Just when you thought it was safe to use a bank that didn’t make you feel dirty, the US Justice Department asks Wells Fargo to cough up $175 million to make good on accusations that it overcharged and wrongly steered minorities on home loans. So much for Wells Fargo being the one bank to survive the recession with a clean nose.
With the ammunition we now have to analyze banks from the standpoint of corporate culture, products, and service, why are so many of us still using them? The typical modern consumer, at least for their personal finances, needs a checking account to store cash until the credit card bill is due, and a savings account to address the emergency and “rainy day” situations. But I love that my bank has ATMs everywhere. To that I gently say, get over it. You can get cash back at the supermarket if you don’t have an ATM near you just when you need it. And if you’re not living beyond your means, 99% of your purchases should be happening on a credit card that you pay in full and which offers incentives. Miles anyone?
ING Direct, for example, allows you to use your smartphone to deposit checks (via a camera snapshot) and to move cash to a friend’s account. Since they don’t have physical branches, their costs are lower and their money market funds pay a good yield (relatively speaking) at any balance level. I’m a fan and a happy customer….so far.
Every unspent dollar should have a purpose. In an ideal world, you’re either saving for something (new house, career change, retirement) or reserving for an unexpected event (roof repair, job loss, injury). For these things, a money market fund rules. For everything else, your dollars deserve better.
Find a credit union or branchless “direct bank” that can offer a decent money market yield at any account balance. Why pay for bank tellers and security guards if you’re using the internet to manage your finances?
How much should you keep in cash?
There’s no exact science to this popular question. I think that 1-3 months of expenses is fine if you feel a good sense of job security. For people with volatile and unpredictable incomes, something closer to 1 year may make more sense. I invite my clients to set “guardrails” so they can create a discipline of investing when they are above the ceiling and rebuilding when below the floor.
If you have more cash in your bank account than the FDIC covered amount, you may be entitled to receive protection beyond the $250k mark if the funds are owned by a living trust. If unique circumstances require you to keep a lot of of your funds in cash for an extended period of time, and you still need “bank diversification” try www.cdars.com, which is a portal for spreading your cash to several banks in an easy manner.
Back to Wells Fargo. Their charitable track record is pretty darn good. They have scored a 100% on the Human Rights Campaign corporate equality index, sponsor just about every LGBT rights event, and have been given numerous awards for celebrating diversity and community development. This is all wonderful, but bank investment products tend to be lousy.
I invite my clients to keep their investment world separate from their savings and checking world, even when the banks dangle carrots (like offering a lower mortgage rate if you keep more of your wealth in their vaults).
Why keep your investments separate from your bank?
1. I have given “second opinion” portfolio reviews for dozens of people, and in several instances, told them to stay where they are because their portfolio had low costs and a suitable level of diversification. This has yet to happen with a Wells Fargo / Wachovia or Bank of America / Merrill Lynch portfolio. The only time I’ve suggested that people with those accounts stay put is because they are in a product or mutual fund where the surrender charge outweighs the benefits of switching to a new portfolio.
2. Uncontrollable spending – I’ll never forget when, in 2008, a client came to tears because she finally looked at her portfolio and realized that her decreased account was more from uncontrolled check writing than from the recessionary market losses. She had no idea how those checks for vacations, house renovations, and basic leisure had added up. People tend to have a better investment experience when they use a discipline for contributing, and have all spending come from a checking account.
3. If you end up disappointed solely with your investment advisor or bank, it’s much easier to fix what’s broken than to have to switch both your bank and your advisor.
For the record, I didn’t pick on Bank of America because I could never top Rolling Stone’s version– not for the faint at heart.
Live long and prosper,