What is an IRA?

When I graduated from college, my dad sat me down and explained that he wanted to help me open up a Roth IRA.

A what-now?

This did not sound like fun.

I figured anything that is named by a bunch of letters is usually complicated and when it comes to money, complicated is scary.

scared boy meets world

Basically me when I first heard the words “IRA”

As he explained what it was and how it worked, though, I started getting a little excited. And when I did my own research, I got a lot excited. Turns out, IRAs, particularly Roth IRAs, are pretty darn cool.

If you’re nervous about finances the way I used to be, it may sound crazy-pants to get excited by something that sounds both boring and confusing.

Fear not. I’m going to walk you through the important basics of IRAs and before you know it, you’ll be able to throw the term “IRA” around like you’ve always known what it means. You MIGHT even get a little excited.

Let’s get started.

What does IRA stand for?

IRA stands for “Individual Retirement Arrangement” although many people just say “Individual Retirement Account” because it makes more sense that way.

What is an IRA?

It’s a retirement account. This means it’s designed for you to put money in it, then invest that money in stocks and bonds, then sell those and take your money out gradually when you retire. Money in your retirement accounts is the money you will live off when you aren’t earning an income anymore.

Where can I open one?

You can open an IRA for yourself without going through an employer. Most brokerage firms, like Vanguard, Fidelity, Charles Schwab, and even E*Trade offer IRAs.

Who can open an IRA?

Anyone, including children, can open and put money into an IRA as long as they earn money somehow. It doesn’t matter whether you have a full-time job or if you babysit or shovel snow as a side gig, you can open an IRA as long as you earned some money and are reporting it to the government. No earned money? No IRA.

Parents can contribute to their child’s IRA as long as the contribution isn’t more than the child earned that year.

How many types of IRA exist?

There are four types of IRA, but we’re going to focus on the main two today: Traditional and Roth IRAs.

The Traditional IRA

The OG IRA.

You can put money into a Traditional IRA before you pay income taxes on it, so you avoid paying taxes on that money right now.

Instead, you pay the taxes when you withdraw the money in retirement. Anything you take out once you reach age 59½ will be taxed like income.

Taking anything out of the IRA before that time will cost you a 10% penalty.

The maximum amount you can put into this account per year (your “contribution“) is $5,500.

**UPDATE: Starting in 2019, the new max is $6,000!

Traditional IRAs are great for when you’re making a really nice salary and are getting closer to retirement.

The Roth IRA

Roth IRAs are the best for young or lower-income people.

Roths allow you to put money into them after you’ve already paid the income tax on it, which means you pay taxes now.

However, all the money you pull out after age 59½ is tax-free, INCLUDING any money you make by investing what you put in (money you make with investments is called “gains“). Income that’s tax-free?! Yes, please.

If you need to, you can take out the money you put into a Roth IRA for free at any time. You CANNOT take out your gains before age 59½ without paying the 10% penalty, but at least you have access to some of the money in the account without having to pay extra. Not that you should ever take money from your retirement account before retirement, but it’s nice to know it’s there.

The maximum amount you can put into this account per year is $5,500.

**UPDATE: Starting in 2019, the new max is $6,000!

Roth IRAs are great for when you aren’t making a ton of money because you pay smaller income taxes now and avoid paying taxes later.

PSST…if this is all a lot to take in, here’s a printable that lists these differences:

The ABCs of IRAs Printable

Which is better?

If you start your IRA early, the chances are good that you will make significant gains on that money, so a Roth is the better choice. Paying taxes on your lower income now will allow you to pull out a nice income during retirement without paying a dime of taxes on it.

As you get closer to retirement, Traditional IRAs often become the better option. The more money you make, the higher your taxes are. Most of us will make more as time goes on, and Traditional IRAs let you avoid paying heavy taxes on some of your income when you’re earning the most.

When you retire, as long as you pull less money out of your account than you used to make, you will pay less in tax than you would have using a Roth.

Confusing? Let’s look at some numbers.

Warning- Math Ahead

Let’s say you make $35,000 at the age of 20.

Using a Traditional IRA

In 2017, you would be expected to pay $4,784 in income tax. That’s not a fun number, so what if you contributed $5,000 of your salary to a Traditional IRA? Your income would now be taxed as if it were $30,000 instead.

That lowers your tax bill to $4,034, saving $750! Nice. If that $5,000 grows at about 5% for the next 30 years, even if you never add anything else to the account, you’d have $21,610 when you were 60 years old.

You could then pull out that money, but you’d have to pay $2,775 in tax when you pulled it out (assuming the tax rates are the same in thirty years!). That brings your total tax paid to about $6,809.

