To Bank or not to Bank?

Contrary to what you may believe, banks have not always been available for use by the general public. What did people do with their money before the existence of banks? Well, if they had money in any substantial amount, it was likely kept wrapped and securely hidden away – perhaps buried somewhere on their property. Long before the advent of an organized banking system, people found themselves with the need to protect their assets from thievery. To best way to ensure the safety of their money was by keeping it close at hand but out of the sight of snooping eyes.

Once banking began to be viewed as viable method of storing money safely, forward-thinking businessmen started to tinker with new ideas to raise capital. After seeing the Colonial government gather funds for the Revolutionary War effort through the sale of bonds, they began to sell off parts of their banking companies (in the form of "shares") to whoever was interested in buying them, touting that investing a small amount of money would lead to big returns. This is the basis of the stock market.

Unfortunately, no one foresaw the devastating crash of the stock market in the late 1920s. Banks closed and locked their doors, leaving their depositors with no way to retrieve their savings. The financial loss was so great that some people literally threw themselves out of windows. After such an incomprehensible disaster, many people reverted to the tried-and-true practice of safeguarding their hard-earned money by stuffing it into a mattress or Mason jar, unwilling to take another chance of losing all that they had.

Of course, the world has changed a bit since then. The banking industry is heavily regulated, having policies and guarantees in place to protect the assets of their patrons from a repeat of such a calamity. And, while there are no truly 'sure things,' the money that you entrust to an FDIC-insured banking institution is as close as you'll come to that ideal.

Banks offer a variety of different types of products for the handling of your money. The most basic account that you can open is a savings account. A savings account is simply a convenient and safe place for you to store your money that's accessible at any time. But it's also an account that earns interest. In other words, the bank pays you for the use of your money (though it's generally not a very high rate). A common savings account at a traditional bank typically doesn't have a set minimum amount necessary to start. At a credit union, however, the minimum amount is necessary to open an account is usually twenty-five dollars (this is actually a 'share' of the credit union that you're purchasing).

In most cases, a standard checking account does not earn interest (banks do offer checking accounts that bear interest, though the minimum required to open such accounts and be maintained monthly can be substantial). This type of account comes with checks so that bills and other payments can be drawn directly from the balance of funds in the account. When you write and present a check to a party for payment, it is a legal representation of the money that you have (or are claiming to have) in your bank account.

Today, debit cards can be added to an account and used in the same manner as paper checks, albeit electronically. If the card is embossed with the Visa or MasterCard logo, it can be used to make purchases at any establishment that accepts those credit cards. And, depending on the network logo(s) on the back of the card, it can also be used at thousands of ATM machines across the country or worldwide to access the funds in your account.

A certificate of deposit is another banking account that can earn you money. Certificates can carry a term of anywhere from three months to five- or more years. Interest rates for CDs are typically higher than those earned with savings accounts because the money deposited in a CD may not be taken out for the duration of the certificate maturation period. If any part of the funds is withdrawn prematurely, the earnings and principal could become subject to an early-withdrawal penalty. Once the term of the certificate expires, the money can be taken penalty-free or deposited into a new CD.

Like CDs, money market accounts also accrue interest at a predetermined rate, and can even be tiered depending upon the amount you keep in the account. They'll usually pay a higher interest rate if you initially open the account with a greater sum and keep a certain minimum balance on deposit monthly. So, if you happen to have $5,000 or more lying around, you might consider sinking it into an MMA.

Money market accounts are actually high-powered savings accounts with the added benefit of checking-writing privileges. MMA-account holders enjoy all the conveniences of other bank accounts, including accessing their money for withdrawal through debit cards and ATMs. For those who can leave a certain amount of money untouched for an extended period of time but don't feel comfortable with the restrictions of a CD, a money market account can provide a good alternative.

It's reasonable to expect that larger institutions can offer more options, but other accounts that may be available are typically variations of one or more of the themes listed above. When shopping for an account or other banking product, you must identify your own needs and how the financial institution can meet them. Create a list of questions and pose them to a bank associate. The most user-friendly accounts are those that offer unlimited check-writing privileges, overdraft protection and access to online banking without imposing any additional or unnecessary fees. But be sure to also consider your future plans and goals when making a choice. For example, you may want to buy a home in the not-too-distant future, and the banking institution you pick should be able to help you with that purchase. If not, you'll have to work with another bank and possibly even transfer your accounts, which could prove to be quite troublesome.

All these things being said, there are still people that have their reservations about banks and the safety of their money. And with the recent (and ongoing) troubles stemming from the housing-market meltdown, which have caved the share values of numerous financial institutions, it's not too difficult to understand why. So let's take a quick "Pro vs. Con" look at the rationale of keeping your money in a bank.

