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The Complete Idiot's Guide to Personal Finance in Your 20s and 30s

- 3 -

Taking a Look at Your Bank Accounts

In This Chapter

• Shopping around for the best bank bargains
• The big three: banks, credit unions, and savings and loans
• Balancing interest rates with bank fees
• Cutting costs when using the ATM
  
  

It's tough to keep up with banks these days, even your own. You just get usedto dealing with the First Bank of Smithsville, when it merges with a bigger bankand changes its name to the First National Smithsville Bank. Just when you adjustto that, it merges again and changes its name to the National SmithsvilleBank of Jonesburg. It's a full-time job just keeping up with all the changes.

It wasn't always like that, though. Not too many years ago, people banked at smallinstitutions where they were known and called by name. They could get an appointmentwith the bank president if they had something to talk to him about, and tellers gavelollipops to their kids. There were no ATM machines nor direct deposit of your paycheck,so you had to walk your paycheck into the bank and t alk to somebody about what youwanted to do with it. The person handling your check would ask how you were and wouldwant to know about your family. Banking was personal. Banks went out of their wayto get and keep your business, and many customers remained loyal to their banks throughouttheir lives.

John T. Connelly is chairman of the board and former president of the First NationalBank of Leesport in Pennsylvania, a mid-sized, regional institution founded as asmall-town bank in 1907. Connelly tells the story of a man in Reading, Pennsylvania,who in 1960 wanted to borrow $300 to buy a truck in order to start an oil-deliveryservice.

None of the banks in Reading, which is located about 12 miles from Leesport, wouldgive the man a loan. The Leesport bank, however, agreed to lend him the money. Theman's business grew tremendously, and he soon had one of the biggest oil-deliveryoutfits in the area.

Leesport Bank had no branch offices in those days, so the man would drive fromReading to Leesport every day to make deposits and conduct other bank business. Finally,Connelly asked him why he didn't find a bank closer to home. "He told me henever forgot that Leesport gave him that first loan when the other banks turned himdown," Connelly says. "He was a customer, a good customer, with us untilhe died."

It's harder these days to find that kind of personal service and customer loyaltyin banking. You may be intimidated by the recent rash of bank mega-mergers or allthe restrictions and conditions under which banks seem to operate. You might be downrightconfused about the type of financial institution with which you want to be associated.You may have to look around a bit to find a place that feels right for you, but don'tbe discouraged. It can be done.

Do You Have the Accounts You Need?

Chances are pretty good that you already have savings and checking accounts. You'veprobably been writing checks for years for things such as books and rent, and youprobably use a debit card, too. There's also a good chance that you've hada savings account since before you were even old enough to know what it was. Manyparents open savings accounts in their children's names and use the accounts as aplace to save the money the child gets at birthdays and holidays.

Of course, there's the possibility that you've managed to get through life sofar without checking and savings accounts. If that's the case, it's time toget them established. If you already have accounts, it's time to take a good lookat them to see if you're getting the best deal on them that you can.

Checking Accounts

The concept of a checking account is simple. You keep money in an account andwrite checks (or use a debit card) from that account instead of paying with cash.Using checks eliminates the need to carry large amounts of cash or send cash throughthe mail to pay bills.

Most banks pay you no or minimal interest on the money in checking accounts, butnearly all banks impose fees and conditions on checking accounts. It pays to lookat some different banks when you're considering opening or changing a checking account,because the difference in fees and conditions imposed can be significant.

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Dollars and Sense

The average interest paid on checking accounts these days is approximately 2 percent, according to www.bankrate.com, a Web site that provides rates from banks across the country. You might be getting a good deal on a savings account at a particular bank, but losing money on your checking account. We'll talk more about credit unions a little later in this chapter, but don't overlook them when shopping for a place to open a checking account.

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There are various kinds of checking accounts. Some pay interest (although nonepay very much), and others charge you a monthly fee if your balance falls below aminimum amount. Some charge you fees to open the account. Some charge you for eachcheck you write, and others charge you if you write more than a certain number ofchecks each month. You get the idea.

