By Jeff Brown
Sure, your checking account probably earns you a paltry interest rate, but before you switch to a money market account with checking and ATM privileges, you'll want to read this.
No one expects to get rich from a checking account, but these days you can actually lose money once inflation is taken into account.
The average interest-paying checking account yields a paltry 0.16 percent, according to the manybanking.com survey. That means it earns 16 cents a year on every $100. Meanwhile, your $100 will probably lose $3 in buying power due to rising prices, a.k.a. inflation.
Why have a checking account at all... especially when so many other types of holdings, like money market and mutual funds are more generous -- and also come with check-writing privileges?
The main reasons are convenience, safety and easy access.
Chances are your traditional bank checking account comes with a debit card which not only replaces checks for purchases but enables deposits and cash withdrawals from automated teller machines. Using a credit card to get cash from an ATM usually means paying a hefty fee. Also, standard checking accounts work smoothly with electronic bill-paying systems like Quicken, the financial software from Intuit (Stock Quote: INTU).
These days many financial firms, including brokerages and mutual fund companies, provide checks and debit cards linked to investment accounts. But some limit the number of checks you can write in a given period or charge fees for ATM withdrawals, which can be limited to only certain machines.
And if using one of these checks or cards causes you to sell assets such as mutual fund shares, it can leave you with a headache at tax time. You’ll have to figure profits or losses on those shares, and even worse, writing a check linked to a fluctuating investment could mean selling assets when share prices are down.
Fortunately, there are ways to minimize the damage from today’s low checking-account yields while still getting the benefits of a traditional bank checking account.
The key is to keep as little money in the account as possible – just enough to pay expenses for a short period, such as the current month. Doing that allows you to keep most of your cash in other accounts with higher returns – savings accounts, certificates of deposit or short-term bond funds.
The typical savings account isn’t much more generous than a checking account, paying 0.28 percent, according to the manybanking.com survey. But some of the online banks pay more. E-Trade (Stock Quote: ETFC) offers savings at 1.7 percent and Ing Direct (Stock Quote: ING) pays 1.5 percent – nearly 10 times the average checking account. (Shop with the sbup search service).
Many online banks offer checking as well as savings accounts. But if you want to keep a checking account at a local bank to have unfettered access to lots of ATMs, you can set up an electronic link for transferring cash from an online savings account to the local checking account. A transfer typically takes several business days.
To reduce the chances of running short because of delays in making deposits, have your employer automatically deposit your paycheck into your checking account.
Use online access to your account, so you can closely monitor spending. That’s especially valuable if another person, such as a spouse, shares the account. At many banks, you can have an e-mail sent automatically to alert you if your balance falls below a set level.
It also makes sense to get overdraft protection on the checking account, so you’re not hit with big fees if your minimal balances turn out to be too small.
Finally, set up a good budget, to reduce the chances of surprise expenditures that could leave your checking account short. Quicken can do this, as well as update values in all your banking and investment accounts every day.