Banking is the day-to-day management of your money — the plan for how you’ll pay for things, where you’ll keep your cash and what you’ll do with paychecks. A bank is physically where you store your money and offers you lots of tools for managing your money more easily.

With online banking, you can set up your deposits and your payments to happen automatically — helping to take some of the guesswork out of money management and give you a healthy, stable financial life.

Why do you need a bank account?

Opening a bank account is the most basic step you’ll take to getting your financial life organized. It also is one of the most important. There are people out there who choose not to deposit their money in a bank — instead using check-cashing services and other methods of turning paychecks into cash.

The problem with this approach is that you lose a lot of money in transaction fees. You also end up having trouble paying bills, which often require payment by check or automatic debit from a bank account.

With a bank, you can set up your paychecks to get deposited automatically, so you make your financial management easier. You also can set up automatic bill-pay, making it so that you don’t have to keep track of paying bills every month by check. It’s the best way to avoid forgetting to deposit your paycheck or pay your bills — making your financial life a lot simpler.

Types of bank accounts

When you open a bank account, you can get two basic types of accounts — a savings account and a checking account.

You use a checking account to take care of day-to-day financial transactions. You use a savings account to store up money for the future. Typically when you approach a bank to open an account, it’s a good idea open both a checking and savings account.

How do I pick a bank?

Where you bank is your personal choice. In general, it’s easier to keep checking and savings in one place, to make transfers between the two quick and painless. Credit unions are a good option — typically having low bank fees — if you qualify for membership through work or a family connection.

These online resources can help you choose a bank:

• CNN Smart Money How to Choose a Bank:
  www.smartmoney.com/invest/strategies/how-to-choose-a-bank-1307378967732
• Investopedia How to Choose a Bank:
  www.investopedia.com/university/banking/banking2.asp#axzz1XlN9SEXr

What to look for in a bank

As you start to look for a bank (or if you’re thinking about changing banks) shop around in your area and look for a bank or credit union that offers these things:

• A free checking account.
  You may need to maintain a minimum balance each month to get this, so see if that balance is realistic for you. It’s common for banks to waive low-balance fees if you direct-deposit your paycheck to your account. Do this if it saves you fees.

• Convenient, free ATMs.
  That means having them close to work, close to home and close to where you go out or travel — if you use cash often. For those who rely on credit or debit cards, this isn’t so important. But just the cost of ATM fees can add up to hundreds of dollars a year if you make a lot of small withdrawals at ATMs that charge fees (you usually don’t pay any fees if you use your own bank’s ATMs).

• A good savings account interest rate.
  Look for a savings account that pays a decent amount of interest on the amount you expect to have in the account. A high-yield account does you no good if it requires a minimum $25,000 balance, and most of the time, you’ll have more like $2,000.

While it’s nice to have a decent interest rate on savings, having free checking and convenient ATMs can be more important — especially if you don’t plan to build up much money in savings because you’ll move the money elsewhere once it builds up. Avoiding $50 in fees is as good as earning $50 in interest.

• See also: Saving

• Free overdraft protection
  Ideally, you’re actively managing your cash flow and don’t need overdraft protection. Overdraft protection is a service your bank provides that covers up to a certain amount if you accidentally withdraw more money than you have in your account — most often, that happens when you lose track of checks you’ve written. You borrow money to cover a negative balance and you pay interest. While overdraft protection can give you peace-of-mind, it’s better to operate as if you don’t have it even if you set it up. You shouldn’t be getting even close to a zero balance — you should always have a cushion of about $1,000 available just in case. If you’re relying on overdraft protection, you have to adjust your spending habits.

• See also: Spend less than you earn

What to do once you’ve opened a bank account

Once you’ve established your checking and savings accounts with a bank, the next step to take is to come up with a cash management plan — a plan for spending and saving your income. The general rule is: Spend less than you earn. That’s the only way to make sure you get ahead, rather than be behind.

The general rule is: Spend less than you earn.

With a good cash management plan, you’ll have a good handle on how much money you have coming in and how much you need to cover expenses — and you can budget accordingly.

This helps you have a little money left over in your account at the end of every month — you want to try to save up to have a cushion of at least $1,000 — so you avoid unnecessary bank fees and taking on credit card debt.

• See also: Budgeting, Saving

Getting your banking and cash management plan right first is the foundation of everything else in your financial life.

How to set up your bank accounts

When you open bank accounts, you’ll most likely receive a debit card, check card or ATM card (or a combination of more than one). In general, we recommend you have:

• One checking account
• One savings account, at the same bank
• One ATM card that also can be a debit card
• Two credit cards (that you use to build credit, but pay off in full each month)

You don’t have to get your credit cards through the same bank where you have your accounts, but often you can get special deals just for being an account holder. It’s something to consider — so all your accounts are consolidated with the same financial institutions.

When figuring out how to use your various accounts and cards, we recommend you use:

• Automatic bill payment for your expenses and bills
• Your debit card or check card to pay for things when shopping
• Your ATM card to withdraw cash (but watch out for high ATM fees)

Credit cards should be a last resort. If you are responsible with money and don’t over spend, then you can use your credit cards to make purchases. This will help you build credit and have a higher credit score. But you have to pay your credit card balances off in full every month. The only way to safely use credit cards as a part of your cash management plan is to pay the balance off in full each month.

The only way to safely use credit cards as a part of your cash management plan is to pay the balance off in full each month.

If not your debt load will get bigger and bigger — because interest keeps getting added to your balance — and could easily turn into a financial nightmare.

Words to know

Unsure about something you read? Many of the financial terms you came across in this article are defined in our financial glossary. A-Z Glossary

Links we like

Here are a couple online features you might find useful:

• FDIC: www.fdic.gov
• Federal Reserve: www.federalreserve.gov
• CNN Smart Money How to Choose a Bank:
  www.smartmoney.com/invest/strategies/how-to-choose-a-bank-1307378967732
• Investopedia How to Choose a Bank: www.investopedia.com/university/banking/banking2.asp#axzz1XlN9SEXr