Careers in finance: Bankers vs. financial planners

By Amy Knapp

According to a recent report, careers in banking and financial services are some of the highest paid in Australia. But are they worth it? Is the $90,000+ salary worth the high stress and fiduciary responsibility, long hours and lack of freedom?

Careers in banking can be very lucrative, especially at the senior management level. But before you jump into a degree in finance or a low level banking job in hopes of a big promotion, consider some of the things you might be dealing with on the job.

Anyone who works at a bank is obliged to the CEOs and shareholders. Bank employees are under constant scrutiny to bring in the big dollars required meet constant demand for sky-high salaries and year-end bonuses. Because of the bonus tradition, there will almost always be pressure from someone higher up.

Not your sky-high salary, of course. You’ll spend the greater part of your career working your way up to a position you may never get. Senior management positions often require a postgraduate degree, years of experience and an outstanding track record. At the very least.

What’s more, you will rarely get any thanks or appreciation. In corporations that large, no one is going to pat you on the back. In some ways, it can be a thankless profession. All work and no play.

Most important to recognise is that you will always be an employee. Even when you get to the upper echelons of the banking industry, long hours will always be required of you. Your vacations will always be regulated. While you may not need to get them approved, you will inevitably have to navigate around your employer’s priorities.

So why independent financial planning?

If you’re truly set on a career in the financial world, you might consider a career as an independent financial planner. Successful people in this profession get a lot of the same perks bank employees do, but without the downside. For example: It’s personal; in a bank you rarely get to build long-term relationships with clients. As you are promoted or moved around in the corporation, your clients are transferred to other advisors. As an independent financial planner, you take your clients with you your whole life long. Relationship building is all part of the fun.

You can offer clients honest, comprehensive services. Banks are limited to the products they offer. When you work for yourself, you can offer virtually any product you think may be good for the client. Service can be customized in a way that is simply not possible at a bank. You can’t put a price on this kind of integrity. At the end of the day, you can be confident you offered the best, most appropriate service to your clients.

You can choose your own hours. At the bank, the clients are sent to you directly. No muss, no fuss. The corporation advertises for you and sends the clients to your door. As an Independent Financial Planner, you have to hustle. Early in your career, you’ll be putting in hours of cold calling and making the hard sales. The bonus is that you will be creating a clientele that is your own, that will return to you again and again for their needs. The fee-for-service model means you can set your own schedule, decide how much you want to make, how many hours you want to work and go from there.

You’re self-employed. Need more be said on that subject? You vacation when you want and work as much as you want. You choose your own desk. If you don’t want to work in a bland, grey office you don’t have too.

You build a residual income. This is perhaps the biggest factor of all. When you work independently, you earn a small percentage of the returns on all of the amount of money you manage. After ten years on the job, your residual income represents a substantial amount of money annually.  When you work for a bank, all of that income goes back to the bank. If you want to make the move to lucrative jobs in self-employment, you start at zero. Is that enough motivation for you?

About the author: Amy Knapp is an HR blogger for InsideTrak, where you can search jobs with anonymous employees reviews from employers across the country.

* Image attribution: US-PDGov

How the risk-free interest rate is determined

 US-PDGov

On the surface a risk-free interest rate is perceived to be the rate of return on an a financial allocation that has no financial risk associated with it. However, 'risk' itself is a word that has more depth to its meaning when coupled with financial instruments. This is because risk also includes the influence of variables such as devaluation from inflation, opportunity cost, and issuer default.

According to Aswath Damodaran of the New York University Stern School of Business, risk-free assets have no variance from the expected rate of return. In other words, what you see is what you get without question; an example of such being guaranteed fixed interest rates. In this sense, risk-free rates do not have to be universal or the same across financial instruments such as savings accounts and government bonds, but do have to possess a strongly assured yield. 

Risk-free interest rates do not include a 'risk premium' or an added amount of interest yield that accounts for the risk associated with investing or depositing money into a financial instrument. For example, a 5 year corporate bond from Company A offers 4.5%, whereas a 5 year bond from Company B offers 5.6% These yields differ with perceived risk as measured in part by credit ratings. These ratings are determined by credit rating agency methodologies such as those used by Moody's. 

To illustrate 'risk premium' and 'risk-free rate' further, bond issuers with lower credit ratings have more credit risk associated with them, and are not therefore 'risk free'. The risk premium is determined by market forces such as the rate of return  investors are willing to accept for financial instruments  priced at certain levels with specific levels of risk as defined by credit rating and investor valuation(s). The risk free rate is often bench-marked using a shorter-term financial instrument such as 3-month Treasury Bills according to Rutgers University. 

