Cash Strapped? Get Your Bank to Pay You

June 25, 2008 -- With the economy feeling like it is on pins and needles thanks to exorbitant prices at the pump and rising costs at the grocery store, every penny can start to add up.

So, let's take a closer look at the very place that holds all your pennies -- the bank -- to give you some advice on how to ensure that you are saving your money at the bank as opposed to spending it there.

Let's start with the very basics. What should you know about your bank?

First and foremost, banks are the bedrock of the American financial system. Since the Federal Deposit Insurance Corporation, more commonly known as the FDIC, was established 75 years ago, no consumers have ever lost a penny of their deposit at an FDIC-insured institution.

That is an incredible track record. The basic FDIC coverage insures $100,000 per depositor per bank and up to $250,000 for some retirement accounts. So it is safe to say, if your money is in one of 8,494 FDIC-Insured banks, it is in safe keeping.

You say a major misnomer that consumers should be aware of is "free checking." Why?

Free checking is one of the most commonly misunderstood banking concepts. Only about one-fourth of all banks offer free checking. And, while your account may be "free," it does not mean that you will not be hit with other fees if your account level dips below a certain balance, if you stop a payment on a check, need extra check copies or, in some cases, check your balance at an ATM.

The one figure that is eye-popping, according to a survey conducted by Bankrate.com, is the average balance required in order to avoid a monthly service fee in an interest-bearing checking account is almost $3,320. If your balance dips below that amount, the average monthly fee is $11.72.

The good news: There is a lot of competition for your money so you have many, many options for checking accounts. My advice -- shop around and ask your bank for a copy of your account fees. All banks have this information and are required to disclose it to you.

Also, a great source to research checking accounts is Bankrate.com. The site is very easy to navigate and contains a wealth of information including a comparison of available interest rates.

Although your money may be protected, how do you make sure it is growing?

The general rule of thumb is that you should have three to six months worth of living expenses in the bank available at all times in case of an emergency. I know this is not easy, especially given today's tough economy, but this is extraordinarily important, especially because you want to avoid at all costs tapping into your 401k or retirement savings if a financial emergency arises.

Money for your everyday living expenses should be kept in your checking account, but your savings should be kept in a separate account so that you are not tempted to dip into it. In terms of emergency savings, you want to put your money in a safe, liquid and easily accessible investment vehicle. Two good options include:

Savings account: A savings account offers the same benefits of a checking account as the money is guaranteed by the FDIC; however, it too can be tapped into with a simple trip to the ATM. While access to your emergency fund is critical, it should stay out of sight and out of mind.

Money market account: Money market accounts are offered by most banks as an alternative to a standard savings account. This type of savings vehicle pays a slightly higher rate of interest than a savings account. While money in this account is readily accessible, most banks limit the number of checks you can write from the account to three a month -- a built-in gut-check to make sure you actually use the emergency funds for an emergency. However, money in a bank money market account can often also be tapped into via an ATM.

Mellody's Math:

If you put your emergency savings in a money market account instead of a basic checking account, the dollars can really start to add up. The most basic free checking account could have an annual interest rate as low as 0.10 percent compared with a high-yielding money market account that typically returns about 3.5 percent a year.

In just one year, you could add an additional $100 to your $3,000 emergency savings fund by keeping the money in a money market account. If you kept the money in the money market account for 25 years, you would have an extra $4,000 for your emergency account.

I know you have warned us about these in the past, but ATM transaction fees continue to be a major thorn in the side of consumers and one of the more costly aspects of convenience banking. What can we do to avoid these unnecessary charges?

ATM fees are absolutely detrimental for consumers. Last year, consumers spent more than $4 billion on ATM fees and visited ATMs more than 10 billion times. Consumers typically get hit with about $3 in fees every time they use an ATM outside of their banking network.

This is really straightforward. You need to choose a bank with a number of convenient ATMs and make it a habit to use only ATMs in your network. If you are in a crunch and cannot find an ATM for your bank, do your best to find an ATM that is at least in your bank's network. The easy way to find out what network your bank belongs to is to look on the back of your ATM card for the network logo.

Finally, you also say that for some people, banking online may be the best way to save money?

Absolutely. For those people who find themselves constantly using ATMs outside their network, there are number of Internet-only banks that do not hit you with any fees. Two of the very best are ING Direct and Schwab Bank.

An ING Direct customer can use one of 52,000 ATMs in the All Point Network for free and if customersuse an ATM outside of this network, they will pay only one charge and will not get hit with the additional fes.

The Schwab High Yield Investor Checking account lets customers use ATMs all over the world for free. In fact, Schwab will reimburse you for any ATM charges. And the annual interest rate of a Schwab High Yield Investor Checking account is five times the industry average.