Summary

The provided web content discusses the importance, functionality, and benefits of having a checking account in the context of personal finance management.

Abstract

The article "The Necessity of a Checking Account" under the "Fundamental Finance" series delves into the role of checking accounts as a cornerstone of personal finance. It explains that checking accounts are essential for daily financial transactions such as receiving salary, paying bills, and making purchases, due to their liquidity and accessibility through various means like checks, ATMs, and electronic debits. Although they offer minimal interest, the convenience and security they provide outweigh the nominal fees that may be associated with their use. The article also touches on the concept of fractional banking, where banks lend out most of the deposited funds while keeping a fraction available for withdrawal, which is a fundamental aspect of the American financial system. The piece concludes by warning readers about potential bank fees, particularly overdraft fees, and advises them on how to avoid these charges.

Opinions

Checking accounts are deemed nearly ubiquitous and essential for modern financial transactions.
The liquidity of checking accounts is highlighted as a significant advantage, allowing immediate access to funds without penalties.
Despite the low interest rates offered by checking accounts, the article suggests that their benefits, such as security and convenience, far exceed the drawbacks.
The author expresses dissatisfaction with the minimal interest rates (e.g., 0.01% at Chase) provided by checking accounts.
The practice of banks lending out deposited money is presented as a standard industry approach to generate profit, with only a fraction of the total deposits being kept on hand.
The author advises readers to be cautious of bank fees and to consider opting out of overdraft protection to avoid unnecessary charges.
The article promotes the idea of establishing a checking account as the foundation of a sound financial system, emphasizing the development of good financial habits like spending wisely and saving regularly.

FUNDAMENTAL FINANCE

The Necessity of a Checking Account

What it is. How it works. Why you need it.

Photo by **Karolina Grabowska** from **Pexels**

In the world of personal finance, there are few subjects that are more basic than how to use a checking account.

They are the staple of our society, allowing us to get paid from our jobs, pay our bills, purchase stuff online, and transfer money to both family and strangers alike.

They are nearly ubiquitous in our lives, but do you know how they really work, and why banks even offer them in the first place?

Do you know both the perks and limitations of your checking account?

Why do you even have one in the first place?

Let’s explore all those questions and more in this installment of Fundamental Finance.

The Basics of a Checking Account

From Investopedia,

A checking account is a deposit account held at a financial institution that allows withdrawals and deposits. Also called demand accounts or transactional accounts, checking accounts are very liquid and can be accessed using checks, automated teller machines, and electronic debits, among other methods.

Checking accounts came about because people wanted a “safe place” to store their excess cash when their mattress no longer fit the bill. Now, they are an essential part of anyone’s basic personal finance system.

As mentioned above, the best thing about checking accounts is that they are immediately liquid. You can roll up to an ATM 24 hours a day and withdraw a sizeable amount of cash.

No questions asked.
No waiting period.
No penalties incurred.

(ATM fees are simply flat fees, not penalties such as those incurred by withdrawing early from an IRA.)

Just quick easy access to your funds.

In return, you get accrue interest at the sky high amount of 0.01%! (At least, that’s my interest rate at Chase. And yes, I’m looking around)

While you don’t make any money with a checking account, it’s a damn sight better than lugging around your entire paycheck in cash, then paying your bills in cash.

The Benefits of a Checking Account

The biggest attraction to having a checking account is that it can be accessed, linked to, and immediately used for just about anything.

Use direct deposit to skip going to the bank every payday.
Link it to Venmo to transfer money for Facebook Marketplace purchases.
Set up automatic transfers to a savings account to pay yourself first when you get your paycheck.
Pay a bill online and avoid the check, stamp, and snail mail hassle.

The flexibility and immediate availability are the best reasons to open a checking account.

FYI: Not All of Your Money Is At The Bank

You might have wondered what banks do with all the cash they have lying around.

The answer? They lend it out.

Say you deposit $1,000 in your checking account. Well, just keeping that full amount in a “free” checking account that isn’t incurring fees or interest won’t make them any money.

In fact, checking accounts are used as loss leaders across the entire banking industry.

While you deposit won’t make any money, a loan will.

The bank takes $900 of your money and lends it out, with interest, leaving only $100 in the bank available for withdrawal.

This lending of deposits is the very definition of fractional banking that is the core of the American financial system.

It might seem risky, as a lot of people might want all their money all at once. This is what’s known as a “run on the bank”, epitomized by the movie It’s a Wonderful Life.

However, when you have thousands or millions of customers across an entire country who are probably not going to want all their money all at once, the risk decreases substantially.

How Do I Get a Checking Account?

Most any bank or credit union will gladly open an account for you. They’ll even make it “free” if you agree to direct deposit, a minimum balance, or some other arbitrary requirement.

You’ll get a debit card for free, but physical checks cost extra.

Just remember that a debit card only allows you to spend what is in your account, and no more. It’s not a credit card.

What Traps Should I Avoid?

Since banks lose money on free checking accounts, they set up all sorts of minefields for you to trip on and get hammered with a fee.

The most notorious is the overdraft fee.

If you spend more money than is in your checking account, you have drafted (approved spending) beyond your actual balance.

The bank will cover this extra amount, but not without charging you an overdraft fee, most commonly set at $35 per overdraft.

If you are running at the financial red line every month, I would suggest deactivating this option and avoid the extra charge.

When your overdraft protection is deactivated, your debit card will be declined. Sure, it might be a little embarrassing, but it’s worth the temporary weirdness to save that $35.

The Takeaway

Opening and using a checking account for your daily finances is the most basic step in personal finance.

Most of us have a steady paycheck, repeat expenses, and multiple debts. Having a checking account as the heart of your money system is the first step to establishing great financial habits.

Spend wisely, watch out for the fees, and pay yourself first.

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This article is for informational purposes only, it should not be considered Financial or Legal Advice. Not all information will be accurate. Consult a financial professional before making any major financial decisions.