Even if an issuer has a very high credit rating and is considered 'risk free', that can change. A recent example of this, and as reported by Reuters, was when the Standard and Poor's Credit Rating Agency lowered of the U.S. Government's credit rating from AAA to AA. These changes are somewhat predictable via rating agency 'outlooks', but for longer-term time horizons, are not always so clear. It is for this reason that a risk-free short-term financial instrument is not actually risk free when longer loan terms exist for the same issuer and instrument. 

What constitutes a risk free rate is not constant, and multiple financial vehicles can be considered to have risk-free rates.  For example, a financial statistics class at The Wharton School of Business considers a 1-month Treasury Bill as being risk free instead of a 3-month. This difference in opinion is further highlighted in a report by the financial consulting firm Value Advisor Associates. Moreover, in the report, both 5 year and 10 year financial instruments are considered acceptable proxies for the risk-free rate due  to factors such as upward sloping 'term-structure' i.e. higher rates of return for longer duration bonds.

Questions to ask before opening a new brokerage account

US-PDGov

Opening a brokerage account is an important banking decision that affects individual finances and any financial commitment made to the account. Understanding how the account works and where one's individual responsibilities lie in regard to managing the account is necessary. Being properly informed of what brokerage accounts entail is instrumental in the choice to open one. Below are some questions worth considering before opening a new brokerage account.

What types of services are offered?

The types of services offered by brokerage accounts often surpass those of traditional banking. For example, some financial institutions offer spread betting, and full-service brokerage firms typically offer financial planning services as well. In other cases, premium services are only reserved for account holders with higher net worths. An alternative to this is to obtain the advice of a licensed securities professional on a per transaction basis via commission on services rendered.

Are the financial instruments worthwhile?

The range of financial instruments offered by various brokerage houses is staggering. Choosing the right financial institution is therefore, of paramount importance to the future of one's finances. This is because the financial products invested in influence potential yields, capital gains taxes, and opportunity cost. Carefully researching what an individual brokerage firm has to offer in addition to the advantages and disadvantages of a brokerage firm is key to making the right banking decision.

How well are the account assets protected?

Asset protection is something all investors should take seriously because of the potential consequences of not being fully aware of specific investment risks. For instance, assets held within a brokerage account are not necessarily insured, and not all account types are protected from creditors. Different assets and accounts have varying levels of security that investors would do well to understand prior to opening an account, and before engaging in transactions through that account.

Do available accounts suit specific financial goals?

Differing accounts are offered by various brokerage businesses. To illustrate, some brokerage firms offer individual retirement accounts and individual business accounts, but do not necessarily offer exotic financial instruments, whereas other firms make more unique financial products available including simulations such as a currency spread betting trial account, but do not necessarily provide those products through a wide range of accounts.

Which jurisdiction is the best choice?

Jurisdiction is a major factor when opening a new brokerage account. Since each jurisdiction is subject to the laws and regulations governing it, the impact on individual banking is noteworthy. For example, Panamanian corporate brokerage accounts are not taxed in the same way as an individual brokerage account located in the United States. Before opening a brokerage account with a large balance, investigating brokerage account jurisdiction options and advantages is potentially a time worthy pursuit.

Banking online: How to protect yourself from fraud and hacking

By Stella Brown

The Internet has simplified our lives. We use it to connect with friends and family, pay our bills, stay up to date on current news, shop and find general information.

Most of us are also using it to keep track of our finances. In fact, a 2011 survey conducted by Nationwide Building Society found that 77 percent of people bank online.

Online banking is much easier than the traditional method of physically going to the bank. Through your bank’s website, you can see a list of your transactions, see how much money is in your savings and checking accounts, transfer money, pay bills and even get a financial report on how your money is being spent. And now, thanks to the popularity of smartphones, you can even deposit checks without having to physically go to the bank.

But being able to access such a private facet of your life through the Internet does make some people nervous about being hacked and having their money stolen by an online predator. Luckily, there are a few things that you can do to ensure that your online banking information and financial security are kept safe and sound.

Create a unique username.

Online banking institutions require you to have a username and password in order to access your account. Most of us make the mistake in becoming comfortable with one or two usernames, and we choose this to be our username on our bank accounts.

Make sure that the username you use for your online banking is different than usernames you use for social media accounts, emails and even other online accounts you have. You should also try and get as creative as possible, but ensure that it’s something you can remember. For example, most people use their first initial and their last name, or their last name and a few numbers. Instead, use an alias that makes sense to only you.

