The Ins and Outs of Checking Accounts

Tired of overdraft fees? Sick of returned check fees? And what about all those fees you don't understand, or didn't even know were there? All this time you've had a checking account, you've assumed it was a free service the bank provided to you in exchange for the privilege of being able to hold on to your money.

A checking account is a bank account that you can deposit money into and withdraw money from. A checking account differs from a savings account, however, in that the money in a checking account does not earn any interest. Many people, therefore, like to have both a checking and a savings account, only keeping enough in their checking account to cover their monthly expenses and keeping everything else in their savings account where it can grow a little while it sits there. The problem, of course, comes in accurately apportioning off those deposits and withdrawals.

One of the easiest ways to get into trouble with a checking account is to write checks before you have the money in the account to cover it. While it may be true that the cash money the check represents will not be deducted from your account immediately, it is better to act as though it will be. You don't know how long it will take a check to clear. Some checks take five business days or more to clear. Some are deposited the same day and clear by the end of the day. You don't know. So it's better to be safe.

Besides, even if you get away with this poor habit of writing checks without the money in the bank to cover it, it gets you into a bigger, poorer habit - that of living outside your means, buying what you can't afford.

Different banks handle bounced checks differently, but all of them charge penalties. Some banks return the check, unpaid, and then assess you a returned check fee. Then you have to face whatever consequences come from whomever the check was written to. Other banks have something misleadingly called "Overdraft Protection" where they'll pay your overdrawn checks (up to a limit). But then they charge you an exorbitant overdraft fee each time they perform the "service." Do you see how the danger can compound month after month?

On the flip side of all this, the ATM/Debit/Check Cards that come with most of these accounts do withdraw the money from your account immediately. If you don't diligently keep a current record of each expense - especially if you're in the habit of using your debit card to pay for things - you can wind up in negative territory without even realizing it until you get your monthly statement.

Going back now to that idea of having both a checking and a savings account, here's a strategic tip on doing it successfully: Keep a buffer in your checking account that you plan never to spend. Make it at least 10% or 20% of your average monthly expenses. Make that your "zero" mark. If, for example, you have a buffer of $500 in your checking account, then every time your balance gets down to $500, you must stop spending as if that balance really reads $0, and not resume spending until you have deposited enough money in the account to do so.

On those seldom occasions where you slip below your buffer, it'll only be you beating yourself up, not a miserable bank fee you can't afford.

Depending on the type of account you have, there are other fees. Some banks charge per check written, assess a fee for using your debit card, account maintenance fees, paper statement fees, and more.

Credit cards aren't the only financial instruments that can cause you as much trouble as they can good. A checking account is considered a necessary asset to civilized independent living, but if not used correctly, it can eat away at your financial foundation. It's up to you to protect your finances, not the bank.

All these reasons point to the importance of keeping a good budget and managing your personal finances wisely. A simple to use software application like Budget Forecaster for Windows® from Strativia Software can help you with this.

Kenneth C. Kelly is the President of Strativia, a financial management software development and services company specializing in applications for personal and business use.  Strativia is the developer of Budget Forecaster, a sophisticated home budget and personal finance management software package.  Website: www.strativia.com Contact: info@strativia.com. 

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