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Savings Accounts and Money Market Accounts

 

The one piece of advice that I think is universally true for people who have filed bankruptcy is to open a savings account once their debt has been discharged, and to regularly deposit as high a percentage of their income as they can into that account. How much you can deposit will vary depending upon your income, family situation, and expenses; but if you can do 10 percent or more, that would be outstanding. If you can only do 2 percent, that's still better than nothing.

The idea behind having a savings account is to have a buffer against the unexpected, but nonetheless inevitable ups and downs of life. Savings accounts are not good investments. Their returns are much too low for that. But they're excellent (and in my opinion, essential) places to stash money that will be available to you instantly or nearly-so in the event that you find yourself in a financial jam from which you need to quickly extricate yourself. Most experts say that you should keep depositing money into your savings account until you have at least three to six months of your average income saved up. Once you get to that point, you can start considering other, higher-yield investment instruments if you like.

The money in your savings account should be dedicated to unforeseen expenses. You should not, except under the gravest of circumstances (such as the Sheriff standing outside your door serving an eviction order) use savings account money to pay for ordinary, recurring expenses. In fact, once you deposit money into your savings account, you should try very hard to forget that it's there. Don't even think about it as a place from which to draw money for food, rent, and so forth except in a dire emergency. Savings accounts are for saving, not spending. It's better to eat beans for a week than to pull money out of your savings account. Yeah, you'll fart a lot; but once the odor clears, you'll still have your money.

One thing about savings accounts that's less-than-wonderful is the interest. When I was a young man, interest rates in the neighborhood of 5 or 6 percent were the norm for standard "passbook" savings account. Nowadays, as of the time of this writing, the average savings account interest rate in the Unites States is an abysmally low 0.06 percent (six one-hundredths of one percent), and many, many banks pay only 0.01 percent (one one-hundredth of one percent). Credit unions tend to be slightly better than banks in this area, but we're still talking paltry rates. That's why I've added the Money Market section further down on this page as part of this revision. Although they do come with strings attached, some MMAs pay as much as a hundred times the interest of savings accounts.

 

 

Where to Open Your Savings Account

Credit Unions

Credit unions are experiencing rapid growth these days as more and more people are getting fed up with big banks and their endless fees (such as the fees that some banks impose merely for possessing a debit card) and their less-than-wonderful customer service. Credit unions, on the other hand, are not-for-profit, member-owned cooperatives that have no stockholders to answer to, so they tend to be more responsive to their members' needs. The management of a credit union answers only to the members. If the members aren't happy with them, they can vote them out.

Credit unions typically pay slightly better interest on savings accounts (usually called "share accounts" at credit unions) and checking accounts (usually called "share draft" accounts). Most credit unions also offer CDs, IRAs, and most other kinds of deposit accounts, typically at slightly better rates than most banks. They also tend not to charge fees for ordinary account maintenance, to have lower loan rates, and to be more flexible and member-centered in terms of loan requirements and terms.

In order to join most credit unions, you need to fall into an eligibility class defined in the credit union's federal or state charter. Eligibility classes are defined in terms of people who have some sort of common relationship. Some examples include working for the same employer, belonging to the same labor union, living within a defined geographic area, sharing a common profession, or being a military service member or a veteran. There also are a few credit unions that have "open" charters, which means that anyone can join them. One way or the other, however, almost all Americans are eligible to join a credit union. To find one near you, please click here, here, or here.

One advantage to credit unions is that most of them will process each other's transactions through the CU Service Centers program. This means that usually, you can do your banking at a credit union other than your own if you're traveling or if your credit union is located far from where you live. In fact, many credit union members have never even visited their own credit unions in person. They may belong to a credit union whose eligibility is based on some criteria such as being in a certain profession, but whose nearest office is located far from where they live. No worries. In almost all cases, credit union members can do most routine transactions at their nearest credit union even if their membership is in a different credit union.

As is the case with banks, federal deposit insurance is optional for credit unions. Most credit unions have elected to become insured through a federal agency called the National Credit Union Administration (NCUA), whose insurance program for credit union members is essentially identical to that provided by the FDIC for bank customers. I strongly recommend that you consider only NCUA-insured credit unions.

Banks

If you don't like credit unions, can't find one, or for whatever other reason don't want to deal with one, then that leaves exactly one option for you to open a savings account: a bank.

Most banks aren't evil. But they're almost always shareholder-owned companies that exist for the express purpose of making a profit for their shareholders. As such, they ultimately have to answer to their shareholders, not to their depositors.

Be that as it may, FDIC-insured banks are still perfectly safe places to open savings accounts. Because the difference in interest rates on savings accounts is even more trivial than the rates themselves, if you want to open a savings account at a bank, just choose whatever bank is most convenient for you in terms of convenience, friendliness of staff, fees, and so forth. Just make sure that the bank you choose is insured by the Federal Deposit Insurance Corporation (FDIC).

As an aside, many communities have small, local banks commonly known as "community banks," which enjoy a reputation for being more responsive to local depositors and their needs than the bigger banks. Don't overlook them. A bank doesn't have to be big to serve most people's banking needs. There are also a handful of depositor-owned "mutual savings banks" left. If you can manage to find one near you, check it out.

