How to Invest $50-$5,000: The Small Investor's Step-By-Step Plan for Low-Risk, High-Value Investing

First Chapter

Chapter One

Institutional Cookie Jars: Banks

"That's where the money is," Willie Sutton told a reporter when asked why he robbed banks.

Some of your money should be in one too. And for that first $50, a bank savings account is the most logical place to begin.

Selecting a Bank

Like Willie, you want the best bank possible for your $50. However, not all banks treat all customers equally. So don't make a mad dash to the bank on the corner. It pays to shop around, even with only $50 burning a hole in your pocket. Eventually you will become a larger depositor and will need to use the bank for other reasons—a loan, a mortgage, or a checking account, certified checks, even references.

Since most Americans are always in a hurry, the single most common factor in deciding where to bank is, of course, location. Yet your nearest bank is not necessarily the right choice.

Before opening a savings account, check out your neighborhood bank, by all means, but also make personal visits to several others. At each one make an appointment with the person in charge of new accounts. Describe your financial needs; pay attention to what this person suggests. Don't worry about the quality of the wall-to-wall carpeting or the abundance of fresh flowers. Decor is not the issue, but other things certainly are.

Check to see:

• What the minimum deposit requirement is for a savings account.
• If all types of services are offered.
• How well rush-hour traffic ishandled.
• If there are express lines.
• If there are branches near both where you live and where you work.
• If there are bank officers available to answer questions, or if you are likely to be sent scurrying from one desk to another, in a Kafka-like circle.
• If there is written material available on interest rates and service charges—material that you can actually understand.

Then, compare fees and interest rates of all the banks you visit.

And check out credit unions.

Credit unions emerged in this country in the early 1900s to help those working-class people who didn't qualify for loans from commercial banks. The members of a credit union pooled their money and made low-interest loans to one another. Today credit unions serve groups of people with a common bond (see Chapter 2 for more on these institutions).

Although banks are free to pay whatever rate they choose, as of mid-2006 they were paying 0.50 to 1% on savings accounts while credit unions were averaging 0.85%. Web-only banks have even higher rates. That should tell you something.

The stated rate, however, is only the tip of the iceberg. It is also important to know exactly how often the interest will be paid, because every time your account is credited with interest, you'll earn interest on that interest, which is known as compounding.

So open your account at a bank where interest is compounded daily, not quarterly. You'll make more money.

Fees

In many banks, if your balance falls below a certain amount, you will be assessed a monthly charge or you will lose interest, or possibly both.

Or, if your account is inactive, meaning you have not made a deposit or withdrawal during a certain time period, banks typically charge a small monthly fee.

Yield

Banks often advertise two figures: the annual interest rate and the effective yield. The difference between the two depends on how often interest is credited to your balance, thus increasing the principal on which interest is paid. A 3% interest rate has an effective annual yield of 3% if the interest is credited annually. If it is credited quarterly, the effective yield is 3.094%, and if interest is credited monthly, the effective yield is 3.116%.

Online Banking

Many of the best rates on loans and savings are available at banks that operate via the Internet, rather than at traditional brick-and-mortar institutions. Because they have lower operating costs, these "virtual" banks are also much more likely to have low (or no) fees or minimum deposits.

Three FDIC-insured Internet banks with interest rates that are consistently above average are:

• First Internet Bank: 888-873-3424,
  firstib.com
• ING Direct: 800-ING-DIRECT,
  ingdirect.com
• NetBank: 888-256-6932, netbank.com
  

Coupon Clubs

It's certainly gimmicky, but if it helps you save, then give the bank coupon club a try.

The coupon club is the generic name for a myriad of programs devised by banks to attract business. These include Christmas clubs, Hanukkah clubs, and vacation clubs. They are also offered by many savings and loan associations and credit unions.

If you decide to join one, each week or month, depending upon the club, you make a specified deposit or payment, enclosing a coupon with your money. At the end of a stated period, usually a year, your coupons will all be gone and your account will be full of money. In some clubs you cannot withdraw your money until the stated period is over. Ask.

Couponless Plans

In many banks, you can sign up for automatic savings deposit plans. You designate the monthly amount you want to save, say, $35. This amount is then automatically taken out of your checking account and deposited into your savings account, where it will earn interest. The record of your transaction is then attached to your monthly checking account statement.

Couponless Plans

In many banks, you can sign up for automatic savings deposit plans. You designate the monthly amount you want to save, say, $35. This amount is then automatically taken out of your checking account and deposited into your savings account, where it will earn interest. The record of your transaction is then attached to your monthly checking account statement.

ATMs

Automated teller machines, electronic machines located on just about every corner of America, provide instant access to money 24 hours a day. To use an ATM you need an encoded plastic card issued by the bank, which is inserted into the machine, and a personal identification number (PIN). This PIN number is then punched in on the machine to access your account. Obviously you should never give your PIN number to another person or have it written down in your wallet; instead pick a number that you can memorize, such as your wedding anniversary or your mother's birthday.