Using a Roth IRA

But let’s say you pay that $4,784 of income tax and then put $5,000 into a Roth IRA. You would make that same $21,610, but wouldn’t have to pay any tax on it when you used it at age 60, so you’d end up paying $2,025 less than you would by using a Traditional IRA.

If you contributed regularly to your IRA, you’d see this play out with much bigger, sexier numbers, but the basic idea is the same. As long as you can, you should contribute to a Roth IRA.

What’s the catch?

These IRA things are starting to sound pretty awesome, right? But, of course, there are some rules that limit how much we can take advantage of that awesomeness.

First, you can only contribute $5,500 per year to your IRAs, total. So, if you have both a Traditional and a Roth IRA, you can put part of that amount, say $2,500, into one, and the rest, $3,000, into the other, but you can’t contribute more than $5,500 between the two.

Also, Roth IRAs have income limits. This means if you make more than $118,000 as an individual, you aren’t allowed to contribute the full $5,500 to a Roth IRA until your income drops below that number again. Once you make more that $133,000, you aren’t allowed to contribute to it at all. Similar rules apply if you are married. For a chart that helps clarify what the income limits are for a Roth, check out Fidelity’s chart.

There are no income limits for a Traditional IRA, though, so if you are lucky enough to be making too much to put money in a Roth, contribute to a Traditional IRA instead.

Lastly, the early-withdrawal penalty I mentioned above can be painful if, for some reason, you HAVE to take money out of an IRA. All the more reason to set up an emergency fund.

Wrap-Up

The Benefits of IRAs

An IRA is a great way to stash away extra money for retirement. If you are already contributing to a work retirement account or if you don’t have an account through work, an IRA can help you stay on track to afford retirement.

Also, the fact that anyone earning income can contribute to an IRA means you can get a jump start on saving before you’re even in a full-time job.

The Potential Pitfalls

Like most retirement-specific accounts, IRAs have rules that punish you if you take money out too early. That doesn’t mean you CAN’T get to that money if you absolutely need it, but you may pay a 10% penalty for taking it out early.

There are exceptions to these rules, especially with a Roth, which is yet another point in its favor, but try to think of money in an IRA as off-limits.

And now you know the basics of an IRA! Congrats on making it through. As a reward, here’s a puppy in a cup!

chihuahua-dog-puppy-cute-39317.jpeg

Now, go open yourself a Roth and start stashing those extra dollars!

 

Disclaimer: None of the companies, apps, or websites mentioned in this article paid me to mention them.

How to start getting your finances together

crazy cat nebula

Does the topic of money make you feel like this? You’re not alone.

Probably the most daunting hurdle in your quest to get smart about your money and build wealth is the very first step: getting started.

Dealing with money can seem scary and feels like a huge chore, so it gets treated like the laundry you don’t really want to do — left in a dark corner until it starts to smell a little.

Ew.

The trouble is that time is one of the most important parts of the wealth equation. Given enough time, even a small amount of money can grow into a tidy sum.

So how do you get started building that little nest egg of yours when you are young, inexperienced, and probably not rolling in cash?

The trick is to keep it simple to start. By taking advantage of 4 types of accounts, you can build yourself a great financial foundation.

The Basic Accounts

Checking

Checking accounts are one of the basic bank account everyone needs. They are usually where your paychecks get deposited and where the payments for credit cards, checks, and even PayPal, Venmo, and other online payment systems come from.

Quick Tip: Look for checking accounts that allow you to pull money from any ATM with no fees or will refund your ATM charges. It’s a nice little perk that you’ll appreciate when you don’t have to hunt down the “right” ATM in a hurry.

Most checking accounts don’t pay interest; you may find one that has an interest rate, but it’ll be really low, so don’t count on your checking account to make you any money. It also shouldn’t be the place you stash your cash for the long term. Keep a comfortable amount in it to pay your bills, but your savings belong somewhere else.

Saving

As boring as it sounds, the best place for your emergency fund or savings you might need soon is in a savings account. Savings accounts can do a lot of what checking accounts can, but, with higher interest rates and no checks or debit cards attached to them, they are designed to be better places for money to sit than checking accounts are.

Not every checking or savings account is alike, however, and I would suggest using a tool like Magnify Money to shop around and find accounts with a decent interest rate and no weird hoops to jump through. Remember, there’s no rule that says your checking and savings accounts have to be with the same bank. Mine aren’t.

Many of the savings accounts with the best interest rates are online-only banks, which means you’ll have to have a checking account to connect to the savings account in order to add or remove money.

Personally, I like the idea that I have to wait a couple days for access to my online savings. The delay makes it really hard to spend that money. However, if you want or need access to your money more immediately, you might want to stick to a checking account or a savings account with a big-name bank that has physical locations. Just know you will be sacrificing interest rate for convenience.