Use a strong password.

Just like our addiction to using easy usernames, we also suffer from the plague of using vague passwords. If your password is weak, you’re making it very easy for hackers to guess. Make sure that your password combines numbers and letters, and use a capital letter and a symbol when possible. The stronger your password, the more difficult it is for someone else to hack.

It’s also a good idea to use a unique password for you online banking than any other account you have, but you need to make sure that it’s something you remember. Whatever you do, do not write your password down and keep it near your computer.

Create strong security questions.

Most online banking institutions require you to have security questions set up so that they can verify your identity. If your bank allows you to choose your own questions, make sure you’re choosing those that only you know. For example, stick to the most recent events as possible that are private to you. The Internet allows everyone to find information on anyone, and choosing a question that can easily be answered by Googling your name will not protect you.

Use fake security answers.

Some financial institutions do not let you choose your own questions, and they have a standard set of questions for you to answer that seem to revolve around an old pet’s name, a grandparent’s name or a city that you lived in—all of which can easily be located by anyone else.

Instead of answering these questions honestly, use fake answers that don’t make sense. If the question asks the model of your first car, say bologna. Hackers will not be able to get these answers from any online profile or public information about you. The only problem is that you’ll need to remember your answers.

Don’t give personal information through email.

Some hackers are creating fake emails that look like they’re coming from your financial institution saying there is an error with your account and they need you to verify it. These emails then ask you to provide a wealth of personal information, such as name, account number, and even your username and password. Your financial institution will never ask you to share this information via email, so make sure that you disregard any emails that look like they come from your bank. If you want to check the validity, you can always visit your bank yourself or even call your nearest branch.

Online banking can make life much easier, but you should always keep yourself protected from hackers by using these four tips.

Prepared by Stella Brown from Authentify, experts in biometric authentication.

When transaction receipts and records become redundant

Image attribution: FreeDigitalPhotos.net; standard royalty free license

Knowing how long to keep household records and receipts avoids problems such as inaccurate tax filings, inability to reconcile checkbooks or cash-flow, and inefficient debt management. Some documents are needed for a lifetime, others expire in months. In any case, being able to identify the functionality, validity and utility of household records and receipts is key in knowing how long they are needed.

One way to make individual or household archival decisions is with the help of a record-keeping reference guide. For example household record tips from the Ohio State University suggest warranties should be kept for as long as the corresponding property is owned, but recommend income records only be kept for six years. However, knowing the reasoning behind such references is also helpful in evaluating the accuracy of record-keeping decisions because individuals can have different record requirements.

Verification

Household records and receipts are used to document transactions, evaluate credibility, and verify tax claims. They can also protect and confirm identity, legal rights, health records and ownership. If the records are expired, invalid or so old they are no longer given any legal or financial credence, then there is a good chance they won't be needed for documentation and verification purposes. However, some household records such as birth-records never expire and should generally be kept for as long as one is alive.

Statutes

In terms of financial records, statutory limitations determine how long a particular financial transaction, debt or income can be legally enforced. These statutory limitations range between 2-15 years depending on the state, type of agreement and debt. For example, according to Nolo, in Kentucky a lawsuit on debt agreed to in writing can be filed for up to 15 years. However, the majority of states limit legal action to 2-6 years for the same contractually defined debt. Each states' specific allowable statutory time limitations and provisions can be obtained via state code or websites such as Nolo and CreditCards.com.

Taxation

The federal government also has a statute of limitations on money owed to it. In regard to taxes, the Internal Revenue Service (IRS) generally has up to ten years to collect taxes and 3-6 years to assess additional taxes per the online CPA Journal. Moreover, also per the CPA Journal, the amount of extra tax assessed affects how long the IRS has to make that determination. State taxes also have collection limitations; after determining what those limitations are and if they apply to particular tax situations, then a determination of the redundancy of tax records can be made.

System

Organizing household records is a skill because if it is done well, it can provide quick access to a variety of valid documentations for multiple tasks such as filing taxes, applying for loans, documenting assets, confirming identity etc. With digital record-keeping, retaining useful financial records and copies of important documents for decades is more feasible, but not necessarily practical. This is because too many records can affect computer processing speed and those records may also be redundant in the sense they cannot serve a functional purpose.

How interest rate swaps work

Image attribution: Suicup; CC BY-SA 3.0

Interest rate swaps are a trading of interest based cash-flows. To illustrate an interest rate swap, if Company A has an initial floating interest rate of five percent on a $10,000 investment but prefers to have a fixed interest rate while still owning the investment, it can trade with another company that prefers a floating rate. This kind of transaction is called a plain vanilla swap per Natalie Moyen, Associate Professor of Finance at the University of Colorado.

