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Some of the Personal Finance content I will be writing about in this series of articles may be obvious or rudimentary to many of my readers but it also may be of great value to young people you may know. Please share this information with those you believe will best benefit from it.
Checking Accounts
The four main banking products most people will have to be familiar with are Checking Accounts, Savings Accounts, money Market Accounts and Certificates of Deposit.
Checking accounts record deposits as credits (Positive) and disbursements as debits (Negative).
Deposits include net pay checks auto deposited into your checking account every two weeks, non-auto deposited net pay checks deposited at the bank teller and other deposits that may be either checks you receive or cash you deposit.
Deposits you make of physical checks you received may take up to five business days to clear and credited to your bank account. If the check you are depositing is issued from the same Bank as yours, the deposit may be credited either immediately or within two days, depending upon Bank policy.
Disbursements include ATM withdrawals, ATM purchases, checks written out of your account by you, withdrawals you make at the bank and any auto payments you have set up, such as a Gym membership, Auto Loan payment, Mortgage payments, Utilities, Student Loan payments, etc.
If you write out a check and mail it out immediately, that check can take as long as five-seven business days to clear. During that five-seven day period, the check is known as an Outstanding Check. Outstanding Checks will cause a disparity between the balance you have recorded in your Check Register and the balance the Bank has. Once the Outstanding Check clears, your Check Register and Bank Balance will be equal.
Most checking accounts do not pay Interest to you, but some may, depending upon the Bank’s average balance requirements.
Some Banks charge fees for standard checking accounts or for checking accounts with consistently low balances.
Every month the Bank sends out a hard copy Bank Statement, unless you opt-out and prefer to receive your monthly statements electronically.
Savings Accounts
If you have disposable income, meaning your Income exceeds your Expenses, it’s a smart idea to open a Savings Account and move excess money from your Checking Account into that Savings Account. Most Savings Accounts pay less than 2% Interest, but 2% is better than 0%.
Savings Accounts can be used as a holding account or placeholder. You can periodically move funds out of your Savings Account and into an Investment Account, such as a Brokerage Account, and put those savings to work. I’ll cover Investment Accounts in a separate article.
Many Saver-Investor Self-Made Millionaires use this placeholder strategy – excess money gets moved out of their Checking Account, into their Savings Account and eventually (i.e. Monthly) into their Brokerage Account to purchase stocks, bonds, mutual funds, exchange traded funds, index funds, etc. Again, I will cover Investments in future article.
Certificates of Deposit (CDs)
Some people use CDs instead of Brokerage Accounts, because they have a low risk tolerance – they are afraid of the risks inherent in Investing in the stock market. They may also use CDs because they intend to use that CD money for some specific purpose, such as a down payment on a house or to pay college tuition for the following year. Since they need that money for future use, and cannot afford to lose any of it, CDs are a smart idea.
Banks or Financial Institutions issuing CDs will require the CD purchaser to hold onto that CD for a specific period of time: three months, six months or one year. The longer the holding period of the CD, the higher the interest rate will be.
Once common strategy CD holders use is called the Laddering Strategy – buying multiple separate CDs with staggered holding periods.
Example:
- $25,000 3 Month CD
- $25,000 6 Month CD
- $25,000 1 Year CD
The Laddering Strategy allows you to minimize the Holding Period for money you will need in the short-term, say in three months, while still getting a decent interest return on your money. Other money you don’t need in the near-term can be invested in longer-term CDs.
When the 3 Month CD matures, you have immediate access to your money. You can either use that money for its intended purpose (i.e. down payment on a house) or you can roll it over into another 3 Month CD, if the house hunting is taking longer than expected.
Tom Corley is an accountant, financial planner and author of “Rich Kids: How to Raise Our Children to Be Happy and Successful in Life”, Effort-Less Wealth, Change Your Habits Change Your Life, Rich Habits Poor Habits and “Rich Habits: The Daily Success Habits of Wealthy Individuals.”