As you get further along in your financial journey, you’ll be able to move some of that cash around and maybe make some more advanced decisions on how to save or invest it, but for your initial emergency fund, I think a savings account is the way to go. Hop over to our post on choosing the right savings account for more help with getting yours set up.

Investing Accounts

Investing is where you can really kick up your wealth-building game. Once you’ve gotten the hang of using your checking and savings accounts, investing is the next step. Without investing, anyone with an average salary is just not going to be ready for retirement.

If you’re a little lost when I say “investing” take a look at our What is investing? article, then pop back!

Retirement Accounts

Everyone needs some kind of retirement account. If you’re lucky enough to have a job that offers a 401(k), that should be your primary retirement account while you’re in that job. Other people might have IRAs, 403(b)s, or another type of account. Many have some combination of these.

Why open a retirement-specific account? Unlike standard savings accounts, these accounts are designed to be ideal places for your retirement savings. By investing your money in a retirement account, you’re likely to see much greater returns than in even the highest-yielding savings account.

Also, if you get on board with a retirement account offered by your employer, you’ll probably also have the opportunity to get some free matching money from that employer.

Even better, contributing to your retirement account often comes with immediate tax benefits, so you could be doing yourself a double favor by saving for your future and getting a tax break. Even those accounts that don’t give you a break on the money you put in usually make up for it with a tax break on the money once you begin to pull it out of the account in retirement.

Every type of retirement account allows you to invest the money you put into it. Some accounts offer more limited options than others, but there’s always a way to help your money grow while you’re just going about your everyday life.

Brokerage Accounts

If you’ve got a full, safely stashed emergency fund AND you’re maxing out your retirement accounts, the next easiest way to invest is through a brokerage account.

Brokerage accounts allow you to buy and sell stocks and bonds. These are TAXABLE accounts, so any gains you get when you sell what’s in them will be taxed as income that year, so be careful. For those of you with money nerves, a couple of low-cost funds and maybe a bond or two are the easiest and least dangerous ways to invest a brokerage account’s money.

The advantages of a brokerage account include the fact that the money in them is pretty liquid, which means you can take it out of the account at any time without penalty, unlike a retirement account. You could think of a brokerage account as like a checking account, except you invest the money instead of keeping it in cash. The danger, of course, is that your investments could lose value and you could end up with less money than you started with. A good rule is to not invest any money that you think you will need in the next couple of years.

I strongly encourage you to learn all you can about how stocks and bonds work before jumping into this pool. It can be rewarding, but it can also be dangerous for anyone who thinks they can game the system and make tons of money on trading. The market doesn’t work that way.

Wrap Up

And there you have it: a basic, 4-account map of how to get started with money.

Can be money be way more complicated? Heck, yes.

Does it have to be? Not if you don’t want it to be.

By keeping things simple with your everyday money in checking and savings, you’ll minimize the effort it takes to track your income and expenses. Taking advantage of your retirement and brokerage investing options guarantees that your future self will have money when he or she needs it.

Quick Tip: Using a platform like Mint or Personal Capital can take the effort out of checking on your finances. After linking all your accounts to the program, you just need to open the app to see how much money you have in each account.

How do you keep your money simple? Share your methods!

 

Disclaimer: None of the companies, apps, or websites mentioned in this article paid me to mention them. I just like ’em!

What is an emergency fund?

This one’s pretty easy.

An emergency fund or “rainy day fund” is any money that you have set aside to use ONLY IN CASE OF EMERGENCY.

The purpose of an emergency fund is to be a safety net in case you have an unexpected bill that would wipe out your checking account.

Experts recommend keeping 3 to 6 months of expenses in your emergency fund. That means enough money to pay your rent or mortgage; essential bills like food, water, gas, and heat; and any other recurring costs like debt payments.

What is an emergency

Losing your job

Probably one of the most stressful things that can happen to most people is the loss of a job. For people living paycheck to paycheck, losing that income can spell disaster for their financial life. Having an emergency fund to keep you afloat while you hunt for a new job can take an incredible amount of pressure off you.

Car repair bills

Cars are expensive, man. When one breaks down on you unexpectedly, you might be faced with a bill totaling hundreds of dollars. If you rely on your car to get to work, that bill needs to be paid right away. Your emergency fund can swoop in and save the day, allowing you to pay that bill and get back on the road with minimum life disruption.

Medical or dental bills

If you, a family member, or a pet get ill or need dental surgery, medical bills can come at you fast. Of course, health and dental insurance will cover some of the costs, but you’ll be responsible for the deductible, at least, which can be thousands of dollars.

 

What is not an emergency

A great sale

Seriously. I know the pull of those great sales at Nordstrom Rack, Target, Sephora, etc. But just because something is on sale does not mean you should buy it. If you were already going to purchase that thing anyway, then get it, but with your normal spending money, not your emergency fund!

