Investing in Your 20s and 30s: Alternatives to Bank Accounts
If you’ve been with me since the beginning of this chapter, you know that the best banks that are focused online should have a cost advantage over their peers that have branch locations. Well, there are other financial companies that have similar, and in some cases even better, cost advantages (which translates into better deals for you): credit unions, discount and online brokerage firms, and mutual fund companies.
Credit union accounts and benefits
Credit unions are unique creatures within the financial-services-firm universe. Credit unions are similar to banks in the products and services that they offer (although private banks tend to offer a deeper array). However, unlike banks, which are run as private businesses seeking profits, credit unions operate as nonprofit entities and are technically owned by their members (customers). If they’re efficiently operated, the best credit unions offer their customers better terms on deposits, including checking and savings accounts (higher interest rates and lower fees) and some loans (lower rates and fees).
Don’t assume that credit unions necessarily or always offer better products and services than traditional banks, because they don’t. The profit motive of private businesses isn’t evil; quite to the contrary, the profit motive spurs businesses to keep getting better at and improving on what they do.
Credit unions have insurance coverage up to $250,000 per customer through the National Credit Union Administration (NCUA), similar to the FDIC protection that banks offer their customers. As when checking out a bank, be sure that any credit union you may deposit money into has NCUA insurance coverage.
The trick to getting access to a credit union is that by law, each individual credit union may offer its services only to a defined membership. Examples of the types of credit union memberships available include
- College and university
- Place of worship
There can be some overlap between these groups. To access a credit union, you also may be able to use your family ties.
To find credit unions in your local area, visit the Credit Union National Association consumer’s website.
A type of account worth checking out at brokerage firms is generally known as an asset management account. When these types of accounts first came into existence decades ago, they really were only for affluent investors. That is no longer the case, although the best deals on such accounts at some firms are available to higher-balance investors.
Brokerage firms enable you to buy and sell stocks, bonds, and other securities. Among the larger brokerage firms or investment companies with substantial brokerage operations you may have read or heard about are Charles Schwab, ETrade, Fidelity, ScottTrade, T.D. Ameritrade, and Vanguard.
Now, some of these firms have fairly extensive branch office networks, and others don’t. But those that have a reasonable number of branch offices have been able to keep a competitive position because of their extensive customer and asset base and because they aren’t burdened by banking regulations (they aren’t banks) and the costs associated with operating as a bank.
The best of brokerage firm asset management accounts typically enable you to
- Invest in various investments, such as stocks, bonds, mutual funds, and exchange-traded funds, and hold those investments in a single account.
- Write checks against a money market balance that pays competitive yields.
- Use a VISA or MasterCard debit card for transactions.
Money market mutual funds
Because bank savings accounts historically have paid pretty crummy interest rates, you need to think long and hard about keeping your spare cash in the bank. Instead of relying on the bank, try keeping your extra savings in a money market fund, which is a type of mutual fund. (Other funds focus on bonds or stocks.) Money market funds historically have offered a higher-yielding alternative to bank savings and bank money market deposit accounts.
The mutual fund business is huge; fund companies hold assets totaling in excess of $17 trillion. A significant chunk of that — nearly $3 trillion — is held in money market mutual funds.
A money market fund is similar to a bank savings account except that it is offered by a mutual fund company and therefore lacks FDIC coverage. Historically, this hasn’t been a problem, as retail money market funds have never lost shareholder principal for retail investors.
A money market fund is similar to a bank savings account except that it is offered by a mutual fund company and therefore lacks FDIC coverage. Historically, this hasn’t been a problem because retail money market funds have lost shareholder principal in only one case for retail investors (the Reserve Primary fund lost less than 1 percent of assets during the 2008 financial crisis).
The attraction of money market funds has been that the best ones pay higher yields than bank savings accounts and also come in tax-free versions, which is good for higher-tax-bracket investors.