Q: My problem with comparing bank accounts is that banks offer things in different terms, so it is like comparing apples and oranges. For example, all the checking accounts with good interest rates out there have a monthly fee. I've also found some free checking accounts, but they don't pay any interest. Of course, the interest rates offered are expressed as a percentage, while the fees are in dollar terms. So, how do I compare the two? Is it better to pay a fee and get interest, or would I be better off forgetting the interest and choosing a free checking account?
A: Financial trade-offs often come in different terms that make them a little challenging to compare, such as risk and reward, or in the case of many checking accounts, the trade-off between interest and a monthly fee. The best way to solve the dilemma is to do a little math to make the terms more comparable, though there are also some broad guidelines you can use for a decision.
In mathematical terms, what you need to is estimate what your average checking account balance is likely to be over the course of a year, and figure out how much interest you would earn on that amount based on the interest rate being offered. If that amount doesn't exceed the fees you'd pay over the course of the year, you'd be better off with no interest on a free checking account.
As a general principle, in a low interest rate environment like today's, you are more likely to be better off forgetting about the interest and choosing free checking. The only exception would be if you maintain a very high (i.e., $10,000 or greater) checking account balance. In a higher interest rate environment, it can be more worthwhile to pay the monthly fee and receive interest, even at lower balances.
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