When a plain vanilla swap exchange first occurs the swap is generally not profitable for either company; however, if the the variable rate changes one of the companies financial position improves. For example, if the variable rate drops to four percent, interest rate risk has effectively been avoided by Company A all other variables held constant. Also according to Moyen, negative cash-flows in the form of debt obligations can be traded for similar reasons i.e. to avoid increases in debt payment or potentially reduce debt obligations.

Fixed interest rate swaps may also be profitable if the exchange is made in competing currencies. To illustrate, if company a exchanges a cash-flow on $100,000 at seven percent in U.S. Dollars with company B's cash-flow on the Euro equivalent of $100,000 at seven percent, company A will profit if Company B's currency increases in value over the dollar.



Moreover, $100,000 at an exchange rate of .68 will require company B's initial equivalent currency investment to be valued at €68,000 and €4,760 at a seven percent interest rate. If that exchange rate becomes .55 but the initial investment doesn't change, then the interest cash-flow on that investment rises in value even though the original investment on which the cash-flow is based stays the same. In other words, when €4,760 is converted into dollars on day 1 it is equal to $7,000, but when the Euro strengthens against the dollar by .13 that same €4,760 becomes $8,654.54.

Interest rate swaps can be used to protect a company against what is known as currency risk as evident in the previous example. Moreover, if a company is concerned about the value of its investment in terms of import costs, it can hedge against this risk with a fixed interest rate swap. However, for this swap to effectively protect against currency risk the incoming cash-flow must increase in value over the outgoing cash-flow creating an element of risk as floating exchange rates generally cannot be predicted with 100 percent accuracy.

Several types of interest rates swaps exist. In the first example above, a plain vanilla swap took place. These are interest rate swaps that exchange a fixed for floating interest rate. The second example was  a currency swap because the interest rates and principle investment were fixed but the exchange rate was floating. A third type of interest rate swap occurs via financial intermediaries or banks.

 Image attribution: Suicup; CC BY-SA 3.0

In the book 'Modern Commercial Banking', Economist H.R. Machiraju describes additional swaps called base swaps and rate capped swaps. According to Machiraju, base swaps exchange floating rates of interest rather than fixed only or a combination of fixed and floating, and rate capped swaps place limits on how high a floating rate can change before the interest rate based cash-flow can no longer increase or decrease in value.

What The Effective Interest Rate (EIR) Is

How Effective Interest Rate is Calculated

Image attribution: Petteri Aimonen; public domain

Effective interest rate, or EIR, is the interest that actually accumulates on a balance over multiple periods of time. In other words, since annual interest rates are charged periodically, the balance of a loan will accrue interest at a faster rate than if the annual interest rate had been charged just once when the loan becomes due in full.

To illustrate further, a $1000 loan with an annual APR of 12 percent will cost $120 to borrow. If that 12 percent is  evenly charged periodically once a month over a year, one percent will be the monthly periodic interest rate. Moreover, with this periodic rate being charged monthly, the total interest on the loan will be $126.83 and not $120.

The calculation for the effective interest rate looks complicated but is actually quite simple. Moreover, according to William R. Tucker of the United Nations Capital Development Fund (UNDF), EIR is calculated using the following formula. EIR= (1+Periodic rate) to the exponent of the number of periods – 1. Essentially all this means is for each period charge the periodic interest rate on the balance plus the prior periods interest.

Using the above example to illustrate EIR = (1+1%)¹²-1 =12.68 percent. In this case 1+1percent is 1.01 percent. That number is multiplied by itself 12 times then 1 is subtracted. i.e. 1.01 x 1.01 = 1.021 x 1.01 =1.0303 and so on until the last of each calculation except the first has been multiplied by 1.01 eleven times.  The resulting number is the total amount of interest that can be applied to the beginning balance to get the same result as when the original balance is charged the periodic rate twelve times.

Another way to calculate effective interest rate is to use an online interest calculator such as the one at MoneyChimp. The result of using that calculator yields the effective interest in the form of the original balance plus total interest for a 'future value'. The original amount of the loan must be subtracted in order to find the EIR. For example, Effective interest=$1,126.83 - $1,000 = $126.83. To convert the effective interest into the effective interest rate, it must be divided by the original loan i.e. $126.83 divided by $1,000 = 1.2683 percent.