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Money Pit

Just like lunch, there is no free checking. Be careful when you see a bank that offers "free checking" when you open several accounts there. You could end up paying more fees on the other accounts or losing out on higher interest rates you could get from another bank.

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Most of us don't think too much about our checking accounts. But by looking aroundand getting the best deal you can, you could save hundreds of dollars over the nextfew years. Of course, contacting 8 or 10 different banks and trying to compare everyaspect of their checking accounts would be a daunting task, to say the least. Butyou do want to shop around. Be sure to consider the deals offered by 3 or 4 differentbanks before making a decision.

What you'll need to do first is figure out your habits as they relate to yourchecking account, and then find t he plan that best suits your habits at the lowestprice available. For instance, if you write only three checks a month--one to yourlandlord, one to pay your Visa bill, and one for your college loan--you may do wellto consider an account that includes a charge for each check written. Your fee wouldbe minimal, and there could be benefits elsewhere that offset the per-check fee.Many financial institutions provide extra services or fee waving for minimum depositsin several accounts. Check this out. You can save money. On the other hand, if youcarry your checkbook with you and write checks for everything from groceries to haircutsand shoes, then you want to at all costs avoid a bank that charges for every checkyou write.

If you always have a lot of money in your checking account or a correspondingsavings account, the bank might waive monthly fees. But if your account balance varies,or you don't keep much money in it, look out. An annoying thing that some banks dois to impose a fee if the balance of your checking account falls below a certainamount even for one day.

Suppose you have $1,000 in your checking account all month long, and now it'stime to pay the bills. You write checks for the rent, the electricity, the phone,and your credit card bill. By the time you've finished, your checking account isdown to $225. You're not worried though, because Friday is payday, and you'll bedepositing more money in the account. Aren't you surprised when your next bank statementcomes, and you've been charged $10 for a low minimum balance. It was only a coupleof days between the time you paid your bills and deposited more money, but wham!your bank got you.

A better way to go is with a bank that uses an average daily balance system. Thatway, as long as your account balance stays above $250 (or whatever) for the month,you're not penalized. Unless you keep a ton of money in your checking account, whichisn't a great idea, you probably will do better with the average daily balance system.

Be sure you find out some basic information about checking accounts from everybank you query. When you get the information, write it down carefully, and keep trackof which banks have given you particular information. Things can get pretty confusingif you don't keep your information in some kind of order. Some things to ask aboutinclude the following:

• How much money do I need to open the account?
• Does the account pay interest?
• Is it compound or simple interest?
• How often is the interest compounded?
• Is there a monthly service charge on the account?
• How much money must I keep in the account to avoid a monthly fee?
• Does the bank use a low minimum balance or an average daily balance system?
• How much will I have to pay each time I need to order checks?
• Is there a limit on the number of checks I can write each month without having to pay a per-check fee?
• Will I have to pay a fee to obtain my account balance?
• How much will it cost if I bounce a check?
• Is there a feature where money will be transferred automatically from my savings account if I write a check for more than I have in my checking account?
• Are my canceled checks returned to me at the end of each checking period? Is there a fee if I want them?
• Is there overdraft protection if I overdraw my account?
• What's the monthly fee for overdraft protection?
• Are checking account fees waived if I keep a minimum balance in my savings account?
• Can I buy whatever checks I want, or must I get them from the bank?
• Can I access my account on-line?

After you've opened a checking account, or changed your account to a bank thatoffers a better deal, there are a few other things to keep in mind. One simple, butimportant, rule is to keep your checkbook in a safe place and report it immediatelyif it's lost or stolen.

You must keep track of how much money you have in your account. If you don't,you risk bouncing a check. The average fee for bouncing a check these days is around$25 per check, making it a very expensive mistake. Bounce three checks, you justwasted $75.

Record every transaction immediately, or sooner or later, you'll forget aboutone. Record the checks you write as well as ATM and debit card transactions. Somepeople find it more convenient to stick a Post-it note on the outside of their checkbookand write down the basic information as soon as they write the check. Then, the informationcan be recorded in the checkbook when there's more time.

