Money Management: Checking Accounts, Budgeting, Savings & Credit Myths

Checking Accounts

  • Purpose: A checking account is a bank account that stores your money until you need it and allows access by writing checks, using an ATM, or a debit card. It is a demand account, meaning funds are accessible at any time.
  • Interest: Checking accounts typically earn very little or no interest.
  • Minimum balance: Some accounts require a minimum balance to avoid fees. Example: if the minimum balance is 1,0001{,}000, you must keep at least 1,0001{,}000 in the account at all times, even after writing checks.
  • Non-interest-bearing option: If you don’t want to worry about a minimum balance and want frequent withdrawals, a non-interest-bearing checking account may be best.
  • Payment methods: Writing checks or using a debit card is a great alternative to carrying large amounts of cash. Americans write billions of checks per year.
  • Paying bills: Writing a check is a common way to pay bills by mail; many utility companies will not accept cash as a mail-in payment.
  • Online features: Most checking accounts offer free online banking and electronic bill pay.
  • Safety: Safety Tip – NEVER send cash through the mail. Cash can be stolen, and a lost envelope means cash is gone with no receipt.
  • Proof of payment: If you pay by check, the reduced check becomes your proof of payment; once cashed, the payment appears on your bank statement.
  • Resources: National Credit Union Association – Money Basics Guide to Savings and Checking Accounts (Opens in a new window). Look especially at Section IV: Maintaining Savings and Checking Accounts to learn more about checks and checking account features.

ATMs (Automated Teller Machines)

  • What is an ATM?: ATMs are machines that dispense cash and allow you to access money from your account using a debit card and PIN.
  • Location and fees: Use ATMs associated with your bank to avoid extra fees.
  • Practical tips:
    • Be aware of all fees (if any) associated with the ATM.
    • Record all transactions (withdrawals and deposits).
    • Control spending — ATMs can make spending seem easier.
  • Access: Access is via a debit card and a PIN (Personal Identification Number).
  • PIN guidance: Choose a PIN that is memorable but not obvious; do not share your PIN with anyone.
  • Safety precautions:
    • Take your receipt after using an ATM.
    • Do not share your PIN.
    • If using an ATM at night, choose a well-lit location, preferably inside a business.
    • Always try to cover the keypad with your hand to prevent others from seeing your PIN.

Reading a Checking Account Statement

  • Frequency: You receive a monthly statement by mail or online.
  • Purpose: Compare the statement with your check register to ensure accuracy.
  • Common items listed on statements:
    • Checks written and cashed
    • Deposits made
    • Cash withdrawals
    • Fees paid
    • Your account balance
  • Debit card purchases: If your account includes a debit card, those purchases will appear on the monthly statement.
  • Check register: A tool to balance your account by tracking transactions.

Balancing a Checking Account (8 Steps)

  • Why balance a checking account:
    • Understand how much money you have
    • Help with budgeting
    • Prevent bounced checks and penalty fees
    • Detect banking errors
  • Steps to balance:
  1. Keep a check register.
  2. Find your current balance from a bank statement, ATM receipt, or by contacting the bank; write this balance in the far right column labeled “Balance.”
  3. Record all checks, deposits, withdrawals, and debit card purchases.
  4. Regularly recalculate the balance (after each transaction or weekly).
  5. Write the new balance after each transaction in the far right column.
  6. Compare your check register with the monthly bank statement.
  7. Correct mistakes by identifying where differences came from.
  8. Finish balancing (you may draw double lines under the balanced amount in your register).
  • Additional resource: Case Study – Balancing a Checkbook (DOCX). Also listen to the FDIC Checking Account Podcast in the Money Smart Series, Checking Accounts, Episode 3: Balance Your Checkbook.

Creating a Budget

  • Definition: A budget is a money plan that includes expected income, spending, and other financial requirements over a specific time period.
  • Purpose: Helps save money and manage finances wisely; plan for future bill payments, car payments, and rent/mortgage.
  • Flexibility: A budget can be flexible; think of income as a pie and allocate portions to different categories.
  • Pie analogy example: You might decide 10% for savings and 25% for rent; the pieces should add up to 100% and include savings.
  • Rule: If you spend more on one expense, less is available for others.

