What's a Bank Really For?


How did you pick your current bank? Maybe it was the one that had the most ATMs in your immediate area. Or maybe it was the one that advertised the highest interest rates for a checking account when, several years ago, you were shopping around. Or maybe you just picked the one that had the coolest display of marble, red carpet, and polished brass in its lobby.

While there are many ways that banks have seduced people into placing their savings in one place rather than another, in all likelihood the top three reasons you're with a particular bank are location, location, and location. If you're like most people, your bank is pretty close to your home, or your office, or the train station, or some combination of those. You're banking where it was convenient to walk in, sit down, and start an account -- even though there's a good chance that you seldom, if ever, actually walk into your bank to talk to a teller anymore.

But, if you're banking with an establishment that has a large number of locations that you can walk into, you are, most assuredly, paying quite a bit to maintain all those locations. That payment takes two forms -- lower interest rates paid by the bank on the money that you keep there and ever-multiplying fees on almost all of your banking activity.

Ask yourself, really, how often do you need to go into a bank these days? With newfangled inventions like the telephone, direct deposit, the U.S. mail system, and even, dare we say, the Internet, you don't need to be particularly close to a bricks-and-mortar branch of any bank if you know how to find the account that fits your needs and keeps costs low. Right now, at this very moment, there are scores of banks that are no further away than your computer keyboard or your telephone. Keep in mind as you read on that virtually all of those banks will have rates and fee structures that are an improvement on the majority of bank accounts maintained today.

How Much Is Enough?

People out there haven't just been casual about where they bank. Many have also been extremely casual about leaving large sums in the wrong accounts -- and passing up on hundreds, and occasionally thousands, of dollars of interest in the process. To get truly Foolish with your banking, you'll need to identify how much money you need to keep in typical banking accounts. The answer to this question, for Fools, should be, "Not much at all." Money that is left in typical banking accounts (that is, savings and checking accounts) is earning very, very little in the way of interest. The average interest paid on checking and savings accounts does not even rise to the level of the rate of inflation, yet Americans today have more than a trillion dollars in such accounts.

If you leave significantly more money in your checking account than you need to pay the monthly bills and avoid a service charge for maintaining a minimal balance, then you're leaving too much money in that account. Furthermore, though many national banks require you to maintain a balance of about $1,500 to get interest on your checking account without paying monthly fees, with a little research you can open an account with as little as $500 and be paid interest.

Are we advocating that you get all of the money beyond your immediate needs into the stock market? Hey, we're Fools, but we're not idiots. The stock market, though a wonderful vehicle for long-term savings, is in no way insured, and can be a great place to see money disappear over the short term. As we've stated all over this site, we only advocate putting money into the market that you believe you're going to leave there for a minimum of five years -- hopefully much longer.

There most certainly is money that you'll want to keep liquid for purchases in the near future -- money that you aren't going to use to pay this month's bills, but that is there for a rainy day, the occasional binge shopping expedition, and just as a security blanket to allow you to sleep at night. It's just that this money, if left in typical savings and checking accounts, will not return to you even half the level of interest that you can secure through equally insured accounts. The best account for you might be from an out-of-state bank, an Internet-based bank, or perhaps through your brokerage account.

Before explaining what these accounts are, though, the first step in every Foolish personal finance decision is to know thyself. And the only way you're going to truly get to know yourself in this instance is to start gathering up your old bank records and create a checklist of banking needs.

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