Upgrading anything

If it ain’t broke, don’t replace it. That’s the saying right?

Raiding your emergency fund to pay for the newest phone, computer, coffee maker, or whatever just because you want an upgrade is not a good idea. If your current whatever-it-is works fine, keep it until you can truly afford to replace it without weakening your savings.

Keeping your emergency fund in a separate account from your spending money is usually a good move. Keeping it just slightly out of reach will help you pretend it’s not there until you need it. Hopefully you’ll never need it, but you’ll be so glad you have it if you ever do.

What is a 401(k)?

Welcome back to our What Is? series of posts. Today, we’ll tackle an exciting topic with a snooze-fest name — the 401(k).

The term 401(k) may look like something out of Algebra class, but it’s actually one the most important perks any job can offer.

More important than free food and a foos-ball table?

Oh yeah.

What is this mysterious number-letter combo and why does it matter so much?

401 huh?

Very simply, a 401(k) is a type of retirement account. Retirement accounts are designed to help you save money while you’re working to live off after you retire.

The name “401(k)” comes from the section of the Internal Revenue Service (IRS) rules that defines the rules for this account.

In 2018, you are allowed to contribute any amount up to $18,500 a year to a 401(k). Starting in 2019, that goes up to $19,000!

What’s the big deal?

These accounts are awesome for several reasons.

Reason #1:

If you sign up for your employer’s 401(k), you can assign a percent of every paycheck to be automatically put into that account. This means that money is safely squirreled away where you’ll never miss it. You’ll be saving with basically no effort on your end.

Reason #2:

Your 401(k) contributions are taken from your salary pre-tax, or before your income taxes are taken out. This lowers your income in the eyes of the IRS, which in turn lowers the amount of money used to calculate your taxes. So, by contributing to your retirement, you could also be saving your current self some moolah in taxes. When you retire and start withdrawing that money from your account, you will have to pay income tax on it, but you won’t be working, so ya know, it’s still not a bad deal.

Reason #3:

Probably the best thing about 401(k) accounts is that employers who offer a 401(k) usually “match” a certain percent of your contribution. What does that mean? If your employer matches up to 3% of your 401(k), that means that the first 3% of your salary you assign to be put into your 401(k) will be doubled by your employer, so you are effectively contributing 6%. That money is in addition to your salary and won’t be taxed until you withdraw it.

Let’s look at some numbers.

Say you earn about $35,000, and you contribute 3% of your salary to your 401(k). That works out to be about $1,050 a year. If your employer matches that 3%, you’ll actually be getting $2,100 a year going into your retirement account.

If you contribute more than 3%, good for you, but your employer will only match that first 3%.

How amazing is that? You’re essentially doubling your retirement contribution by taking advantage of your 401(k) — free money!

free money simpsons

What happens to that money?

When you sign up for a 401(k), you will usually be given a list of funds that you can choose to invest your 401(k) money in. Once you’ve done your research and chosen a fund or two, your money will be invested and will start to work for you, growing even beyond what you are contributing.

Once you reach age 59.5, you will be able to start taking that money out of the 401(k). If you take it out before then, however, you will be hit with a 10% fee, so try to imagine that money as off-limits until retirement.

Other types of accounts

Some professions have retirement plans that are different from a 401(k). If you work for a non-profit or for the government, for example, your retirement accounts will have different names.

Teachers and non-profit employees are often offered a 403(b) plan — named, shockingly, after section 403(b) in the tax code — which allows similar contributions to an account. These accounts work differently from a 401(k), however. We won’t delve into them in this post, but the fees and rules around each type of retirement account can vary significantly, so educate yourself on what those are before signing up for any account.

Can I wait to open my 401(k)?

No. Why would you?

It’s a lot to think about when I’m starting a new job.

Better to get the paperwork out of the way when you’re filling out all the other forms for your job than put it off for some mythical future date when you’ll magically have time.

I’m making so little money! Won’t it be better to wait until I make more?

If you start right away, you’ll never miss the money that comes out of your check, and you’ll be taking advantage of your most valuable asset — time. The longer you give that money time to grow in your account, the more money you’ll end up with down the line.

What if I need every penny?

Even if your starting salary is tiny, try to assign at least a percent or two for retirement. That’s about $200 a year from a $20,000 salary, or $17 a month. You can do this.

Future-you will thank you.

How to write a check (and other check-related stuff)

When you open a checking account, you’ll usually be given or sent a box with a bunch of checks in it. Even though they are much less popular than cards or cash for everyday spending, checks are still a viable way to pay for stuff, and sometimes they are the best or only way.

They also come in handy when you need to pay someone but don’t have the money right away. You can write the check and tell whomever you’re paying to wait until a certain date (when you know you’ll have the money) to cash it. 

