Kia Ora to the Maori Millionaire Whanau,
Today, we have a guest post from Mr. Sean Hamilton. If you'd like to see his post from last week, you can read it here:
Disclaimer: The information in this article is provided as general information. It is not intended as financial advice for the purposes of the Financial Services Legislation Amendment Acts 2019 (FSLAA). No investment objectives, financial situation and particular needs of any particular person has been taken into account in the publication of this article. Professional advice should always be sought before taking out any financial product.
Starting the relationship - Money in; Money Out
Sean Hamilton
A goal for this series is to help you be as financially independent as possible. With that in mind, this article will explore two of the most basic of banking functions which get taken for granted, but form the basic building blocks of your daily financial world. I will try to share some common banking terms in brackets, to help you understand what a bank means when you interact with them.
In the first article, we set out that your relationship with a bank is important. It often lasts many years and underpins some of the most important financial decisions in your life. So how do you get going once you’ve decided which bank to use?
To start, the bank will undertake some legal requirements like verifying your identify, and then you take up one of their products. Usually the first product is an “everyday” account and a debit card to use with it.
So, what is an everyday account? Why is it important? And how does a debit card get used with it?
Most people will be familiar with the need to have somewhere for their money to be stored (deposited) and want to use that money to buy things (withdrawals). This is the basic purpose of an everyday account. Your money goes in and then comes back out. The most common way money goes in, is in the form of pay from an income source. When it comes out, it is usually in the form of either cash, transfer, or debit card to buy things like groceries, gas, pay bills, etc. Sometimes debit cards are also referred to as eftpos cards. (Eftpos is the electronic funds transfer at point of sale, that allows transactions to be made using a debit card).
There are a few types of everyday accounts and choosing the one that most suits the type of behaviour you want is important. This is because the different account types often have different types of fees and charges associated with them. Breaking these down, there are two types to be aware of, pay-as-you-go accounts and flat fee accounts.
Pay-as-you-go, just like the name suggests, carry a cost for each type of deposit or withdrawal (transactions). The cost can vary depending on if you make manual transactions, or electronic transactions. Manual usually means involving a person, like a banker to help you to do something. Here you are paying for their service. Manual fees are often higher, because people cost more money to complete services. Electronic transactions are automated and so don’t usually cost as much as manual ones, but still carry a charge to you.
Flat fee accounts typically charge a monthly fee and at a given amount, e.g., $5 or $10 per month, regardless of how many transactions or the type of transactions. Some will even not charge a fee if you meet certain conditions with them, but this can vary between banks.
The major banks also typically offer student accounts. These can be offered to customers below 21 or 18 and have benefits of not charging as many fees, or having special interest-free products associated with them, such as overdrafts. I’ll touch on those in a later article.
Regardless of the type of account you use, you must check the fees and charges before committing to the one you want. Banks should always provide these up front, before you take the product out with them, but it never hurts to ask anyway. Sometimes banks can even give you advice on the best option from their products to meet your needs.
If you don’t get the set up of your everyday account right it can often lead to costly fees stacking up each month without you realising it. Banks will send you statements for your account, either in the post, or more often via their online banking platforms. Think of your banks website which lets you login to check on your accounts and important documents.
Make a habit of checking your statements each month. Check for unexpected fees and charges and question them with your bank if you don’t know what they are. Errors can be made by banks and their customers, so see if you need to discuss refunds or goodwill gestures. Banks take complaints seriously and many of their staff might have discretion to sort out fees that don’t seem right.
Now that you’ve got your account sorted, how do you use it?
If you getting paid from a job, or other source of income, you will give your account number to your employer or whoever needs to pay you, to deposit the money into. This is usually straight forward and is often seamlessly completed electronically to make it more efficient. When the money is in your account, that’s when you can use it and where a debit card comes into play.
A debit card is simply a piece of plastic that has an electronic-magnetic strip on one side (or maybe a chip also) that can be used in eftpos terminals to buy things. A common phrase is that “Cash is King”, well this is just an electronic version of cash. In Aotearoa the eftpos network is free, however extras like “pay-wave” can cost the merchant a fee, so sometimes the shop will pass this onto their customers. Be aware of these catches, as you don’t want to pay more than you need to when buying things, even if it is convenient.
Debit cards access your everyday account and you would normally have them loaded in the “cheque” option when using the debit card. Cheque is an outdated term from a time when everyday accounts were referred to as “chequing accounts”. When you use the debit card, it will take the money from what you have in your account (balance).
It is important to only spend what you have in the account, not more. Sometimes banks will allow you to go over the amount you have in the account according to their discretion. This is allowed to happen, but it does carry costs to be aware of. Sometimes, depending on the amount and if you bring your balance back in line, nothing will happen. But, if you don’t bring your balance back to 0 or above within a timely manner, then the bank may charge you interest and fees. Think of it like you’ve borrowed money, but without realising it.
Now this can seem a little off putting, and you’d be right in questioning why banks even allow this to happen. Consider though, standing in line at the supermarket and the cost of your groceries being slightly more than what’s in your account. The bank allows you to pay for it all, but like everything, there is a cost for that service. You avoid the embarrassment at the checkout of your card declining and having to sort through what to put back, and the bank makes a little more money from a service they provide. This is why its important to check your statements and make sure you don’t get charged fees or charges you’re not aware of, as it will cost you money, and impact your ability to grow your wealth.
Another good way to check for things like this, is to download your banks smartphone app or make use of their online banking to keep a more regular check of your accounts. These services are often free, but check the fine print to be sure.
Whether you’ve just started your financial journey, or are already well established, its always a good idea to review your everyday account to make sure you’re getting the best out of it and not paying for more than you need. Keep in contact with your bank to see if things should change, they’re available to help as part of your on-going relationship. Remember, if you don’t like the way its working, you can also consider a competitor to see what they have to offer.
Next time we’ll take a look at another type of account used for those rainy days, when you might need set some money aside; savings accounts. Until then.
Nga mihi,
Sean Hamilton
Disclaimer: The information in this article is provided as general information. It is not intended as financial advice for the purposes of the Financial Services Legislation Amendment Acts 2019 (FSLAA). No investment objectives, financial situation and particular needs of any particular person has been taken into account in the publication of this article. Professional advice should always be sought before taking out any financial product.