In summary effective interest rate is the amount that is really charged on a balance when that balance is charged the annual percentage rate in installments. The interest charged in those installments is known as the periodic rate and is compounded or charges interest on a balance that has been charged interest. After the total amount of periodic interest rates have been charged, a new balance with interest is determined but this new balance is higher than had the APR only been charged once.

Reasons to join a credit union

 Image attribution: Kenneth Allen. CC BY-S.A. 2.0

The benefits of joining a credit union are actually quite good because it's like banking with perks. With banks the managerial priority is usually to serve its shareholders by gaining profit from banking services. With credit unions the shareholders are members so the result becomes a more affordable banking experience. Credit Unions often serve their members with free services, lower borrowing costs, higher lending rates, and personalized service.

 • Free online bill pay

Online bill pay is a convenient way to pay bills and saves on stamps, time and gas going to the post office. Many credit unions offer free online bill paying services that allow members to literally pay bills through the credit union. Some bill payer services such as the one available at CINCO Credit Union can also be automated to withdraw a fixed amount of money from a pre-specified account every month as bills become due.  

• Free cashiers checks

Another benefit of banking with some credit unions is free cashiers checks. For those who only require one to three checks a month, this can save the cost and hassle of purchasing and managing a check-book. Cashiers checks are also guaranteed so the payee has greater financial assurance of the payers ability to pay. These types of checks are useful for important purchases such as down-payments, but can also be used for other transactions typically involving checks. The Navy Federal Credit Union is an example of a credit union that not only provides members with free cashiers checks, but also allows them to be ordered online. 

 • Free online banking 

Apart from online bill pay, free online banking allows a credit union member to track and monitor banking transactions easily and affordably. Some credit unions such as NIH Federal Credit Union offer free online financial software, free electronic statements or e-statements and have free  tax preparation software built in. Free online financial software can benefit members with financial planning and secure online financial record-keeping.  

• Lower cost credit cards

Credit cards can be expensive, but they can be less financially costly with no annual fees, lower interest rates and fewer surcharges. Credit unions tend to provide their members with competitive interest rates that are useful for consolidating credit card debt or re-directing credit card expenses normally put on higher interest cards. According to Bankrate, Inc. penalty fees on credit union credit cards are also lower. 

• Personalized service

Since credit unions are often relatively small in comparison to banks. This is helpful when seeking to develop a banking relationship with credit union staff and employees. Personalized financial services through a credit union can also assist with speedier and more helpful service. For example, obtaining help with the loan application process, with opening accounts and choosing between different financial products is facilitated through personalized financial assistance.

How small banks manage financial risk

Risk management is the process of limiting risk while maintaining or growing bank profitability. Assessing risk in a small bank is an ongoing function as the banks clients' credibility can change over time. The same is true for business patrons since local markets and economics can also fluctuate based on various supply and demand trends, competition, lending rates etc. 

Risk management for small banks is achieved through implementing a number of risk management procedures that address the various areas of banking risk. This article will address the different types of risks small banks face and how these risks can be ameliorated for the benefit of the banks ownership and operational performance.

Types of small bank risks

Included in the types of bank risks facing small banks are 1) credit risk, 2) interest rate risk, 3) liquidity risk and 4) price risk. (Fraser, Gup and Kolari, p.9) These risks are linked to the banks solvency, investments, lending and borrowing rates, and clientele. If these risks are too high, the banks net income can decline through written off asset accounts, lowered revenue, and in some cases the bank can face undercapitalization. To illustrate the above credit risk, if small bank A makes credit loans to 100 customers, 25 of whom have less than excellent credit, the bank is taking on more credit risk than it would if all 100 customers had excellent credit.

The above credit risk scenario leads to another risk, specifically underperformance. For example, if bank A's management decides it does not want a high credit risk and instead only lends to customers with excellent credit the risk of underutilizing capital emerges if not enough customers with high credit borrow the same amount of money that would have been lent if people with less than perfect credit were allowed to borrow from the bank on credit. Thus, the adept risk manager will be experienced and knowledgeable enough to realize what adjustments to the bank's credit policy will lead to the highest lending return with the least amount of risk for that return. This is accomplished in part by effectively measuring risk.

Measurement of small-bank risk

Risk can be measured partly with the aid of 'risk ratios' which are usually simple division based mathematical scenarios that focus on specific aspects of the banking operation. For example, risk ratios address small bank concerns such as 1) capitalization, 2) liquidity 3) operating efficiency, and 4) interest rate sensitivity. (Fraser, Gup and Kolari, p.76-80) Moreover, capitalization ratios quantitatively determine how much money a small bank has set aside for loan charge offs in relation to the amount of loans made. 