If you’ve never had to use or write a check, however, they can be a little scary. The first time I wrote a check I messed it up majorly. So get psyched, because today we’re going to go over everything you need to know about checks!

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This is a check:

sample-check

Some will look a little different, but the basic layout of a check is always the same.

In the top left will be the information of the person or company who is writing the check. On your checks, your name and address will be here.

In the top right corner will be a number, which represents the number of the check. The first one in your pack should be something like 001.

On the bottom of the check should be a bunch of numbers in three groups. The group on the left is the routing number for your bank account. The middle group is the account number itself, and the last group is the check number again. When you pay for things online using your account or set up direct deposit payments, you’ll be asked to provide the routing and account numbers.

Then there are a lot of blank lines for you to fill out. Let’s look at how to do that.

How to write a check:

  1. Use a pen, never a pencil. You don’t want anyone being able to change the info on the check after you’ve written it. Also, as much as I love colored or sparkly pens, stick to blue or black ink for checks. 
  2. Write the date.
  3. On the line next to PAY TO THE ORDER OF, write to whom the check is addressed. For example, pretend Pinocchio is paying Jiminy Cricket for being his conscience. He’s going to write “Jiminy Cricket”. If you’re writing the check to a person, make sure you write the name that appears on that person’s bank account. In other words, don’t make it out to Bobby if his legal name is Robert.
  4. Next, on the big line under the PAY TO THE ORDER OF line, write the dollar amount you are paying in words and the cents as a number over 100. For example, Jiminy Cricket might charge $106 for his services, so Pinocchio writes “One hundred six dollars and 00/100”.
  5. In the box or on the line that has a $ in front of it, write the amount you are paying in numbers. Don’t forget the decimal! This is $106.00 in Pinocchio’s case.
  6. At the bottom of the check are two lines. The left one should say FOR. This is where you can write a note about what the money is being given for. You can write stuff like “Birthday gift” or “Gas money” here to help you keep track of where your money’s going or to remind the person you’re giving it to what it’s for, but this line is technically optional.
  7. Lastly, sign the line on the bottom right of the check. Hooray! You’re done.

Pinocchio’s finished check would look like this:

sample-check-filled-out

How to deposit a check:

  1. Double check that all of the information on the check is correct, including who is giving it to you and how much it’s made out to. Fixing errors after the money has been deposited may be difficult or impossible.
  2. Sign the back of the check on the line that says ENDORSE HERE. By endorsing the check, you are saying you have received it and the information on it is correct. Some banks have added a box on the back of their checks that needs to be marked if you plan to deposit your check through a mobile app.
  3. Take your check to the bank, or use your bank’s app to deposit the check.
  4. NOTE: If you use an app to photograph and deposit a check, make sure you hang on to the check until it clears and the money appears in your account. If something goes wrong, you don’t want to have to go back to the check writer and ask for another check. After the money is in your account, destroy the check by shredding it before trashing it.

I’m sure Jiminy Cricket needs his money for…top-hat maintenance? Whatever. He’d endorse his check like this:

sample-check-back

What to do if you make a mistake:

If you’re anything like me, you’re going to make at least one mistake on a check. Since checks are always written in pen, correcting errors has to be done carefully. Never use white-out on a check.

If you make a mistake, correct it neatly and with as little scribbling as possible; then write your initials next to the correction. This proves that you made the change, not the person you’re paying.

What to watch out for with checks:

  1. This may seem obvious, but make sure there’s enough money in your account to pay the full amount of the check. Checks act like debit cards in that they take the money from your account as soon as they are cashed. If you don’t have enough money to back it up, a check will “bounce”. A friend might just be annoyed by this, but businesses often charge fees of around $25 if a check you give them bounces.
  2. NEVER give anyone your blank checkbook, and especially don’t pre-sign a check for them. Once a check is authorized with your signature, someone could write any number they wanted in the money box and clean out your account.
  3. It’s also not a great idea to walk around with checks in your wallet or purse. If you lose your checkbook, it’s basically like losing a debit card. You’ll have to call your bank to freeze your account so no one can access your money, including you. Then you’ll have to go through the process of closing your account and opening a new one with a new number since checks have both the account and routing numbers on them. It’s a whole messy thing, so leave the checkbook safely tucked away at home unless there’s a very specific reason for taking it with you.

Whether or not you use checks regularly, knowing how to write them is an important skill. Now, when you go to pay your first month’s rent, split bills with your roomies, or pay your parents back for a loan they gave you, you can fill out your check with confidence and sign it with a flourish.

Snow day? Money day!(w/ Printables)

It’s the most wonderful time of the year: Snow Day Season!

In the winter, students all over the country wear their pajamas inside out and flush ice cubes down the toilet, hoping they’ll wake up to several inches of snow and no school.

