Ask The Expert

Q: I'm going to be starting college in the fall. Where do you suggest I look to find good savings and checking accounts for college students?

A: It makes sense to focus on the checking account first, because finding a good one can be a big challenge for college students.

Free checking accounts are becoming increasingly rare. The most recent MoneyRates.com Bank Fee Survey found that just 36.6 percent of checking accounts now are free of any sort of monthly maintenance fee. Since those fees come to a total of more than $140 a year on average, they can take a serious chunk out of the typical student's account balance.

While banks will frequently waive monthly checking account fees under certain conditions, college students often don't have the two things most often necessary to qualify for those fee waivers: a weekly paycheck to be directly deposited or a large account balance.

Still, there are ways a college student can find free checking. One good place to look is online banks. Here are some reasons why online banks are often an especially good fit for younger people:

1. They are more often likely to offer free checking accounts. Two-thirds of online checking accounts have no monthly fees, compared to just over a third of checking accounts at traditional banks.
2. They have smaller minimum balance requirements. Those smaller balances are often a better fit with the limited finances of most college students.
3. When they do charge fees, those fees tend to be lower. This is true of monthly maintenance fees, overdraft fees and ATM fees.
4. They offer geographic flexibility. This is important for students who travel frequently between home and college. Just make sure you choose an online bank with an ATM network that covers both places.
5. Today's college students have grown up with the Internet. This makes that generation especially comfortable doing business online.

Online banks are not necessarily the only good option for college students. Some traditional banks offer special accounts for students, with low balance requirements and no monthly fees. These special accounts are most often found at community banks, but some larger institutions offer them as well.

As for savings accounts, college students face the same challenge all savings account customers face today: Interest rates on those accounts have shrunk to practically zero. According to the FDIC, the average interest rate on savings accounts is now down to just 0.06 percent. However, you can find savings account rates more than 10 times that average if you shop around. Online banks are a good place to look, and when comparing rates, make sure you can meet the balance requirement for the rate being advertised.

Got a financial question about saving, investing or banking? MoneyRates.com invites you to submit your questions to its "Ask the Expert" feature. Just go to the MoneyRates.com home page and look for the "Ask the Expert" box on the lower left.

Q: I see the stock market and real estate are improving every day, so why do we still see these ridiculously low rates on CDs and savings accounts? Are those rates going to improve soon, or do we have to put our money into the stock market?

A: You've put your finger on the Catch-22 facing investors these days: Low interest rates are driving investors into stocks, but if stock prices go up solely because interest rates are low, those stock prices may be vulnerable when interest rates start rising.

A look at the numbers reveals why this dilemma is so tough. Over the past three years (through April 30, 2013) the S&P 500 stock index rose at a rate of 12.8 percent per year. More recently, home prices have been recovering, and have risen by about 9 percent since hitting bottom early last year.

Meanwhile, rates on savings accounts and other deposits seem stuck in the mud. As of the end of April, the average savings account interest rate was just 0.06 percent, which is even lower than savings account rates were three years ago. It's only natural that investors should be looking to stocks and other risky investments as an alternative.

The problem is that while stock prices are up, the overall economy has made only sluggish progress. This suggests that stocks are up primarily because investors lack for better alternatives, and that's a shaky foundation on which to build a market rally.

So what are you to do in this situation? It's probably best not to look at it as an all-or-nothing proposition. You might incline a little more toward stocks in this environment, but that doesn't mean you should cash in your savings accounts and put every penny into the stock market.

Before taking on more stock market risk, ask yourself these fundamental questions:

1. When are you likely to need this money? If you'll need a substantial portion of the money within the next five years or so, stocks may not be an appropriate investment.
2. Do you have a sufficient emergency fund? This would help you avoid having to cash out of stocks at an inopportune time.
3. Are you emotionally prepared for the ups and downs of the stock market?

As for the money you keep in deposit accounts, while there are no signs that interest rates are going to rise anytime soon, there seems little point in locking yourself into a long-term CD at today's rates. Keep your money flexible by concentrating on short-term CDs, money market accounts or savings accounts. It's hard to say when rates will rise, but you want your accounts to be able to react quickly when they finally do.

Got a financial question about saving, investing or banking? MoneyRates.com invites you to submit your questions to its "Ask the Expert" feature. Just go to the MoneyRates.com home page and look for the "Ask the Expert" box on the lower left.

Q: CD rates are in the tank, and we have an aversion to risk, no pension to speak of, but a solid amount of savings. Should a retired couple consider an annuity as an income producer?

A: If you can find an annuity that provides you with an adequate amount of income, it would certainly be worth considering. The catch is that like everything else, annuities have seen their income yields shrink a great deal in recent years.

Annuities are investment products created by insurance companies. They have certain tax deferral features, but that would not be particularly relevant if you were investing for immediate income. There are both fixed and variable annuities, with the words "fixed" and "variable" pertaining to the type of return you would receive. Obviously, a fixed annuity would have the income features most comparable to a certificate of deposit (CD), but it is not apparent that fixed annuities have an advantage over CDs.

According to the FDIC, average CD rates these days range from 0.06 percent for one-month CDs, to 0.77 percent for five-year CDs. At the five-year end of the range, you can do about a percentage point better than the average if you shop around for the best CD rates.

The question, then, is whether you could do better with an annuity. You shouldn't rule either option out until you've seen what income yields are available, but it is likely that you'll find annuity rates are not much higher than the best CD rates. In either case though, it is wise to do some comparison shopping to find the best rate before you commit.