This is calculated by dividing the loan loss reserve of a bank by the total dollar amount of loans. Risk management theory can be extensive and involved for the purpose of focusing on sufficiently accounting for and dealing with unnecessary risk. The result of this theory yields a number of risk management case studies and forumulaic, quantitative and qualitative measurements with statistical probabilities of success and viability in some cases. Essentially, if the risk a small bank faces can't be measured, that risk becomes a greater hazard to the bank, hence the need for risk management metrics.

Implementing risk management

Implementation of risk management policy involves developing a risk management bank policy that takes into account risk management metrics/measurements with the goal of profit optimization. This requires the bank's management to accurately record, monitor and forecast financial scenarios in which the bank can operate safely and profitably. The task of risk management is performed well when the small bank manager has a firm comprehension and sensitivity to the quantitative and qualitative factors within the banking industry. Over time, experience and knowledge of the banks capacity combined with adequate metrics and forecasting may yield a successful risk management policy that provides the bank with the financial security and success it often seeks.

Additional forms of risk management involve Federal regulatory policies that impact how a bank can borrow and lend funds, the services the banks can provide and how banks disclose information to their clients and the government for insurance and consumer protection purposes. Still further risk management positively affects the banks legal positioning through sound compliance with banking law in addition to strong public relations that can assist with lowering a banks reputational risk. Technological risk is another area of risk that can be soundly dealt with through a banking information technology management.

Summary

Small bank risk management deals with sources of risk to a bank whether it be financial, digital, legal or social and implements risk management policies to prevent and lower the various types of risk that can affect a bank and as described in this article. Implementation of risk management requires the bank's management to monitor, assess and supervise the banking operation to ensure enhanced profitability, adequate capitalization, needed liquidity, regulatory compliance, public relations and unnecessary debt for the bank. Experienced bank managers are or should be familiar with the banking environment, market forces, banking policies and regulations and sound financial management to properly deal with the risks that can face a bank in its daily operations.

Sources:

1. Fraser, Gup and Kolari. 'Commercial Banking: The Management of Risk' 2nd edition' South-Western College Publishing, Cincinnati, Ohio. 2001.
2. http://www.chicagofed.org/banking_information/legal_reputational_risk.cfm
3. http://www.chicagofed.org/banking_information/risk_management.cfm
4. http://fic.wharton.upenn.edu/fic/papers/1096.html

Bank of America Website Review

Image attribution: Mark Holloway. CC BY-SA 2.0

The Bank of America is predictably branded with red, white and blue colors which commercially is consistent with its brand image and therefore its brand equity. As for the actual functionality and use of the website, it's what one might expect from a bank i.e. not to flashy, practical and slightly impersonal and intent on delivering and/or informing existing and potential clients of banking products and services.

Band of America website features

The features of the website do include some useful features that can make both individual and business banking more manageable and streamlined. The range of products and services is quite broad allowing the website to cater to a larger demographic market share. However, the site is somewhat impersonal and seems to assume an innate sense of banking among its visitors.

For persons who might find themselves confused on the website there is somewhat unenthusiastic help link at the top right of the home page that leads to a 'select state" scroll down menu. After clicking on one's State, one is then forwarded to a list of frequently asked questions and few if any phone numbers that put one in touch with anything other than an automated voice system. A few of the website services are included in the following list:

• Online Banking

• Products and Services

• Small Business Banking

• Web Mortgage application 

• Other loan applications

Navigational aspects of the website

Available in both English and Spanish, the Bank of America website has functional links to a vast amount of banking information including military banking, fee schedules, retirement financing, car loan information, wealth management and much more. One does need to be somewhat literate in the wide range of banking products and services to fully navigate the website. However, if one knows what he or she is looking for before visiting the website, it is generally just a matter of finding the correct tab or link.

The website homepage is organized with red tabs toward the top of page that help channel clients toward personal, business, and corporate banking pages and the default page is the personal banking page. Very evident on the home page is the online banking feature and at the time of writing this article, an advertisement for a bank of America credit card which may be a little off putting to some visitors. After all who wants to visit a website to immediately be made an offer of sale.