 

Online Banks

There are a number of FDIC-insured banks that exist entirely online, with no physical branches. Because of their lower expenses, these banks tend to be a bit more generous when it comes to interest on deposit accounts and to have lower (or no) fees. You can open a free online bank account online in minutes.

The downside is that because they have no branches, some online banks can be a bit inconvenient when it comes to making deposits. If your paycheck is direct-deposited, this isn't a big deal. But if you have to deposit cash or checks, it used be a hassle.

Nowadays, almost all online banks have some way for you to deposit checks, at least, without having to mail them. Most often, they offer a mobile app that allows you to sign the check, take pictures of the front at back, and upload it into your account. Then you hold on to the paper check until you're certain that it's cleared, after which you shred the check or file it away in the safe.

Options for depositing cash are more limited, but they do exist. Some online banks and credit unions have made arrangements that allow you to make cash deposits at local branches of other banks, department stores, convenience stores, Western Union branches, or other locations.

Obviously, the ease of making deposits is something you need to consider when choosing an online bank. Another is that as is the case with brick-and-mortar banks, FDIC insurance is optional for online banks; so make sure that any online bank you deal with is FDIC-insured.

 

Money Market Accounts

First off, let me make clear that this section is about money market accounts, not money market funds.

Money market accounts are interest-bearing deposit accounts held by financial institutions, usually banks or credit unions, that are insured to the extent that the institution itself is by either FDIC (for banks) or NCUA (for credit unions). As of right now, that limit is $250,000 combined for all accounts that a depositor has in the institution. That means that your money is just as safe in a money market account as it would be in a savings or checking account at that institution.

Money market funds, on the other hand, are investment instruments in which shareholders collectively own debt that in most cases is not insured in any way other than by promises from the debtors. You can make or lose money by investing in a money market fund. In theory, you could lose it all (although that would be extremely unlikely).

As stated earlier, you can't lose money in a money market account issued by an FDIC- or NCUA-insured institution as long as your total deposits in that institution do not exceed the federal insurance limit, which is currently $250,000 for both FDIC- and NCUA-insured institutions. Most recently-bankrupt people don't have a quarter-million dollars sitting around looking for a home, so the $250,000 limit should be more than enough to give you a warm fuzzy feeling about your money's safety.

The advantage to money market accounts over savings accounts is that they pay better interest. Some of the highest-paying ones pay about 1%. That seems paltry to someone my age who remembers when simple savings accounts paid six or seven times that much, but 1% is about a hundred times what most banks are paying for savings account interest these days.

There are a few catches, however. First of all, under federal law, you can only make up to six withdrawals per month from a money market account. That doesn't include in-person withdrawals, but many institutions do count them toward the total (which they are allowed to do as long as they tell you in advance). There also are exceptions for certain other transactions; but generally speaking, you should deposit money into a money market account with the assumption that you will be limited to six withdrawals every month. That's not a bad thing if your purpose in opening the account is to save money, but you shouldn't use a money money account as a cash account to pay ordinary living expenses.

Another catch is that some money market accounts have minimum deposit and/or minimum balance requirements, or have different interest rates based on how much money you have in the account. Read the fine print carefully. The big number splashed across their Web site may not be the one they pay you. It may apply to higher balances than you're able to maintain.

Some institutions that offer money market accounts also have fees associated with them. Personally, I avoid those institutions. I refuse to pay personal banking fees of any kind other than overdraft fees in the unlikely event that I ever bounce a check. In that case, it would be my own fault. Otherwise, I refuse to open an account at any banking institution that wants to charge me fees for lending them money, which is exactly what you're doing when you open a deposit account. They lend that money to others and collect interest on it. That's how they make money. I'm not going to pay them to do it.

Another thing to consider is how difficult it will be to get your money out of the MMA should you need to. Practically all institutions that offer money market accounts will let you transfer money in and via EFT (Electronic Funds Transfer) for free. This typically takes between one and five days in the United States. Most will also transfer money into another account instantly by wire transfer, which usually costs about $25.00 or $30.00, if you need it moved in a hurry.

In my opinion, the best withdrawal option for money market accounts is old-fashioned paper checks. Many institutions include check-writing privilege with their MMAs, some provide ATM or debit cards, and a few provide both. I prefer the checks because if I need the money in a hurry, all I have to do is write a check to myself and deposit it in my account at my local credit union. I could also write a check to anyone who's willing to accept one, and around here practically all individuals or businesses will. We're trusting that way.

I don't like the debit card so much because it makes it too easy to access my money. The MMA is where I keep emergency money. I don't want it to be so easy to get to that I can just yank it out of any ATM on a whim. That's too much of a temptation for me.

I'm not going to make any specific recommendations regarding where you should open a money market account because the rates change almost daily. Instead, I'm going to provide a link to Nerd Wallet, which somehow manages to stay up-to-date on these sorts of things.

 

Whether you choose a local bank, a credit union, an online bank, or a money market account as your savings repository, the important thing is that you have some sort of savings account somewhere. I personally like the MMA because of its (relatively) high interest and access to money that's neither too easy nor too difficult. Your needs and preferences may be different. But one way or the other, opening a deposit account for the purpose of saving for the future is an essential part of any bankruptcy plan. It is one of the very first things you should do after your debt has been discharged.

Revised January 17, 2017

 

 

 

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