And every so often, it works! (Not really, but it’s fun to imagine it might.)

Building snowmen and going sledding are both super fun, but after several snow days, you might find yourself looking for other things to do.

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Sure, you could binge the newest Netflix shows, play a video game, finally learn how to knit, or *gasp* finish all of your homework, but I’m going to make a radical suggestion: make a money plan.

Many money experts and companies encourage adults to set aside one weekday per quarter (every three months) to look through their money situation and change or update anything that needs attention.

Teens and college students may not have much money to manage, but it’s always good to know where you stand and have a plan in mind for the future.

So this year, I invite you to set aside at least an hour or two during a snow day (or teacher work day, or whatever) to take note of what you have, what you want, and how you’re going to get there.

To help, I’ve created a few printables that you can use (for free!) to help you get and stay organized with your money, even if all you have is a piggy bank.

Let me know if you use them and if you have any suggestions for edits or for other printables!

 

saver-sheet-image

A simple sheet with 12 steps to reaching your savings goals.

 

cash-countup-printable-image

For a quick round-up of your cash and accounts.

doodle-page-printable-image

If you just want to sketch out some of those awesome dreams and goals!

money-matters-printable

The classic envelope system of putting aside money.

 

What is overdrafting?

My senior year of college, five other girls and I drove down to Daytona Beach, Florida for our spring break. We were there too early in the season for all the crazy, party-hard events Daytona is known for, but we had a good time exploring the area and lying on the beach.

On our last day there, several of us stopped by a stall where a lady let you pick an oyster and then made some jewelry for you from the pearl inside. For $12, I got myself a cute gold necklace featuring my perfect, white pearl.

On the way home, my phone rang. It was my dad, telling me he’d gotten a message from the bank that my checking account was overdrawn.

“Don’t use your debit card for anything else!” he said.

I stared at the soda and snacks I had just bought at a gas station. Oops.

When I got home, my dad marched my brother and me over to the bank to talk to someone about overdrafting and how we had to be careful about our money. I was so embarrassed, I wanted to melt into the floor. It was a rough introduction to the overdraft monster.

How does overdrafting happen?

The overdraft monster appears when you spend more money than you have in your bank account.

Say you use your checking account to pay for something that costs $50. Unfortunately, you only have $45 in your account. Now, one of a couple of things might happen.

  1. Your bank declines the transaction and does not charge you a fee. Lucky you. Of course, you won’t be able to buy the item you’re trying to purchase. This scenario usually happens if you try to use your card for purchases, but sometimes the bank will reject (or bounce) a check or electronic withdrawal.
  2. Your transaction will still go through, but now your account will have a negative balance of $5. You have now overdrafted your account and the bank will charge you an overdraft fee as a penalty. This is what happened to me. Overdrafts usually happen with checks or automated payments that come out of your account, although each bank varies in its policy on what is allowed to trigger an overdraft.

Overdraft fees:

If you overdraft, the bank will charge you an overdraft fee, which is usually around $35. And not just once.

No, no.

Every time you overdraft, you owe another $35, which can really add up if you’re not careful.

The necklace and snacks I had bought had only cost maybe $20 total, but they had racked up $70 on top of that in overdrafts and fees!

Avoiding overdrafting:

Obviously, we NEVER want to pay overdraft fees, but how can we best protect ourselves against them?

Firstly, of course, we should always pay attention to how much money is in our checking accounts, especially if we pay automated bills or subscriptions from them. By being aware of how much money you have going into and coming out of your account, you can save yourself a lot of worry and will never come close to overdrafting.

If you don’t trust yourself to keep track of your money that closely, there’s a backup option available. Most checking accounts come with free “overdraft protection”.

Basically, overdraft protection means you connect your checking account to another, separate, bank account or credit card and give the bank permission to charge any overdrawn amounts to those accounts. I would recommend using a savings account as your overdraft protection. Credit cards are much riskier back-ups, since you’re just borrowing that money and will have to pay it back, perhaps with interest.

Some banks have restrictions on what kinds of accounts can be used for overdraft protection, so check with your bank before you sign up.

If you overdraft

There’s not much you can do if you overdraft, but it’s worth a shot to call your bank and ask about your options. After my dad dragged me to the bank, the woman we talked to was willing to excuse one of the two overdrafts I’d racked up. Someone might at least be able to help you sort out a payment plan.

In the end, however, it’s best to stay aware of your money situation and keep that overdraft monster from invading your life and bank account.

How to pick the right savings account

Just a head’s up, this post is not short. It has a lot of important info though, so if you make it to the end, I promise to have a shot of cuteness waiting for you. 😉

So you’re looking to open a savings account. Yay! Whether you’ve checked out my post explaining what a savings account is or you’ve independently decided to take this step, I’m proud of you.