Additional aspects of the website

Comprehensive is probably a good adjective to describe the website although it tends to not make bold statements concerning interest rates and inward looking information such as banking ratios that measure the banks performance as a financial institution. In other words, the information presented on the website seems selective and geared toward a factual presentation of products and services rather than benefits and advantages. Other information included in the website includes standard information that might be typical to many other banking branches. Some examples of such information are listed below:

• Privacy and Security information

• Disclaimers and Banking terms

• Bank Information, financial statements and community information

• Locations and Branches

In reviewing the Bank of America website, one might fell slightly overwhelmed by the large amount of banking needs the site is able to meet. For this reason it may come across as overly functional or have too much information on the homepage. The site also doesn't come across as warm and friendly which is somewhat typical for a bank, but may deter some people from using it. In terms of functionality, the site is quite complete and can be a useful resource to individuals and businesses serious about banking, however few if any incentives or benefits seem to jump out of the websites pages from behind the inferred commercial goals of the bank.

Source:  https://www.bankofamerica.com/

Zombie Banks: Avoiding the Japanese Banking Crisis in the U.S.

During the Japanese banking crisis of the 1990's, Japanese banks refused government stimulus injections because they weren't interested in complying with excessive bailout conditions per Business Week. The lack of immediate government stimulus into Japan's banks caused the Japanese banking crisis to last around a decade long, hence the term zombie banks. To avoid a similar situation in the United States, the Government and the banks have acted faster than the Japanese financial system in the 1990's.

Reasons for the prolonged Japanese banking crisis

Zombie banks' emerged in the Japanese banking crisis for several reasons listed hereafter. The Japanese banking crisis lasted from the early 1990's to the early 2000's. During much of this time period Japanese banks remained stagnant with the affect of slowing the Japanese financial system and the Japanese economy.

• Banks initially refused government stimulus

• Slowed consumer borrowing

• Political inconsistency and lack of resolve

• Yen experienced strong currency deflation against the dollar

• Asian factories owned by Japanese corporations closed

Similarities between the Japanese and U.S. banking crisis

The parallels between the Japanese and U.S. Banking crises are clear. Similarities between the two crises are evident in relation to real estate prices, bank capital reserves and failures, and the need for government intervention to help end the crisis and save' the domestic economy.

• Preceded by a housing bubble in which real estate prices collapsed

•Reduced consumer spending and borrowing

• Multiple bank failures

• Bank insolvency

• Reluctance of banks to lend money in the late 1990's

• Need for Government assistance

• Decline in equity markets

Differences between the Japanese and U.S. banking crises

There are some differences that are palpable between the Japanese and U.S. banking crises. First, the Japanese and American consumers were positioned differently within the economy, each not spending for different reasons. Second, the Japanese Government was slow to act, taking years to financially bailout' Japanese banks. These differences are part of the reason the resolution of the U.S. banking crisis was different.

• Consumers and corporations heavily indebted

• Banks unwilling to receive bailout from the Government

• Japanese consumers not indebted, rather unwilling to accumulate debt

• Lack of immediate or short-term Government intervention in crisis

• Dollar didn't devalue to the same extent as the Yen

• Japanese banks had stronger balance sheets

How the U.S. avoided the existence of zombie banks

Zombie banks resemble the walking dead, and in 2008-2009 U.S banks were faced with two choices, bankruptcy or bailout. The option to exist on life support or stagnant non-performance was avoided through market and government action. On the one hand the equity markets collapsed and confidence in banking dropped heavily causing stock and bond prices to decline. 

Banks revenue, capital reserves and ability to pay off debt on defunct financial instruments such as mortgage backed securities also failed. For example, Freddie Mac and Fannie Mae had assumed financing of too much sub-prime debt that later became a foreclosure bonanza causing solvency, net worth and ability to pay off debt on loans near to if not impossible.

Since Japanese banks, unlike U.S. banks were not heavily invested in mortgage derivatives the extent of their insolvency was more manageable causing less of a failure or bailout scenario, but rather a reduce risk catch 22 in the sense consumers weren't borrowing enough before the late 1990's, and banks weren't lending enough after this period. 

In 2008, all the U.S. private investment banks failed and large banks and/or banking insurance companies were either partially nationalized, dissolved or re-capitalized. Moreover, some banks previously engaged in risky investment banking practices changed their structure to a commercial banking model to allow improved financial protection in return for higher regulation.

The unfolding of the U.S. financial crisis was consequently more expedient and directly addressed by the U.S. Government, its banks and market. The consequences did lead to rising unemployment, steep drops in the stock market, slowed GDP growth, increased Federal deficit, and dollar devaluation. 

In the long run however, the causes and results of the U.S. financial crisis were addressed and allowed to evolve more rapidly through an expediting of fiscal and economic influences and effects such as restimulation of the U.S. financial system, capital liquidity, housing foreclosure intervention, and the Troubled Asset Relief Program (TARP).