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Show Me the Money

You use debit cards, which look like credit cards, to pay for purchases, but the money comes out of your checking account. Debit cards give you the best of both worlds: You get the convenience of a credit card without putting yourself in debt. An ATM card may or may not be a debit card. An ATM card accesses your account through an ATM machine. A debit card accesses your account from almost anywhere.

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Even if you don't balance your checkbook to the penny, which is what you shoulddo, make sure you know as accurately as possible how much money you have. Alwayslook over your statement each month and confirm all deposits, ATM transactions, andwithdrawals. If you notice something that doesn't look right, call your bank rightaway. Banks do make mistakes, and they're not always in your favor.

Balancing a checkbook requires you to first list every transaction made duringthe month. You add deposits to your balance, subtract out checks, and remember everyATM or debit card transaction. At month end you compare what you have with what thebank has on their statement. Should be the same. The easiest way I've found is bykeeping the checkbook on the computer.

To help you avoid bouncing checks, find out about your bank's check-hold policy.Banks may hold any local check of $5,000 or less for two business days and certainother checks, such as those for large amounts, for up to eight business days. Thatmeans that you could deposit your paycheck or the birthday check from Aunt Mary andstill not have money in your account for two days or more. You'll be in for a shockwhen you use your debit card at the grocery store only to be told that you're sufferingfrom the dreaded insufficient funds.

Also, find out what time of the day your bank stops handling transactions. Ifyou make a deposit at 3:30 p.m., you may have missed the transaction cutoff for thatday, and your deposit won't be processed until the next business day. Don't hesitateto ask the teller whether your deposit will be made that day.

If you ever find yourself considering a stop payment on a check you've written,consider what it will cost you. Say you write a check for $50 to your friend Robbecause you just bought his old in-line skates. Two days later, Rob tells you helost the check. He's not sure if he threw it out along with a stack of papers, orif he dropped it somewhere between your place and his. What to do?

You could call the bank and request a stop payment on the check. You'll need toprovide the bank with all the applicable information about the check. The problemis, a stop payment will cost you somewhere around $20, and your check might be safelyresting in a landfill someplace, never to be seen again. Or it might be somewhereon the sidewalk between your place and Rob's, waiting to be found by someone whojust might try to cash it. It's a judgment call, and you'll have to decide what todo.

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 Dollars and Sense

There are some good software programs to help you balance your checkbook and take care of other basic financial tasks. Check out Quicken Basic 98 or Microsoft Money. Or look in your library or local bookstore for books to help in these areas.

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Savings Accounts

A lot of the same points we discussed about checking accounts apply when you'relooking for a place to open a savings account. You'll need to figure out your savingshabits and find a bank that has a deal that will best suit your habits.

Most banks will charge a monthly or quarterly maintenance fee and maybe an additionalfee if your balance falls below a required minimum. In addition, you might be requiredto keep a savings account active for a spe cified time, or face penalties.

Review the list of questions suggested in the section on checking accounts, andask those that apply to savings when you're looking for a place to set up your account.You'll also need to ask a few other questions that apply to savings accounts:

• Does the bank use a tiered account system? A tiered account system means you'll earn higher interest if your account balance is consistently over an amount as set by the bank, usually at least $1,000, but many times higher. There are exceptions, but generally it's better to have your money somewhere other than a savings account if you have a large amount. Still, it's nice to know what you'll be earning on the money in your savings account.
• Will I be penalized if I close the account before a certain time?
• Is the account federally insured?
• How much interest will I get on my savings?

Although many banks don't pay interest on checking accounts, all banks pay intereston savings accounts. Banks used to pay 5 percent interest on all savings accountsbecause it was a federal regulation. Then along came banking deregulation in 1986,and interest rates haven't been the same since. Deregulation allowed banks to offerdifferent kinds of accounts, which became competitive with each other and earnedsubstantial interest. The higher interest on those accounts resulted in savingsaccount interest rates being lowered.

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Dollars and Sense

The average savings account earns about 2 percent interest, similar to an interest-bearing checking account. Not much to get excited about, is it? <<HR>

Still, it pays to shop around because the amount of interest varies from bankto bank. In addition to www.bankrate.com, financial magazines such as Moneypublish lists of the highest-paying bank accounts each month.