Now, on to the toughest part: picking a savings account.

It might seem like the most convenient account to open is the best. Many teens and young adults end up opening accounts in the same banks that their parents use. When I went to college, my dad and I opened an account in the bank that was closest to my college campus. Sure, these options may work, but you should consider more than convenience when it comes to your money.

Fees

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Yeah, I know, I feel ya.

Probably the number one feature you should pay attention to when choosing your savings account is the fee structure. Let’s take a look at some of the most common fees that banks will build into their savings accounts.

Opening an account

Most major banks today allow you to bank with them at no up-front cost, but there are still a few that may require you to pay them to open an account. Unless there’s a really good reason for you to use such a bank that makes it worth $20-$30, I’d look elsewhere.

Monthly fees

Most big-name banks tack a monthly fee onto their savings accounts, and that fee might cancel out any benefit of a good interest rate. However, there’s usually a list of ways to minimize this fee or get around it altogether.

For example, as of this writing, TD Bank’s monthly fee for its Simple Savings account is $5. If you opt to receive your statements online only, that fee drops to $4. If you also open a checking account with the bank AND set a recurring transfer between the accounts of at least $25 a month, you get to avoid the fee for twelve months. Even better, if you can keep a balance of at least $300 in the account every day, you won’t get charged a fee at all. This account also has age incentives on it, so people under 18 or over 62 get their fees waived automatically, regardless of how much is in the account.

Whew! That’s a lot to absorb. And that’s just TD’s Simple Savings. That bank has a couple of other options for people with more complex money situations, but the fees and minimum balances of these are much higher.

Minimum Balance Fees

In the TD example above, we saw that a minimum daily balance of $300 would keep any Simple Savings customer from having to pay the monthly fee. This rule is fantastic until you spend a couple extra bucks and dip below that $300 mark. You’ll then be responsible for that fee for the month in which you slipped up. If you’re going to rely on a minimum balance to keep you from paying fees, you’ll need to keep careful track of the the money flowing out of that account. Keep an eye out for a bank with a low minimum balance.

Withdrawal penalties

Many banks have rules that cap the number of withdrawals you can make from your savings account. If you pull money out of the account more often, you might be slapped with a penalty fee up to around $10. Before you sign up for an account, know how often you’ll be allowed to withdraw money.

Early closing fees

Certain banks will charge a fee if you close your account before a certain date. Usually, this date is about 3-6 months from the day the account is opened, but the fee can be hefty — usually around $25. You should be sure that you can leave at least the minimum in an account until any waiting period is over.

Dormant/Inactivity Fees

Don’t let your money sit too long! Some banks will charge a fee of something like $5 if your savings or checking account has no deposits or withdrawals for a certain amount of time, often a year. This shouldn’t be a problem for a primary account, but if you switch banks, don’t forget to move your accounts within a year to avoid these fees.

Interest Rates

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Math. Can you do it?

High to low

Some banks will offer a fantastic, way-above-average interest rate to new customers. You might think you’ve lucked out, only to discover that the rate plunges after the first six months or year of your owning the account. This may or may not matter to you, but if you’re choosing a savings account based mostly on how much interest you expect to earn, make sure you read the fine print about how the interest rate will change over time.

Online vs Traditional

When we talk about banks, many people jump to the big names: Bank of America, Wells Fargo, SunTrust, etc. These banks follow the traditional model of having brick-and-mortar locations you can visit to do business, but they all offer online banking, too. The thing is, although these banks might seem like the best places for your money, they often offer some of the worst interest rates out there. They expect you to get excited if they give out 0.5% on a savings account.

So what’s the alternative? Fully online banks. Banks with no physical locations can offer interest rates double or more of the traditional banks’. The one major drawback to these accounts is that you must allow 3 or more business days for any money transfers out of them. Also, don’t go throwing your money into any online bank that flashes a pretty interest rate at you. These banks and their accounts still need to be analyzed based on the criteria above, but if you don’t care about having a big-name bank you can walk into, an online bank might be a good choice for you.

Bonuses

Banks are increasingly offering bonuses for opening accounts with them. Usually, these are chunks of money the bank gives you for opening an account and meeting some requirement(s), such as setting up direct deposit or depositing a certain amount of money. A nice bonus can make up for a lower interest rate, especially for smaller accounts.

Sources

The website MagnifyMoney.com allows you to compare accounts based on where you live and how much money you are looking to start the account with.  It also grades the banks based on how easy it is to understand their fine print, so you don’t get stuck signing a bunch of forms you don’t understand. It’s a quick, free way to see what’s out there. I recommend checking it out, and I’m not even getting paid to say that.

Nerdwallet.com regularly posts articles highlighting some of the best accounts out there. It’s also a wealth of information about all things financial. The folks there are also not paying me to talk them up, but they do good work.

