Investing All-in-One For Dummies. Eric TysonЧитать онлайн книгу.
— only a handful of banks failed annually.)
FDIC backing is hardly a unique protection. Every Treasury bond is issued and backed by the federal government, the same debt-laden organization that stands behind the FDIC. Plenty of other nearly equivalent safe lending investments yield higher returns than bank accounts. Highly rated corporate bonds are good examples (see Book 4 for more on bonds). That’s not to say that you shouldn’t consider keeping some of your money in a bank. But first, you should be aware of the realities and costs of FDIC insurance.
Investing in Banking Account and Savings Vehicles
While traditional banks with walk-in branch locations are shrinking in number due to closures, bank mergers, and failures, online banks are growing — and for good reason. Some of the biggest expenses of operating a traditional retail bank are the cost of the real estate and the related costs of the branch. An online bank eliminates much of those costs; thus, these banks are able, for example, to pay their customers higher interest rates on their account balances. And online banks can offer better terms on checking accounts and loans.
The internet is lowering costs for many industries, and the banking industry is one of those. This doesn’t mean, however, that you should rush to become a customer of an online bank, because other financial companies, like mutual funds and brokerage firms, offer attractive investment accounts and options as well. (See the section “Exploring Alternatives to Bank Accounts” later in this chapter.)
Bank checking accounts and debit cards
Whether it’s paying monthly bills or having something in your wallet to make purchases with at restaurants and retail stores, we all need the ability to conduct transactions and access our money. Credit cards aren’t a good idea for most people, because the credit feature enables you to spend money you don’t have and carry a debt balance month to month. Notwithstanding the lower short-term interest rates some cards charge to lure new customers, the reality is that borrowing on credit cards is expensive — usually, to the tune of more than 18 percent for most young adults.
Paying a credit card bill in full each month is the smart way to use such a card and avoid these high interest charges. But about half of all credit card holders use the high-interest-rate credit feature on their cards. And, even if you pay your bill in full each month, it’s worth considering whether charging purchases on your credit card encourages you to spend more.
Debit cards are useful transaction vehicles and a better alternative for folks who are prone to borrow via their credit cards. A debit card connects to your checking account, thus eliminating the need for you to carry around excess cash. Unlike a credit card, a debit card has no credit feature, so you can’t spend money you don’t have. (Some checking accounts offer prearranged lines of credit for overdrafts.) And as with a credit card, you can dispute debit card transactions if the product or service isn’t what the seller claimed it would be and fails to stand behind it.
One reason why bank customers have gotten worse terms on their accounts is that they gravitate toward larger banks and their extensive ATM networks so they can easily get cash when they need it. These ATM networks (and the often-associated bank branches) are costly for banks to maintain. So you generally pay higher fees and get lower yields when you’re the customer of a bank with a large ATM network, especially a bank that does tons of advertising.
By using a debit card that carries a Visa or Mastercard logo, you won’t need to access and carry around much cash. Debit cards are widely accepted by merchants and are connected to your checking account. These cards can be used for purchases and for obtaining cash from your checking account.
Savings accounts and certificates of deposit
Banks generally pay higher interest rates on savings account balances than they do on checking account balances. But they have often lagged behind the best money market funds, offered by mutual fund companies and brokerage firms. Online banking is changing that dynamic, however, and now the best banks offer competitive rates on savings accounts.
The virtue of most savings accounts is that you can earn some interest yet have penalty-free access to your money. The investment won’t fluctuate in value the way that a bond will, and you don’t have early-withdrawal penalties, as you do with a certificate of deposit (CD).
The yield on bank savings accounts is generally pretty crummy. That’s why your friendly neighborhood banker will be quick to suggest a CD as a higher-yielding investment alternative to a bank savings account. They may tout the fact that unlike a bond, a CD doesn’t have fluctuating principal value. CDs also give you the peace of mind afforded by the government’s FDIC insurance program.
CDs pay higher interest rates than savings accounts because you commit to tie up your money for a period of time, such as six or twelve months, or three or five years. The bank pays you, say, 2 percent and then turns around and lends your money to others through credit cards, auto loans, and so on. The bank often charges those borrowers an interest rate of 10 percent or more. Not a bad business!
Early-withdrawal penalties: When you tie up your money in a CD and later decide you want it back before the CD matures, a hefty penalty (typically, about six months’ interest) is usually shaved from your return. With other lending investments, such as bonds and bond mutual funds, you can access your money without penalty and generally at little or no cost.
Mediocre yields: In addition to carrying penalties for early withdrawal, a CD yields less than a high-quality bond with a comparable maturity (such as two, five, or ten years). Often, the yield difference is 1 percent or more, especially if you don’t shop around and simply buy CDs from the local bank where you keep your checking account.
Only one tax flavor: High-tax-bracket investors who purchase CDs outside their retirement accounts should be aware of a final and perhaps fatal flaw of CDs: The interest on CDs is fully taxable at the federal and state levels. Bonds, by contrast, are available in tax-free (federal and/or state) versions, if you desire.
Negotiating