If you are like many Canadians, you opened your first bank account as a child, most likely with the help from your parents. You may even continue to hold that same account today.
At some point, you will want to open another bank account. Maybe it's a joint chequing account to share with your sweetie; maybe it's a new savings account to keep your holiday savings fund sheltered from the rest of your cash.
So let's learn how the banks work, how they make money off of you, and how you can sweeten your deal!
1. What's in it for the bank?When you open an account - savings or chequing - you are in fact lending the bank your money to use for their own investments. The bank earns interest for itself on all the deposits it holds and that is why the bank is willing to pay you interest on the funds you leave with them. The difference between how much the bank earns in interest (a lot) and how much it pays you in interest (a little) is called "the spread".
2. Savings versus chequing — does it really matter anymore?
Back in the day a chequing account was where you kept your money for spending and writing cheques for household expenses. Today, you are more likely to pay your bills online rather than using paper cheques, but the function of the chequing account remains the same — an account where money is coming in and going out at a frequent rate.
Savings accounts were traditionally designed for storing money that you didn't want to use immediately, while keeping it nearby and accessible. As such, banks have generally been willing to pay a higher interest rate on savings accounts, due to the fact that you provide a more reliable amount of money for the bank to use than you do in your ever-fluctuating chequing account.
With paper cheques going the way of the VCR, many banks today offer accounts that blend the traditional advantages of savings and chequing accounts. You can have debit card access to your savings account, as well as pay your bills and transfer funds as easily as you can with your chequing account. Some banks even offer higher-interest chequing accounts that rival what you would receive in any savings account.
The questions you need to ask are "what will I pay?" and "what will I earn?"
3. What should you pay?
Why on earth would you pay the bank to loan them your money? From the bank's perspective, you pay for the transactions you choose to do and the services you use.
Transactions include withdrawing money, depositing money, using your debit card at the ATM, transferring funds, paying bills out of your account, and writing cheques.
Services include all those extra things the bank can do for you, such as certifying cheques, issuing money orders and bank drafts, giving you overdraft protection or renting you a safety deposit box.
How you wish to pay for these transactions and services is a key factor in choosing a bank account. Most accounts charge a flat monthly fee that covers a set number of transactions and a range of services. Monthly fees can range from as low as $4 a month for minimal transactions and no extra services, to as high as $25 a month for unlimited transactions and many extra services included.
For many people however, the idea of paying a monthly fee is detestable and they want an account with no monthly fee. This can be a smart idea; however, it is important to examine the individual transaction fees that you will pay on such an account and be aware of how often you do said transactions. Those seemingly little incremental charges can add up quickly!
4. What should you earn?
If you have a mortgage, a credit card or a student loan, you are probably used to cheering on low interest rates. This is because you are used to paying the bank interest. But, when it comes to interest on your deposit account, look carefully!
When choosing a deposit account, look for the highest possible interest rate available to you. Banks are very competitive with these products, so there are tons of choices. While traditionally savings accounts paid higher interest rates than chequing, this is no longer always the case.
5. The secret to paying less and earning more
Remember, if they can make money by using your money, then they are less inclined to charge you fees and more inclined to pay you interest.
Here's the thing…if you are in the habit of draining your account empty each month, the banks won't be able to generate anything with your money since they can't rely on it. In this case, they will be eager to charge you transaction and service fees so as to generate some kind of return for the favour of babysitting your cash.
So, the secret to skipping fees and earning more interest is thus to maintain a minimum balance in your account at all times. Keeping as little as $1,000 or as much as $5,000 in your account at all times can really pay off. But remember — this is money you could be investing elsewhere for a bigger return — so be demanding! Look for high-interest earning accounts that waive monthly fees and provide unlimited transactions in exchange for maintaining a minimum monthly balance.
6. Comparison shopping
Ideally, you would be able to find an account that earns you more in interest than you pay in fees, or at least lets you come out even. You don't need to trek all over town to do it. The Financial Consumer Agency of Canada (FCAC) has a terrific online interactive tool called The Banking Package Selector Tool - this helps you comparison shop for bank accounts all across Canada.
Who knows, you might just find that the first bank account you ever opened is still the right bank account for you!
Found on Yahoo.ca Finance
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