Besides the importance of shopping around, another similarity between investing in an annuity and in a CD is that each one confronts you with the dilemma of whether you should lock in a given rate of income. Interest rates are unusually low right now. While making a longer-term commitment -- whether in a CD or an annuity -- will earn you a higher rate of income, it also means locking yourself into that rate of income for the duration of the instrument. If interest rates return to more normal levels before the maturity date of the CD or annuity, you could find yourself stuck with a sub-standard rate income for longer than you'd like.

Finally, when comparing the best CD rates and annuity rates, keep in mind one key difference between the two types of instruments: Deposits in CDs are guaranteed by the FDIC (up to the $250,000 maximum per depositor at any insured bank), while annuities have no government insurance. An annuity is backed only by the insurance company that issues it, which is a significant risk factor to consider when making your decision.

Got a financial question about saving, investing or banking? MoneyRates.com invites you to submit your questions to its "Ask the Expert" feature. Just go to the MoneyRates.com home page and look for the "Ask the Expert" box on the lower left.

Q: My new job requires that I have my pay deposited directly into a bank account. Does it make more sense to deposit my pay into a savings account or a checking account?

A: As with so many banking questions, the answer to this depends on the circumstances of your situation. There is no single right answer that applies to everybody. Ideally, you would deposit pay into savings, but here are some factors that could determine whether that approach would work for you:

1. Do you expect to have money left over at the end of the month? It's important to save money if you can, so having your pay deposited into a savings account would be the most efficient way of making that happen. However, given how low interest rates on savings accounts are these days, the benefits of having direct deposit go into a savings account may not outweigh the drawbacks (which are discussed below) if you are going to be living paycheck-to-paycheck, with no money left over.
2. Does the checking account require a minimum balance to avoid a monthly maintenance fee? Unless you have a free checking account, your bank may require you to keep a certain minimum balance in your checking account to avoid paying a monthly maintenance fee. According to the latest MoneyRates.com Bank Fees Survey, these fees average $12.26 per month, or just over $147 a year. So, if having your pay deposited into checking helps you avoid this kind of fee, it may be worth more than the interest you would earn by having your pay deposited into savings.
3. Are you confident in your ability to avoid overdrafting the checking account? The MoneyRates.com fee survey found that overdraft fees recently rose to an average of more than $30 per occurrence. It's best to opt out of overdraft protection, but if you need your pay directly deposited into checking to avoid overdraft situations, this could make more sense than repeatedly paying a $30 fee.

People have a tendency to deposit their pay into checking accounts, and then periodically transfer any accumulated money into savings accounts. However, a better saving strategy would be to have your pay deposited into your saving account, and then transfer a budgeted amount into checking to meet your expenses. This would maximize the interest you earn by getting your money into the savings account sooner, and perhaps more importantly, this method would help you put savings first, and have money available for spending only according to a budget.

So, as long as you can avoid a checking account fee and keep your spending within budget, depositing pay into a savings account would be preferable.

Got a financial question about saving, investing or banking? MoneyRates.com invites you to submit your questions to its "Ask the Expert" feature. Just go to the MoneyRates.com home page and look for the "Ask the Expert" box on the lower left.

Q: I have some back pay for unused sick days coming to me from my employer in a lump sum. I want to put the money toward my retirement, and could either put it in my employer's 401(k) plan or an IRA. Is one likely to cost more in fees than the other?

A: It depends very much on the specific plan and service provider, but generally speaking a 401(k) plan is likely to be more expensive than an IRA. However, a more important issue is whether your employer makes matching contributions to the 401(k) plan. Some employers will match, or at least partially match, some or all of the amount their employees contribute to the 401(k) plan. If you are eligible for this kind of matching contribution, it could very well outweigh any fee differential between a 401(k) plan and an IRA.

If your employer does not make matching contributions, then there might be a couple of advantages to putting your money into an IRA rather than a 401(k). One of these advantages is a broader range of investment options. Depending on which 401(k) platform your employer uses, there may be some limitation to the investment choices available to you. Most plans have a range of options ranging from low-risk to high-risk, but you are limited to the options the plan has chosen to make available. In an IRA, you can use any legitimate investment vehicle, from savings accounts to stocks to commodities.

Another advantage of an IRA may well be a lower fee structure. If you invest in a mutual fund or other managed investment vehicle, you will pay some form of fee, whether it is in a 401(k) or an IRA. On top of that though, 401(k) plans also have record-keeping and administrative fees, which can add another layer of cost.

Still, even if you do your investing via an IRA, be advised that investment fees can vary widely, so look carefully when choosing your investments. That's not to say low-cost is necessarily the best option -- you may well find it worthwhile to pay a little extra for a skilled active manager, but a fee comparison should be one of the factors you consider when choosing how to invest. Also, when looking at mutual fund fees, make sure you check not only the ongoing management fee, but also whether there are any front-end or back-end sales loads.

Keep in mind that there are annual contribution limits to both an IRA and a 401(k) plan. If the lump sum you are going to receive exceeds either of these limits, you may want to put some money in both types of plan to take maximum advantage of the tax deferral.

Got a financial question about saving, investing or banking? MoneyRates.com invites you to submit your questions to its "Ask the Expert" feature. Just go to the MoneyRates.com home page and look for the "Ask the Expert" box on the lower left.

MoneyRates.com has always searched interest rates to find you the best rate. Savings interest rates may be low, but that's all the more reason to shop for the best rate. Check out the top savings interest rates from Ally Bank, American Express and others.