A checking account is a bank account you use primarily for convenience—a place to keep money that you’re going to need frequently to pay bills. The way you actually pay those bills is by writing checks to the people and businesses you owe money. When a business “cashes” your check at their bank, the money is taken from your account and deposited in the business’s bank account. You’ll find that this is a very convenient way to pay your bills.
An account against which the depositor draw checks that are payable on demand. –Princeton University
Fewer than 30% of American high school students receive even one week of education on personal finance and money management.
Checking vs. Savings
Contrast a checking account with a savings account, a bank account you open to grow savings and build wealth over time. The advantage of savings accounts is that they pay you interest—an ongoing fee, usually a percentage of the money in your account—to keep your money parked there.
Many banks’ checking accounts, by contrast, don’t pay interest or pay a lower rate than savings accounts pay. The benefit of a savings account is the interest you earn; a checking account’s key benefit is the convenience of being able to write checks.
Banks offer high-yield savings accounts that pay higher interest rates. To qualify you must make a sufficiently large initial deposit and maintain a high minimum balance.
Why a checking account is important
As soon as you move into an apartment or dorm, you’re going to have regular bills. Rent, home phone, cell phone, cable, Internet, gas, electricity—the list goes on. How are you going to pay those expenses?
We’re not asking where you’re going to find the money to pay your expenses. We mean, literally, how will you get that money into the hands of all those businesses you owe every month? You can’t drive all over town delivering handfuls of cash to your cell phone provider and the power company. And you should never put cash in the mail.
This is where a checking account comes in.
A checking account is a great tool for paying your bills and expenses. It’s convenient, and it helps you keep an easy-to-review record of how, where and when you’re spending money.
It also offers safety for some types of payments—most importantly your rent. There are horror stories of people paying their landlord in cash every month, only to find out months or even years later that the landlord didn’t record those transactions and claimed the tenant never paid rent. When you pay with a check, you don’t have to worry about that, because the landlord “cashing” your check is proof you paid it.
Always make large payments like rent or mortgage with a check (or electronically from your account) to create a “paper trail”—proof of payment. When you do pay with cash, get a receipt signed by the person you are paying that clearly states the amount and date you paid.
The Danger – Bounced checks
If you don’t properly manage your checking account and keep accurate records of your transactions, you might “bounce” checks, which means writing checks you don’t have enough money in the account to cover.
This can lead to big fines and penalties from your bank as well as from the businesses you’re trying to pay—and it can even cause some businesses to stop accepting your checks as payment.
And if you bounce a check for your credit card payment, that one mistake can send your card’s interest rate up by several hundred percent—forever.
SCARY BUT TRUE
Over 450 million checks bounce each year.
Beware of minimum-balance fees
Another danger of checking accounts is the minimum-balance requirement.
Many accounts require you to keep a certain amount of money in the account at all times—say, $500. If you dip below that amount, the bank charges you a fee. These fees can be high—sometimes $20 a month, even if your balance dips below the minimum for only a short time during the month.
Even worse: If your balance dips below the minimum and the bank charges you a $20 fee, the bank pulls the money from your account immediately.
So if you’re already cutting it close, that $20 deduction might trigger one or more of your checks to bounce.
SCARY BUT TRUE
About 20% of American households pay as much as $1,400 a year in fees for writing bad checks.
Opening an Account
Operating your own checking account is pretty simple.
Let’s say you’ve got $1,000 and want to open a checking account. Go to a bank that’s convenient and simply ask to open a checking account.
A bank representative will have you fill out some paperwork, ask you to select the design of checks you’d like and what you want written on them (like your address), and then they will deposit your money in your new account.
Soon you’ll get a box of checks in the mail, and from here you’re ready to start using your account.
You might need a parent on your account with you.
Use Checks to Pay Bills
Now let’s say you receive a bill for $200.
You have $1,000 in your checking account, so you’ll write a $200 check (we’ll show you how soon) and send it off to the person you owe. Now you have $800 left in your account.
When the person receives your $200 check, he’ll take it to his bank to either “cash” it (exchange it for $200 cash), or “deposit” it (place the $200 into his account). He can also do a combination of these—say, take $50 in cash and deposit $150 in his account.
Either way, he’ll hand the check to a bank teller at his bank, who will then contact your bank electronically and deduct the $200 from your checking account.
GOOD TO KNOW
Checkbooks are available with carbon copies under each blank check. They may cost a little more but you’ll have a copy of every check you write.
Your Check Register
Soon, you’ll probably be writing several checks every month, and you’ll probably also be making deposits into the account regularly to make sure there’s always enough money to cover the checks you’ve written.
