Personal Finance Ology

Checking accounts are usually the primary reason many people start a relationship with their banks. Usually you will find parents opening an account for their children or grandparents opening one for their grandchildren. Either way checking accounts are a popular service within the Banking Facility.

Types of Checking Accounts

Alongside the common checking account, there are many other options, services and features you can add on to your account to personalize it to suit your needs. The basic function of the checking account stays the same it’s just the way it performs that changes with the different type you choose.

Basic Checking

This account is normally for people who write very few checks monthly and would like an ATM or debit card. At some Banks there may be some fees associated with this account such as a maintenance fee, which is a monthly fee charged to your account if your balance falls below the required amount or you may be charged a fee if you write more checks than what is allowed monthly. A lot of times you can avoid fees being charged to your account if you use direct deposit for your paychecks. Before opening any account be sure to ask about any and all fees that are associated with it.

Student Checking Accounts and Senior Citizen Checking Accounts

Many banks offer accounts geared towards the particular needs of students or senior citizens. They are similar to the Basic Checking Accounts, however they may offer discounts on certain things. For instance, a Student Checking Account may offer free ATM usage or discounts to venues that students may find interesting while Senior Citizen Checking Accounts may offer discounts on prescriptions or discounted travelers checks.

Interest Bearing Checking Account

An Interest Bearing Checking Account is designed to pay you a small percentage of interest on your account monthly if you meet the certain qualifications. One of the most common qualifications is maintaining a certain balance. It is important to know how your bank calculates the minimum balance. Some banks require you to have the minimum balance in your account every day of the month while others require the average of your monthly balance to be higher than the minimum balance. This is information you should know so that you know when, where and how you would be charged a fee.

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Another step you can take in making an informed decision on which loan or savings product you choose is to know as much as you can about the financial services you need so that you can shop around for the best deal.

Alongside it being your duty to do as much research as possible there is also a responsibility that the lenders have to you. The Consumer Credit Protection Act of 1968, also known as Truth in Lending, is a law requiring lenders to disclose all the costs affiliated with your loan. This is where the Annual Percentage Rate (APR) or the actual cost of the loan including fees and expenses is found. This rate is normally higher than any advertised rate that may have gotten your attention and should be the rate you use when deciding which loan will work best for your situation.

For example, the next time you receive a mailing for a credit card pay attention to the way the interest rate is advertised. The company may state that the interest rate is 10 percent however somewhere in the fine print will be a disclaimer indicating the APR is 10.25 percent. You must review the credit card company’s guidelines to be really sure about their offer.

Deception

There is a lot of confusion and complication when deciding to choose a loan based solely off of the APR. This is because lenders use APR’s differently. Some may include all of the fees associated with the loan while others will include some fees and leave others out. Lenders use this to get around the Truth in Lending law and provide the consumer with a number that will more likely get them to borrow.

Advantages of APY

Not only did the Truth in Lending law require lenders to provide the APR but it also requires them to quote interest rates on an annual basis. This is the Annual Percentage Yield. APY is easier to use over APR because it gives you numbers that you can compare. Whereas with the APR you couldn’t really compare numbers because all of the numbers were calculated differently depending on the lender.

With the APY it’s pretty simple. All you have to do is calculate the total interest earned on an interest-bearing account for a full year. The APY allows you to compare two products with the same length however one may pay interest quarterly while the other pays it monthly. Since it would be more complicated to compare the rates of the two products by using their methods of interest payouts, it would be easier to calculate the APY. The key thing to remember here is that some products you are calculating the APY for may not have a length of time for a year. They may only last for 6 months or so. In this case you would be using the APY to get an idea of which product is the best deal. Your calculations for that particular product will not give you the actual APY.

Clarity

APR, Annual Percentage Rate, is meant to be the cost of the loan in totality and is used when you are borrowing money. Meaning any fees or expenses normally are added in and the total amount you are going to pay for the loan is revealed in the APR. However, many lenders will only disclose certain fees and expenses in the APR making it a deceptive number. You should always read the fine print and if you have any misunderstanding contact a bank representative for clarity.

APY, Annual Percentage Yield is the total amount of interest you could earn on an investment or deposit product. It is used to calculate and compare your profit on different deposit products. It should be remembered here that if you are comparing products that don’t last as long as a year then you are only getting an idea of the potential earnings of those accounts for the sake of comparing and not getting the actual APY.

Another factor in calculating interest rates and their effects on your loan or investments is compounding interest. For more information on compounding interest you can take a look at the article “The Basics of Interest (Part Three)” where it is discussed in more detail.