Income

  • Salary concept: If you are salaried, you receive the same amount each month and must plan accordingly.
  • Pie approach: Treat income as a pie; allocate a slice for rent, another for food, etc.; increasing one slice reduces the others.

Types of Expenses

  • Necessities / Nondiscretionary Expenses: Absolutely necessary (example: electric bill).
  • Nonessentials / Discretionary Expenses: Not essential (example: going out with friends, a coffee shop visit, gym membership).
  • Routine Expenses: Stay the same month to month (example: rent, car insurance).
  • Nonroutine Expenses: Not regular but important to plan for (example: major car repair, medical bill).
  • Fixed Expenses: Stay the same from month to month (example: rent, gym membership, car insurance).
  • Variable Expenses: Change month to month (example: food, entertainment, clothing).
  • Quick classifications (examples):
    • Gym membership: fixed, discretionary
    • Monthly rent: fixed, routine, nondiscretionary
  • Review exercise: Determine which items are discretionary vs non-discretionary:
    • Discretionary: Cable TV, going out to dinner, tickets to a sporting event
    • Non-discretionary: Gasoline, groceries, rent

Long-Term and Short-Term Savings

  • Goals: Setting goals is important for financial success; savings strategy differs for short-term vs long-term.
  • Short-term savings: For items like a summer vacation or a flat-screen TV; use high-interest savings accounts that do not penalize withdrawal.
  • Long-term savings: For goals like education or buying a house; invest more conservatively since the horizon is longer; penalties for withdrawal are less of a concern.
  • Common principle: Regardless of term, assign a minimum amount to each budget item and contribute to savings to grow wealth over time.
  • Budget worksheet: A worksheet should include all expenses (discretionary and nondiscretionary), income, and savings; plan savings before spending to pay yourself first.
  • Practical approach: Decide how much to save each month before you begin budgeting.

CREDIT MYTHS (Think About It)

  • All debt is bad: Not necessarily. Some debt may help you get ahead by helping you earn more money. Some debt (e.g., buying a house or a car) can be necessary for big-ticket items with lasting value.
  • Good debt examples: Debt that is an investment in your future (e.g., mortgage for a house or loan for education) can increase wealth if the asset rises in value or improves earning ability.
  • Wealth effect: If you buy something that increases in value or improves your ability to earn money, wealth may increase; if the value decreases, wealth may decrease, even if the debt remains.
  • Credit card use for extras: Using credit cards to pay for all extras you want but cannot afford is not a good practice and can lead to long-term trouble.
  • Getting out of debt: It can be difficult to recover from too much debt or poor financial decisions; it often takes years.
  • Online banking: It is a convenient way to manage money daily and avoid debt; most banks offer daily tracking tools.
  • Further reading: Federal Trade Commission (FTC) resources on credit (FTC website).
  • Note: As you review, keep notes on what you read and reflect on practical implications for personal finances.

Practical Takeaways

  • Always be mindful of minimum balances and fees in checking accounts.
  • Use ATMs associated with your bank to minimize fees; safeguard PINs and receipts.
  • Regularly balance your check register against your bank statements to catch errors early.
  • Build a balanced budget using the 100% pie approach; ensure savings exists in every plan.
  • Distinguish between types of expenses to prioritize essentials and plan for future costs.
  • Define short-term and long-term savings goals and choose appropriate accounts based on withdrawal penalties and liquidity.
  • Evaluate debt decisions with the concept of good debt vs problematic debt; avoid paying for discretionary items with high-interest credit.
  • Leverage reliable resources (FDIC, FTC) to deepen understanding of personal finance concepts.

Formulas and Numerical References

  • Minimum balance example:
    • If minimum balance = 1,0001{,}000, then required balance = 1,0001{,}000 at all times.
  • Budget pie (income I):
    • Savings: extSavings=0.10imesIext{Savings} = 0.10 imes I
    • Rent: extRent=0.25imesIext{Rent} = 0.25 imes I
    • Other: extOther=(1−0.10−0.25)imesI=0.65imesIext{Other} = (1 - 0.10 - 0.25) imes I = 0.65 imes I
  • Summary equation for the budget pie:
    • 0.10I+0.25I+0.65I=I0.10I + 0.25I + 0.65I = I