Posts Tagged ‘savings’

How many different types of bank accounts are there?

Thursday, June 30th, 2011

It’s pretty simple; once you’ve put your money in a bank, it usually lives in one of four types of accounts:

1. Checking – usually doesn’t earn interest, but the money is easy to access (like at the ATM or when you write a check)

2. Savings – earns a little bit of interest and is usually easily transferable to an attached checking account

3. CD – earns more interest than a savings account, but you agree not to take the money out for a set period of time

4. Money Market – earns more interest than a savings account, but the rate can fluctuate and there may be other account restrictions

It’s important to remember that these accounts are typically used to hold money you need today and the near future. If you have more money and are interested in earning greater return for the more distant future, talk to your financial advisor about other types of investments.

What’s the difference between checking and savings?

Tuesday, March 2nd, 2010

You probably see the words “checking” and “savings” most often when you’re hitting the ATM. Although both checking and savings are bank accounts that hold money you’ve deposited, when people withdraw money, they almost always take it from checking. Why?

Generally, a checking account is designed to hold spending money – money that you don’t want to carry around with you or stash under your mattress, but that you want within reach when you need to pay for your expenses. A savings account, as the name suggests, is designed for money that you want to save for later use. Because of this distinction, there are important differences between the two types of accounts.

When people or corporations cash checks you’ve written them, that money usually comes out of your checking account. You can withdraw money from either account, but people usually want to take the money from checking if they can. The logic behind this decision is that savings accounts generate interest, while checking accounts don’t necessarily (or if they do, there are usually a ton of conditions attached). The more money you leave in your savings account, the more you get paid in interest, so it makes sense not to take out any of that money unless you absolutely have to.

Checking accounts are created under the assumption that the amount of money they contain will fluctuate, while savings accounts are meant for money that you expect will stay with your bank for a while. Checking and savings differ from each other in accordance with their designated purposes, but they’re meant to complement one another.

A Savings Rate is…

Thursday, November 5th, 2009

A savings rate is the percentage of your disposable income that you save. For example, if your annual savings rate is 5%, that means you save 5% of your disposable income every year.

Today at TILE… Savings, Small Banks, and You!

Tuesday, October 13th, 2009

Today at TILE we talked about how people are saving more, yet banks are continuing to go out of business. If people are putting more money in banks and banks are lending less, why are they still failing? Shouldn’t more money in the banks mean a more stable economy?

You’d think extra savings would make sense, but so far this year, 98 (mostly small) banks have failed. That’s because the health of a bank isn’t only determined by the amount of money people save or how much it has locked away in the safe. It depends on a few key factors: the quality of the bank’s loan portfolio (what they lent to other people or businesses in the past), the amount of money they can currently loan to generate new business (which creates revenue or earnings), and, yes, the amount in the bank.

A bank’s loan portfolio is basically the assets on the bank’s balance sheet. The loan decisions made in the past can either prove to be good ones or bad ones. Let’s imagine you spent some money on seeds to plant a vegetable garden, with the expectation of selling the vegetables at the end of the season for a profit. Towards the end of the summer, you realize that the seeds were bad, or maybe you just didn’t take proper care of them. You try to salvage them, but unfortunately, no matter how much fertilizer and water you throw on, a bad seed is a bad seed – and you wind up losing money. Without any revenue or earnings, you can’t go out and grow your vegetable business and you may even see your plot of land absorbed by a more experienced gardener!

This is how a lot of small banks feel right now. The difference is that the “bad seeds” in their case are really bad loans for commercial real estate development (think about all those empty strip malls). According to Foresight Analytics, half of the industry’s $1.8 trillion in commercial real estate loans are held by small and medium sized banks – and those banks represent just 15% of the total banking industry. In other words, the small banks hold a very high percentage of bad seeds.

Another important factor is the amount of money banks can loan out in order to earn revenue. Going back to our garden analogy, let’s say that in the past you could plant one seed every inch; but today, the garden authorities (or regulators) are saying that in order to preserve seeds you can only plant one every five inches. In financial terms, regulators are requiring banks to hold greater capital reserves (money for a rainy day) and are thus reducing the amount of money they can borrow. In the past, a bank may have had $10, and regulators only required them to hold onto $1 in case of an emergency. At that time, banks also had the ability to leverage their money 20x. That meant they could generate $180 in loans ($9 multiplied by 20). Today, banks may have $10 in capital but need to hold onto $3, and can only leverage the money 10x. This means they can only generate $70 in loans. With bad loans (or “bad seeds”) on the balance sheet they are mostly focused on “getting back to even” – not focused on lending to new businesses or generating future revenue.

So what does it mean for the TILE Community? Well first, if you and your financial advisor determine that saving (or growing) your money is a good idea, then do it! At the same time, be conscious of the amount in each account (is it more than the $250,000 maximum insured against bank failure by the FDIC?), where it is (a large or small institution), and the expected return. Second, if you are looking to get a loan (and it doesn’t have to be for a vegetable garden), it may be tough out there. Since many smaller banks are overwhelmed by dealing with so many bad loans, they’re still hesitant to lend. But if you have a project or a business idea you really believe in, be persistent. Your time and energy may be the best investment of all.

- Amy

Pay-Yourself-First is…

Tuesday, June 30th, 2009

Pay-yourself-first is the smart money management practice wherein you place the money you’ve budgeted to save in your savings first thing – before you pay for bills, buy food, clothes, or anything else. This way, you’re making savings a priority and ensuring that you get some of  your income before anyone else does.

Why is a bank better than your mattress?

Wednesday, June 10th, 2009

Carving out a secret hole in the side of your mattress may seem pretty cool, but it’s really not a practical place to store your money (it doesn’t sound too comfortable either).

Mattresses, along with stuffed animals and shoeboxes, all seem like safe places to store your money (supposing no one else knows where it is), but you’re actually putting yourself in a financially bad position. By storing your money in places like these and not a bank, you are slowly losing money and risking all of it too. How does that happen?

Banks are not just money storage facilities; they use your money to offer financial services (at a cost) to other customers and in turn pay you interest on a regular basis. By keeping your money in a bank, you are actually earning money as opposed to just hiding it away. Banks also keep your money safe; your money is guaranteed up to $250,000 by the Federal Deposit Insurance Corporation (FDIC), a government organization, in case something happens to the bank. No one has ever lost a penny of covered funds from a bank failure since the FDIC was created in 1933. Compare that to losing your wallet or your sister raiding your mattress – you are not getting that money back.

What does this mean for you? Well, you can either be sure about the safety of your money (while earning a little extra at the same time) or you can hide it away under a mattress and hope no one ever peeks under the sheet.