Pros

Opening a bank account is convenient and pretty simple to accomplish. Once your account is active, you can keep your money in a safe place without having to worry about it every waking second of the day. What's more, payroll checks can be electronically deposited directly into your account, eliminating the need to make a trip to the bank each Pay Day. Further, with Internet access to the account you'll have the ability to transfer money without ever having to leave your home. Many banks offer online bill-paying services, which can save you time, effort and the cost of postage stamps. And, of course, with many accounts, your money will accrue interest.

An institution that's federally-insured protects your money even if the bank experiences a financial crisis. Your money is guaranteed up to $100,000.

Don't overlook the fact that the world is built and enhanced through relationships. Establishing one with a banking institution can be very important. A bank that knows you and has worked with you over the years is more likely to loan you money for a new home or car. Local branch employees may even grow to know you on sight. And, make no mistake; having a 'friend' can still be a valuable commodity in the business world. A good banking relationship can go a long way to helping secure your financial future.

Cons

Depending on the type of bank account you open, there may be some drawback that you should consider. Whether these negative aspects are major or minor should be gauged by your own circumstances and perception of the situation.

Most people generally do their best at their jobs, but we're all human. Human error is a definite possibility in any business, but it can be particularly detrimental when your finances are involved. A payment deducted early or more than once can leave you with a big problem. The creditor may not give you the money back, opting instead to credit it to your account for the following month. And that may be all well and good, but you could still be out a few hundred dollars or more right now. Furthermore, if you as the account owner don't notice and investigate the problem yourself, it very likely will go completely undiscovered.

Banking errors can be difficult to discover, and the bank will typically at first maintain that the fault lies with the customer. Only through persistent digging will the problem be found. If it is the bank's mistake, insist that they rectify the situation and refund any bounced check or overage fees. You'll also need them to write letters to affected creditors explaining the error so that you can avoid any additional fees charged by them. These types of costly errors are inconvenient and troublesome, but they usually rely squarely on you to initiate the corrections.

Hidden fees are something that you should be wary of with all banks. For the privilege of using your money, a bank will charge you. You could lose several dollars or more every month to recurring fees. For instance, if the bank use doesn't have its own ATM machine, expect to be hit with two fees for each withdrawal that you make – once for the use of someone else's ATM, and once by your bank.

An understanding of check registers and keeping your account balanced is necessary to avoid bounced checks. The bank won't tell you; they'll simply expect you to know that there may be a delay from the time you make a payment until the time the money actually leaves your account. This is not only true with paper checks, but with some online transactions as well. Also, the money you deposit may not be available to immediately. Banks differ on the "hold-times" that they place on deposited funds, so be sure to read all the information given to you before opening an account with any banking institution.

Communication can be difficult with online bank accounts. A traditional brick-and-mortar banking institution has actual people working in each branch office that can personally help you with problems. Online, you get a telephone number. That number may connect you with a live person or with an automated system. And, if you aren't sure which category your problem falls under, you could waste lots of time being misdirected.

But, before deciding upon whether or not to use a bank account, it's important to know that it's not good business to simply jump at the first bank or account type that you hear about. There are different types of banks, just as there are different types of accounts for you to choose from. So, as with other financial decisions, shop around to see what's being offered and which bank is the best fit for you.

A commercial bank has a group of investors that make policy for the bank and its patrons. These banks offer savings, checking, money market, and CD accounts. They typically grant business and personal loans for mortgages, equipment and vehicles. Commercial banks are usually larger institutions with numerous branches across the country or a particular region. They have more resources at their disposal so they can typically offer a wider variety of programs to their customers. Depending on your needs, a commercial bank may be the best place to open an account.

Credit unions are owned by their members. In order to join a credit union, you must open a "share account," which is simply another name for a savings account; but with it, you have a stake in the operation of the credit union. The CU is generally based on a membership group with similar interests. For instance, you might be able to join one through your job, club association or church. The membership is restricted to these relationships (and their families), but there are enough credit unions in existence that there's one available for just about everyone. Most typically offer the same types of loans as their commercial counterparts.

You can now also opt strictly for online banking. These institutions do not have traditional brick-and-mortar buildings, offering higher interest rates on their accounts due to the fact that their overhead costs are lower. Just as regular banks and CUs, online banks offer debit- and credit cards to qualified applicants.

In conclusion, banks and bank accounts can provide you with convenience and peace of mind. You can deposit your money with the assurance that it's both safe and insured. Of course, as with virtually all things, there are potential downsides. But, as long as you take the time to make wise choices about where you keep your money and how you spend it, the advantages should far outweigh the negatives.