Other Useful Accounts

Money market accounts and certificates of deposit are two other kinds of bankaccounts you can have. These accounts are explained in detail in Chapter 13 if youwant more information than is presented here.

Money market accounts (MMAs) were created in 1982, and, in those good old days,you could earn 10 percent or more interest on them. For some reason, banks in Atlantaat this time offered interest rates of 25 percent on MMAs. Of course, it was toogood to last. Atlanta's rates came down fast (as you might imagine), and rates elsewherealso fell. During the next 10 years, MMA interest rates bobbed up and down like asmall boat on rough seas, but they never got back to the early rates. MMAs, whichare considered to be a type of savings account, generally pay a bit more interestthan regular savings accounts, and you can write a minimum number of checks (usuallythree) on the account each month.

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Money Pit

If you write only a couple of checks a month, a money market account might be worth considering. But there's usually a hefty fee ($10 to $20) if you write more than the number of checks permitted. Any additional interest will quickly be chewed up if you have to pay for extra checks.

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If your savings account balance becomes substantial, that is, containing moremoney than you think you'll need anytime really soon, consider putting some of itin a certificate of deposit (CD). With a CD, you deposit money for a specified amountof time, usually from three months to a number of years. The longer you leave yourmoney in the account, the more interest you should get on it. Interest rates on CDsare higher than those on savings accounts and money markets accounts, but there'susually a penalty if you need to get the money out of the account before the agreed-upontime. Although there are variable (changeable) late CDs, usually CD rates are setfor the term of the certificate, while money market rates are changeable at any time.

All Banks Are Not Created Equal

Take a look around the area where you live sometime, and notice the differencein the financial institutions. There are probably quite a few, ranging in size fromsomething as big as the $300 billion-dollar Chase-Chemical bank to a small, localbank. When you look a little closer, you'll even find some places other than banksthat will handle your money for you.

Generally, there are three types of financial institutions: banks, thrifts, andcredit unions. Although commercial banks handle about three-quarters of the totalamount of assets within the entire financial system, many people prefer thrifts orcredit unions. Let's take a look at each type of institution and some of the differencesbetween them.

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Pocket Change

The U.S. banking system is federally operated, but it has 50 state jurisdictions, each with its own regulatory and operating procedures.

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Commercial Banks

Commercial banks, sometimes called full-service banks, are the most wi delyused financial institutions in the United States. There are somewhere around 13,000different commercial banks operating. That's down considerably from the banking heydayof the 1920s, when there were about 31,000 different banks.

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Show Me the Money

Commercial banks are the segment of the U.S. banking system that provide the majority of financial transactions services. They hold about three-quarters of the total assets within the banking system, and provide a variety of services.

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Banks first became regulated in 1863, smack in the middle of the Civil War. Today'sregulations are still based on that 1863 legislation, called the National BankingAct. The act was instated to cover five areas of banking: deposit taking, foreignexchange trading, lending, issuance of notes, and negotiating or discounting promissorynotes. Other areas of regulations have been added since the original banking act,and some of the original regulations have become obsolete.

Commercial banks are permitted to take deposits, loan money, and provide otherbanking services. They can have either a federal or state charter and are regulatedaccordingly. Those with federal charters are regulated by the federal Comptrollerof the Currency. Federally chartered banks must be members of the Federal Reservesystem and the Federal Deposit Insurance Corporation (FDIC), which the bank paysto insure individual bank deposits.

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Dollars and Sense

The name of a bank can help you figure out whether it's state regulated or federally regulated. If it's federally regulated, its name will include "National" or "N.A."

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Those with state charters are regulated by banking authorities in the state inwhich they're incorporated. However, those that meet specific guidelines can applyto be members of the Federal Reserve system and the FDIC.

Commercial banks vary greatly. They can be huge mega-banks that have been springingup during the past several years or small, community banks. The 300 foreign banksthat operate in the United States are technically commercial banks. They must complywith federal regulations, but many of them do not offer the banking services thatan average customer would require.

Credit Unions

If you want an alternative to commercial banks, you can consider a credit union.Credit unions offer many of the same services as commercial banks: checking accounts,savings accounts, vacation clubs, ATM services, and calendars at the holidays. Theygenerally can offer better rates on loans and savings, however, because they don'tpay federal taxes.

