to not pay interest. Regulation Q (now migrated to Regulation D) set limits on the interest banks can offer. From the bank’s perspective this makes sense as they are simply acting as a fire proof mattress to store your money for future use. Yet, there are no more toasters to incentivize consumers – and from an early age we are imprinted with the ‘let your money work for you’ philosophy of money management. So, what have banks done?
Well, on a very basic sense, they created different candy bars. My online internet bearing checking account is actually a Negotiable Order of Withdrawal (NOW) account. This complies with Regulation Q. This new product allows one to have access to an unlimited amount of checks, but also the benefit of earning interest.
So with two of my accounts explained, I have two types to go. Savings accounts, online and traditional, are very simple. They are places where banks store your money, figure you will not be demanding redemption of it frequently, and use this money to build their reserves. They will loan this money, charge a slightly higher interest, and pay you for letting them use your money. The advent of the virtual or online savings bank account has cut down overhead, as rent and employees are expensive. Because of this lack of expense, interest rates tend to be higher. Some will have regulations stating how frequently one can withdraw and charge fees for additional withdrawals or have stipulations on amount per withdrawal. Some may have minimums, some may have cumbersome websites, but that is for the consumer to decide. Ask questions, call the bank, they all will have customer service.
So, with all that said, what exactly is a money market deposit account? This is an account that has high interest rates – as it is not technically a demand account. These rates are higher than NOW accounts because banks make a similar assumption as they do to savings accounts, that the demand for this money will be less frequent than checking accounts so will use these funds to build their reserves. They have check writing abilities – but stipulate how many withdrawals (electronic or check) one may make in a statement cycle, and frequently amounts that may be withdrawn per transaction or statement cycle.
All of these accounts serve a purpose. Checking accounts provide immediate access to your funds via an insured institution, but the banks do not pay you for the use of your money. Savings accounts provide a no-risk medium for storing your money and have interest, but do not allow immediate access to the funds. One may have delays in transferring money in and out of the account, and/or be charged fees for access/transfers. NOW accounts provide immediate access to funds, but with limited interest accruing on the funds and are a relatively new vehicle, yet to be tested over time. Money market deposit accounts provide immediate access to your funds, yield savings like interest rates, but have withdrawal restrictions.
I was a teller in a previous life, and since then I have not spoken, face-to-face, with a teller more than five times in the last nine years. I may be mildly extreme having so many accounts (not including brokerage accounts), but I’m not that abnormal. I am a day saver – one who constantly shops around for the best savings account rate. While the difference of, say, 0.25%, may not make a huge difference with my meager savings now, someday it will.
I personally like the ability to write a check with direct access to my savings (which I keep in a money market). Each person can and should choose their accounts based on their needs, but also on their personal taste and learn which type will compliment the best use and ease of access to their money. Some people like chocolate with coconut and some people like gummy bears.