Now you’ll need to start balancing your checkbook, which means grabbing the monthly bank statement the bank sends you (or going online to check your account there), all your ATM receipts, debit-card receipts, and canceled checks (if your bank mails them to you after they’re cashed).
You’ll need to review all these items against your own record in your checkbook register, to make sure you’ve got an accurate tally of what’s in your account.
Most banks scan your checks when they’re cashed. If you forget to record a check, these copies are usually available through your account online.
Checks Aren’t the Only Part of Checking
Keep in mind that not all money leaving your account will be through the checks you write.
You might go into your bank and withdraw cash; maybe you’ll use an ATM card to take money out at the ATM; and maybe you’ll pay for things at a store with a debit card tied to your checking account. So you’ll need to keep a record of every dollar going into and out of your account.
Balancing your checkbook every month helps you do that—and to catch mistakes that you or the bank might have made.
SCARY BUT TRUE
Bank customers pay more than $35 billion a year in fees for bouncing checks.
These will be the main tools you’ll use to pay bills and expenses from your account. Most checks will are very similar and have a layout very much like the one below. Lines 1 through 5 are the items you’ll have to write on every check:
1. the date
2. the name of the person or business the check is made out to
3. the amount, written as a number ($53.00);
4. the amount, written in words (Fifty three and 00/100 dollars)
5. your signature.
6. Item 6 is an optional line called “Notes” or “Memo.” Sometimes you’ll write a note here for the recipient (“Happy Birthday!”), or to remind yourself of what the check was for (“Repaying Mom for skateboard loan”). And typically, when you have an ongoing relationship with a business (like your phone company), they’ll ask you to write your account number here.
Online Account Access
You’ll probably do a lot of your banking online.
All major banks have online banking. You can check your balance, transfer money to other accounts (if you have several at one bank) and pay bills electronically. Most banks’ websites also let you set up automatic payments—where money is automatically taken out on a specified day each month (to pay your gym membership, for example).
If you manage this tool properly, online banking is a great convenience. But it’s important to keep track of everything you do online, and your checkbook is the best place to do it.
If you transfer money or pay a bill online, record those transactions in your checkbook. If you don’t, the next time you write a paper check, you won’t have an accurate picture of your checking account balance.
Writing Electronic Checks
Your checking account will almost certainly allow you to write an electronic check. This is a convenient way to pay bills online and can save you the hassle of dealing with some of your bills that would otherwise come in the mail.
Most businesses are happy to receive checks electronically and encourage you to pay online rather than mailing them checks. For the same reasons that it’s easier and less expensive for you to make payments online, it’s also easier for businesses to receive payments electronically.
But be careful. If you don’t record online payments, you won’t really know how much you have in your account because previous transactions may not have “cleared” yet. So get in the habit of grabbing your checkbook and recording any money you put into or take out of your account.
Checks don’t work everywhere
Not all businesses accept personal checks. Movie theaters, restaurants and many stores won’t. They feel safer if you pay with cash or a credit card. That’s because a check is riskier. When the retailer goes to cash your check, they may learn that the money isn’t there.
Sometimes it’s an honest mistake, where the buyer unintentionally wrote a check for more than he had is in his account. And sometimes it’s fraud, where the buyer wrote a bad check on purpose to steal merchandise.
You might find some retail businesses that will take personal checks—like certain grocery stores and department stores. But it’s best to plan on using cash, credit cards or debit cards when you go to a store.
You’re probably going to use your checks mostly to pay for regular expenses—like phone bills, rent, mortgage and credit card bills.
There is Spent Money in Your Account
Let’s say you have $250 in your checking account, and over the last few days you’ve mailed out several checks, totaling $180. Because you’ve already sent those checks out—and they could be cashed at any moment—you should treat that account like you have only $70 available.
But many people fail to do this. They check their account online, see that some checks haven’t been cashed yet—and that their balance is still $210. Then they reason, “I’ll put more money in the account before all these people can cash my checks,” and they write that $120 check.
Then… bam! Someone tries to cash one of those checks and it bounces. Or several of them bounce. That one mistake can cost the check writer hundreds of dollars in fees and fines from their bank and the businesses they were trying to pay.
Bouncing a Check Costs You
Millions of Americans regularly pay substantial fines and fees to their banks for making mistakes with their checking accounts—mistakes they could easily avoid by spending a few minutes making sure they know how much they have in their account before they write checks.
It’s that simple.
And bad-check fees have nothing to do with the amount of the check that bounces. Even if you write a bad check for $3, it’ll still cost you $27. On top of that, the merchant you pay with a bad check will often charge you up to $30 for their trouble.