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Show Me the Money

Credit unions were first established in this country in Massachusetts. They were defined as "a cooperative association formed for the purpose of promoting thrift among its members."

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Credit unions are non-profit organizations that were imported to the United Statesfrom Germany in the early 1900s. They were regulated in 1934 by the Federal CreditUnion Act, which limits membership to "groups having a common bond of occupationor association." Groups from particular geographical areas also were eligibleto join c redit unions.

Membership limits were expanded in the early 1980s, however, mostly to accommodatesmall businesses that didn't have enough employees to establish their own creditunions. These small businesses were allowed to join existing credit unions, causingmuch dissatisfaction among banks. Banks and credit unions have been sparring overthe relaxed membership requirements, with banks claiming that credit unions havean unfair tax advantage. The Supreme Court recently ruled on the side of the banks,saying credit unions have been allowed to add members that shouldn't have been eligibleto join.

If you're interested in joining a credit union, find out if you're eligible formembership through work. If not, you might be able to join one based on membershipin a professional organization or club. If you need more information about how tojoin a credit union, you can call the Credit Union National Association in Madison,Wisconsin. The number is 800-358-5710. Before joining a credit union, make sure it'sa member of the FDIC, which guarantees deposits. Some credit unions are not FDICmembers.

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Pocket Change

Credit union membership has extended far beyond people who work for a particular business or industry. There are credit unions organized by ethnicity, such as the Polish-American Credit Union, and even by family name. There are seven Lee Credit Unions, supported by the approximately 100,000 people in the United States with the last name Lee.

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Thrifts

Thrifts are the financial institutions commonly known as savings and loans(S&Ls). Savings and loans have had a tarn ished reputation since the late 1980s,when many of them failed and had to be bailed out by Uncle Sam (that is: taxpayerdollars). The cost of the bailout continues, and experts say it could ultimatelycost taxpayers as much as $500 billion.

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Show Me the Money

Thrifts are the collective name for savings banks and savings and loan associations. They generally accept deposits from, and extend credit primarily to individuals.

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Although the thrifts have lost some of their allure during the past decade, theyprovided an excellent service when they were first started in the 1930s. The ideaof the savings and loans was to promote individual home ownership, and many peopleborrowed from S&Ls in order to realize their share of the American dream.

Recent legislative changes have greatly improved the quality of thrifts, makingthem again a good options for depositors. Make sure your deposits are insured bya sign in the window that says SLIC, on bank material, or ask a bank employee, andwho knows? You might be able to grab onto a little small-town banking atmosphereat a savings and loan.

So, What's a Percentage Point or Two Among Friends?

For most people, interest rates are among the most important, if not themost important, reason they choose a particular financial institution. Although it'snot always smart to choose a bank based solely on its interest rate, the interestrate definitely is important.

Say you have $1,000 in a savings account that you're going to let sit for a year.At 2 percent interest, you'll have $1,020 at the end of the year. But if you putthe $1,000 in a CD, you might earn 4.75 percent. At the end of the year, you'd have$1,047.50. A percentage point here and there adds up. And, as you get more money,it makes even more of a difference.

Another New Bank Fee?

We've already covered a lot of material in this chapter about fees imposed bybanks, credit unions, and thrifts. It might seem like every time your monthly statementcomes, there's an additional fee. Banks are able to do this because customers letthem. Don't you think that if every single customer of a particular bank showed upat the door to protest the latest fee, the big shots of that bank would think twicebefore adding another one?

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Pocket Change

It used to be that most of the profits financial institutions realized came from the spread between interest they'd pay on deposits and interest they charged on loans. But now more than 50 percent of the average bank's earnings comes from fees.

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Nickel and Diming

Bank fees might seem like pesky little charges that customers have to pay. Makeno mistake about it, though, banks are making big bucks off these nickel-and-dimecharges. Many banks count on fees to boost their bottom lines. An extra 50 centson your monthly service charge won't kill you. That averages out to six dollars ayear, about the cost of a lunch. But think of six extra dollars from every bank customer,and the amount seems more sizeable.