Final thoughts

Clearly, there’s a lot to consider when choosing a savings account, but don’t let it overwhelm you. It’s better to have your money somewhere than nowhere, and if you decide you’d like to switch banks in the future, you can. Find a bank and account that fits your life right now, and get to saving!

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Ta da! I told you there’d be cuteness!

What is a checking account?

Checking accounts, along with savings accounts, are probably the most common types of bank accounts people have.

At first glance, checking accounts actually resemble savings accounts. They allow you to put money safely in a bank and access it whenever you want. The money in checking accounts is also insured up to $100,000, just like money in a savings account.

However, checking accounts come with a few perks that savings accounts do not.

Perks

First, they come with paper checks that you can write to pay people. Okay, so checks are certainly not used as much as they once were. When was the last time you saw someone pay with a check at the supermarket? But they are still an acceptable form of payment for most things you might want to buy. They are also useful for making big purchases when you don’t have or cannot use a credit card. Every landlord I’ve ever had has required a paper check payment for the first month’s rent and security deposit.

The second perk of a checking account is a check card, or debit card. This looks like a credit card, but will usually say “Debit” on it somewhere. This card is connected to your checking account, so whenever you use it to buy something, that money comes directly out of your checking account. This gives you the convenience of a credit card without the danger of spending way more than you have.

Two accounts?

So why would you have a savings account and a checking account? Well, one drawback of checking accounts is that they often do not pay interest the way savings accounts do. This has been changing over the last few years, but the interest rates are ridiculously tiny (as of this writing, Bank of America’s checking account interest rate is 0.01% — that’s one cent for every $100 in the account!), and you often must deposit a minimum amount to qualify to receive interest.  

The other drawback to checking accounts is how easy it is to get the money out of them. I can hear you thinking: Hold on. Isn’t that a good thing?

Yes, it is good…unless you’re trying to save money and you tend to be a spender. The fact that savings accounts make you put a bit more effort into getting your money out can help stop you from going on spending sprees, but that shiny debit card in your wallet is just begging to be whipped out every time you find an awesome outfit on sale.

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That being said, you’re going to need to build up some self control, and a debit card is often a great way to practice using a card responsibly before you get a credit card.

Your choice

In the end, the choice whether to have a savings account, a checking account, or both is up to you. A balanced approach might be to put most of your money in savings, and leave only what you’re willing to spend in the checking account. Having a little fun money never hurts, just don’t go crazy.

What is a savings account?

Ah, the good old savings account. This is often the only account most of us have or have even heard of before high school. A savings account is an account you can open with a bank. You put money into it, and it sits there, safely, waiting for you to need it. But what’s the big deal? Why is a savings account any better than stashing money in a piggy bank or under a mattress?

Two words: interest and insurance.

Interest

Unlike the money that sits in your piggy bank, money in a savings account earns interest. This means that the bank is loaning your money to people and paying you something as a thank you. Don’t worry, your money is still there and you can access it whenever you want. It’s just being used as part of the big pool of money the bank has to lend.

Sounds awesome, right?

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Free money!!

Well, this is a great arrangement for the banks, too, because they make the people to whom they loan money pay interest back to them, and that interest is a lot higher than what they pay you! Still, it’s fun to think of your money growing without you doing a thing except putting it in a bank.

You might have heard complaints about “low interest rates” in savings accounts over the last few years. It is true that the interest you earn on savings accounts is pretty tiny right now, but you’ll likely see interest rates rise and fall several times over your lifetime. Even a tiny interest rate is better than no interest, which is what you’d get from a piggy bank. Right now, the highest interest rates on savings accounts are around 1%. You definitely won’t get rich from your savings account, but, hey, it’s something.

Insurance

The second benefit of storing your money in a savings account is the insurance the bank offers on your money. Any money you put in a savings account (up to $100,000) is insured by the bank and stored in a fireproof safe. This means that if the bank goes out of business or burns down, you can still get your money back. If something happens to your piggy bank, though, that money is gone. Vanished. Kaput.

Something else money in a savings account is protected from? You!

If you are a spender, a savings account is your friend. Once money is in the savings account, the only ways to get it out are to physically go to the bank or ATM to get the cash or have it electronically transferred to another account, like a checking account. Most transfers take about three days to go through, which makes impulse spending difficult. It’s not foolproof, but by making spending your saved pennies difficult, savings accounts can help you break habits that keep you broke.

Know before you save

Ready to get a savings account of your own? Wait! There are a few things you need to know before you sign on the dotted line. Not all savings accounts are created equal. Learn about how to pick the right savings account for you and set yourself up for success in your saving journey.

If you want to know about other types of accounts, check out other articles in my “What Is…” series.