When a bank complicates your life, you can lose money and time. This cuts into your freedom.
So let’s look at the basics of banking so you’ll know what to expect and where to find the best deals.
How Banking Works
A bank or a credit union should serve as a pantry for your financial life:
- You store up money through deposits: your direct deposits from work, the cash you earn side hustling, the money you clear when you sell something you no longer need.
- Then, little by little, you use some of your stored money: for groceries, at online retailers, through your favorite mobile pay app, or when you need to pay a friend back.
It’s really that simple. So why does it get so much more complicated? What’s up with all the fees, rates, terms, and transfer fees?
We’ll have to dig a little deeper to find out, starting with a quick look at types of accounts.
Your checking account is the eye-level shelf in your pantry: The money in this account should be easy to access because you may use it several times a day.
We use the term checking accounts because account holders used to write checks. You can still write checks, but it’s easier to use an ATM or your debit card or to connect your checking account to PayPal, or an app like Venmo.
Most banks offer free checking accounts, though even free accounts will typically charge you overdraft fees or ATM use fees.
Traditionally, your checking account balance would not gain interest, though now you can find exceptions, especially if you keep a high balance.
Your savings account is where you store up and save money, but this is where our analogy about the kitchen pantry runs out of steam.
Unlike the household supplies in your pantry, your money in savings can grow while it’s stored. Your saved money grows because your bank will pay interest on your balance.
Paying interest means the bank pays a percentage of your balance to you on a regular basis.
How much interest you’ll earn depends on what kind of account you have:
- Low Rates: Your neighborhood branch of a large national or regional bank will typically pay a lower interest rate. In fact, you may not notice your money grow if you have a small balance.
- Better Rates: Money market accounts tend to pay higher interest rates but you can only access your money six times a month.
- Best Rates: An online-only bank can usually give you the best interest rates. Some online banks pay 2 or more percentage points higher than a traditional bank.
You can find free savings accounts at most banks. Some banks charge fees if your balance falls below a pre-set level.
CDs Pay Better Rates
Savers who want to optimize their interest payouts tend to like certificates of deposit, or CDs.
With a CD you agree to leave your saved money alone for a specific period of time — 3 months, 18 months, 60 months, for example. In exchange, you get a higher savings rate.
If you access the money early, expect to pay a fee or lose earned interest. CDs work well when you know you can leave the money alone for a while.
Flipping the Script: Borrowing Money
You earn interest on the balance in your savings account because you’re letting the bank use your money. When you use the bank’s money, you pay the bank interest.
Another term for using the bank’s money is getting a loan. Banks loan money in several different ways:
- Mortgages and Auto Loans: Customers use these to buy a car or a house.
- Personal Loans: These loans could help you pay larger personal expenses such as higher-than-expected income taxes an unexpected dental procedure.
- Overdraft Protection: Customers can avoid overdraft fees in their checking accounts by covering temporary overdrafts with borrowed money.
- Credit Cards: Banks typically back credit cards which customers can use to make purchases.
Any time you borrow money, find out the interest rate you’ll be paying both now and down the road. Credit cards, for example, charge incredibly high rates which can hobble your financial freedom.
Ideally, you should borrow money only when you have a really good reason and a plan for getting out of debt. Owing money cuts into your freedom.
Types of Banks
In most towns, banks line the retail strips and downtown business districts. To choose the best bank, it helps to know about the different kinds of institutions:
These are the banks with branches in busy shopping centers and Interstate exits. They offer basic checking and savings accounts along with credit cards and other personal loans. Most retail banks now have a strong presence online, too.
These institutions work a lot like retail banks but without the goal of making a profit. They’re owned by their customers, and they’ve also embraced online banking in most cases.
Online banks are essentially retail banks which interact with customers exclusively (or almost exclusively) online. Because they have fewer employees and locations, they can usually extend higher interest rates to account holders.
Commercial banks usually focus on serving businesses. They offer lines of credit and other business tools.
Savings and Loans
These institutions aren’t as numerous as they once were, but they’re still out there. They focus on real estate development by using savings accounts to finance mortgages.
Investment banks help connect investors with securities to make the economy more fluid.
Most of us will have little direct interaction with a central bank which helps set monetary policy for a nation.
Most people starting a relationship with a bank will opt for a retail bank, credit union, or online bank.
Pros and Cons of Main Bank Types
- The convenience of having branch offices nearby.
- Typically large networks of ATMs.
- Wide variety of banking products.
- Low savings rates.
- Fees can be punitive
- Great savings rates.
- Not limited by geography.
- Can connect to retail bank through online banking.
- Few or no branches.
- Fewer options for accounts and loans.
- Strong customer service.
- Pretty good rates on loans and savings.
- Fewer locations and ATMs.
- Online tools sometimes lacking.
Top 3 Banks for Millennials
Ally Bank got its start as the finance arm of General Motors, but it has reinvented itself as a standard in online banking.
While many online banks excel at niche products which you can use in coordination with a retail bank, Ally Bank can be your retail bank.
Ally has friendly terms on savings and checking accounts, paying higher returns than traditional retail banks yet still offering access via a network of ATMs.
The downside is you can’t deposit cash. Instead, you’d have to deposit cash into another bank and then transfer it. For customers who seldom use cash, this isn’t an issue.
Like Ally Bank, Discover Bank is an online-only bank that could serve as your primary bank. Technically, the bank does have one branch, but unless you live in Delaware, you probably won’t interact with an in-person teller.
Instead, you’d use Discover Bank’s mobile and online tools. The bank’s customers have access to about 60,000 free ATMs around the country.
I like Discover Bank’s 1 percent cash-back debit card rewards program. You can earn cashback without worrying about interest rates because you aren’t using a credit card. Plus, Discover’s checking account has no fees.
Discover Bank does not offer automatic overdraft protection loans, so be sure you’re aware of your balance.
Radius Bank’s Radius Hybrid account got my attention. It’s a free checking account that pays interest on your checking account balance.
Many banks offer interest-bearing checking account balances, but only if you opt for the account with high monthly fees and high minimum balance requirements. Radius Hybrid is completely free, and it pays a decent interest rate on balances above $2,500.
Like Ally and Discover, Boston-based Radius Bank operates online and offers a broad range of accounts and services. The bank has only one branch, so you’d be interacting with your money through Radius Bank’s apps and online banking, both of which are sleek and easy to use.
And, if you need to use an ATM, Radius Bank will reimburse the fees you have to pay. Many online banks will reimburse fees up to a limit per month. Radius Bank will reimburse all of your fees.
Just like with Discover: Be careful about overdrafts since the bank charges $5 per day for being overdrawn, on top of the $25 per transaction overdraft fee.