The best thing to do is to go to your bank and get a copy of its fee disclosurestatement. Look it over carefully, and see how many of the fees apply to you. Ifit seems like too many, you might want to think abo ut finding a new bank.

The Great Interest Versus Bank Fee Dilemma

You find a bank that's offering an interest rate that's higher than any otherbank around. You can't wait to get your money into it. Well, you might have founda good deal, but you might be getting pulled into something you'll regret. Be sureto take a careful look at the fees this bank charges before you march in with thecontents of your savings account. Banks sometimes try to lure in customers with highinterest rates.

Although you think you're getting a good deal on interest, a bank could be chargingyou much higher fees than you'd pay at the one down the street. And it's very likelythat the "special interest rate" that drew you to the bank in the firstplace won't last for more than three or six months.

On the other hand, don't automatically reject a bank because the interest rateis a bit lower. If the fees are substantially lower, too, you still might end upsaving money.

Banking restrictions and regulations can be complicated, but try not to be intimidated.Don't be afraid to ask questions, and don't worry about making a pest of yourself.After all, you work hard for your money, and it's smart to look for the best dealyou can find.

Stop at the ATM, I Need More Cash

If you're like most people, you can't imagine life without automated teller machines(ATMs). They're so convenient and easy-to-use. Studies show that in 1996, the averageATM user visited machines 72 times. Consider though, that there is another classof ATM patrons: heavy users. Heavy users, who account for about one-sixth of allATM card holders, banked an average of 156 times at ATMs.

Autom atic Teller Machines or Automatic Theft Machines?

As convenient as ATMs can be, they can be expensive. Some cynics have stated that,considering the fees levied at cash machines, ATM should not stand for automatedteller machine, but for automated theft machine. Some banks charge as much as $3for you to withdraw money (keep in mind that it's your money), transfer funds,or get an account balance. If one of those heavy users pays $3 for every transaction,he could be end up paying $450 a year just to access his own money!

ATMs have been around for about a quarter of a century, but they have proliferatedduring the past 15 years or so. ATMs are now found anywhere you might need some cash:restaurants, bars, coffee shops, department stores, movie theaters, and gas stations.

The banking industry tells us that ATMs are wonderful because they're accessible24 hours a day and are more convenient than having to go to a bank and wait in linefor a teller. The truth is, the banking industry loves ATMs because they save theindustry a lot of payroll costs and generate a lot of cash through fees.

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Money Pit

Banks encourage customers to use ATMs, where customers are charged substantial fees. To add insult to injury, some banks charge a fee (a dollar or so) to customers who would rather come to the bank and deal with a teller! You can't win!

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Tips to Cut ATM Fees

If you use ATMs--and who doesn't?--follow these tips to save yourself some moneyon fees. And don't forget to retrieve your card before leaving the machine!

• Use your own bank's ATMs whenever possible. Most ban ks still don't charge a fee for customers to use their machines.
• If your bank's ATM machine is "down" when you try to use it, note the time and place and call your bank the next day business day to report it. It should credit your account for the amount you had to pay to use another bank's machine. If it doesn't, find another bank!
• If your bank or credit union doesn't have a machine that's convenient for you, shop around to find a machine with the least expensive fee. Fees vary as much as $2 per transaction.
• Use your debit card at the check-out line of the grocery store and get cash back. Many stores will let you get extra money, usually a maximum of about $50, when you use your card to buy groceries. This strategy makes more sense than paying $3 to withdraw $50 from an ATM.
• If you have to withdraw money at an ATM, think ahead and get enough so you won't be back in a day or two. It doesn't make sense to pay $2 to get $10 out of your checking account. Limit your visits to the ATM to once a week, or maybe even twice a month.

We're not saying that ATMs don't have lots of advantages. But be aware of thedifferences in fees from machine to machine, and try to find yourself the best dealyou can.

• Understanding your options in financial institutions will help you make a good choice when deciding where to put your money.
• Banks, credit unions, and thrifts (savings and loans) are the three most common types of financial institutions.
• You've got to know t he questions to ask when trying to find the best checking and savings accounts.
• Being aware of the fees associated with ATMs can save you some money.