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Inflation is often watched by economists with a detailed eye due to the effects it can have on the economy. It is normal to have moderate inflation this is a sign of a growing economy however, if inflation gets out of control it can have an ugly effect on the value of the dollar and on your savings.

What is Inflation?

Inflation is when there are too little goods or services for the amount of demand on those goods or services. Simply put it is when a lot of people want too much of one thing. This allows for the merchant to raise the price because it is a highly desired product that is hard to get.

The biggest effect inflation has is it’s ability to rob you of your purchasing power by lessening the value of your money in the future. For instance, if there is a 4 percent a year inflation that means anything costing a dollar today will cost $1.04 in a year. Usually when you see the rate on inflation it is just an average number and does not necessarily mean everything will rise to that number. Some things will not rise as high and some will rise higher, whichever way keep in mind that the rate of inflation is normally given as an average and not a definite number.

It is important to consider the effects of inflation on the future value of your investment only if you are choosing between different time periods. If you are choosing between two different amounts but with the same time period the effects of inflation need not be considered.

The Dangers of Inflation

In most cases with the rise in prices there is a rise in salaries. However, there may be some companies who, due to the need to compete with other businesses, aren’t able to raise their prices therefore enabling them to raise the salaries of their employees. This in turn has a negative effect on those employees.

Another danger with inflation is for those who are invested in a fixed income product such as bank CD’s or bonds. With one of the solutions to inflation being higher interest rates those involved in a fixed rate investment will definitely lose out on the benefit of the prevailing interest rate.

What Does Inflation Mean To You?

Inflation can work for you or against you depending on your situation. If you are invested primarily in stocks for a lengthy period of time you could do fairly during the fluctuation of inflation. However, the negative effect comes into play if your money is heavily involved with bank CD’s or bonds with fixed interest rates. If you feel safer with your banks CD’s or bonds it is important to see if they offer special investments with inflation protection. If your bank doesn’t there may be other banks that do offer these services. Therefore, always remember to do your research before committing to an investment.

Whenever picking and choosing your investments and determining their present and future value it would be wise to always consider inflation and the effect it will have on your investment.

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Once you familiarize yourself with the business of banks and how they operate with your money the next thing you want to do is responsibly maintain your accounts. This is something I had to learn because I would always find myself spending more money than I had in my account because I didn’t keep a record of what I was spending. It was because of this I incurred a lot of overdraft charges and non-sufficient fees that were costing me more than my actual purchases. It wasn’t until I finally got control on my spending and the way I handled my account that I realized how important it is to responsibly maintain your account.

Balancing Your Checkbook

The first thing to keeping track of your account is to balance your checkbook. When you do this you are always aware of how much money you have in the bank, as well as what transactions will be posting to your account at a later date. That can be tricky as we sometimes forget certain transactions because they don’t instantly show up on our account. Therefore, if we post our transactions in our checkbook as we perform them we will always know what has already posted and what hasn’t.

A good way to keep an accurate record of your accounts’ balance is to use the account ledger that comes with your checkbook. This way you can enter the date, the vendor, the amount of the purchase, and whether you wrote a check, or used your debit card. You also want to record your withdrawals from ATM’s and deposits to be sure your balance is as accurate as possible. Once you enter in this information you can then subtract the amount of your recent purchase from your current balance. If you stay on track with this process you will always know how much money you have remaining in your account. I also use this process to look at the amount of money I am spending. A tip is at the end of the month review your purchases and how much money you are spending on what. This way you can do away with frivolous spending and find ways to put extra money in your savings.

Monitoring Your Account

Alongside recording your transactions, you also want to keep a close eye on your actual account. If you prefer to check your account online you can go to your banks website and setup an online account there where you will be able to have access to your account 24 hours a day seven days a week. If you would rather monitor your account over the phone your bank provides a phone number you can call when you would like to speak to speak with a live representative or even access your account through an automated system, for times when you call after hours. Whichever way you choose to keep an eye on your account you should always make an effort to check it at least once a week. This way you can compare the balance in your transaction ledger with the balance the bank has and be sure they are the same. Another important advantage to keeping a close eye on your account is in the case someone else besides yourself gets a hold of your account information. When you pay close attention to your account and the transactions posted to it you can easily catch a fraudulent transaction and alert the bank immediately.

Bank Mistakes

In the case of a transaction not being fraudulent activity and it being the banks mistake you can also alert them in timely fashion if you are regularly checking your account. If you happen to come across a bank error the best thing to do is to call in to the customer service number and speak with a live representative. That way they can view your account and make the proper notation so that your account can be corrected expediently.

All in all you want to pay close attention to your spending, the transactions posted to your account and how it all affects your balance. This will help you to keep a close reign on your finances and assist you with improvements to it in the future.

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