Sources:

1. http://www.businessweek.com/globalbiz/content/mar2008/gb20080331_833526.htm
2. http://www.businessweek.com/the_thread/hotproperty/archives/2008/11/lessons_from_ja.html

The Importance of the LIBOR

LIBOR is the acronym for London Interbank Offered Rate and this rate can vary from basis points in the tens to the multiple hundreds. The LIBOR is widely used as a financial benchmark for both consumer and business finances worldwide and is linked to the lending of over a hundred trillion dollars. (economistsviewtypepad.com) To put that in perspective, the U.S. economy produces around $14 trillion in value every year, making the LIBOR's influence very large.

LIBOR rates are set daily for 1 month, 3 month, 6 month and 1 year lending between United Kingdom banks. The reason LIBOR is important in regard to a credit crisis is because lending rates can affect the availability of capital in a financial system. The higher the LIBOR rate is, the greater the cost of borrowing funds for individual, real estate, equipment, individual or other loans becomes.

What happened to LIBOR during the credit crisis

When the most recent credit crisis began and the U.S. Federal Reserve Bank was lowering interest rates and making funds generally more accessible, the LIBOR continued to rise until October 2008, well into the credit crisis. (wsjprimerate.com) Essentially, this meant the British Bankers Association responsible for setting LIBOR rates were either unable to convince banks to lower rates or not fully cognizant of the implications high LIBOR has on financial markets. Unfortunately, the credit crisis was a big problem for the U.K. and the LIBOR did end up being lowered. In fact, the 1 month LIBOR rates dropped from over 3.8096% in October, 2008 to .3834 percent in January, 2009. (wsjprimerate.com)

The fourth quarter 2008 and 1st quarter 2009 drops in the LIBOR were due primarily to a recognition the credit crisis required liquidity to be alleviated. Dropping the 1, 3, 6 and 12 month LIBOR rates implied lower costs of financing new lending for banks. The reason LIBOR rates took so long to decline so long after the credit crisis started has to do with credit worthiness of banks. Since banks lend to each other with the risk of default, the risk of default rises during a credit crisis despite being a bank with good credit. Consequently, the default risk was built into the LIBOR rate until the credit crisis risk became higher resulting in a lower LIBOR.

Direct consequences of LIBOR and LIBOR Metrics

As a market indicator, a lower LIBOR indicates 1) acknowledgement of the magnitude of problem the credit crisis imposed on financial institutions and 2) the cost of borrowing money for financial institutions utilizing the LIBOR 3) measurement of perceived risk in the credit market and 4) assessment of progression and development within credit crisis. The causes of changes in LIBOR have been measured statistically by comparing the rate to other market lending rates. 

For example the TED spread is used to determine the difference between LIBOR and government securities yields of the same maturity. Other spreads used include the overnight interest swap rate for 30 day LIBOR, credit default swap rate to LIBOR spreads, and bank solvency risk to LIBOR spreads for measurement of credit and lending risk as a cause for LIBOR rates. (economistsviewtypepad.com) The course credit crises take is dependent on a wide range of factors both economic and financial.

A lower LIBOR has the effect of alleviating and spurring on economic and/or financial growth but is still only one of the variables in the equation of market and economic growth. Since LIBOR is not as connected to the government as the U.S. Reserve's Federal Funds Rate, the LIBOR is a more direct measurement of market conditions rather than Government linked response to financial market conditions. 

When LIBOR rates decline it may also be an indicator of where the financial markets are within a credit crisis. For example, since LIBOR reflects lending and default risk, a lowered LIBOR may indicate more creditworthiness between banks and a beginning to progressed resolution of the credit problems within the crisis. Moreover, a continually lowering LIBOR or bottoming of the LIBOR over time may also indicate the desire for financial growth combined with lower credit risk between banks.

Summary 

In summary, the LIBOR is an important banking-lending rate tied to a large amount of money worldwide. When credit and lending risk for banks rise, generally, so does LIBOR. However, when these risks become resolved, or are less important than the need for commercial growth, the LIBOR would decline. During the unresolved concerns of the credit crisis, LIBOR rose dramatically as commercial lending tied to the previous financial crisis devaluated. This happened even as the U.S. Federal Reserve has consistently lowered its lending rates. 

Evidently, the risks were still present throughout this period. It wasn't until the 4th quarter of 2008 and 1st quarter of 2009 that the LIBOR began to decline reflecting a possible resolution or bottoming of the credit problems and risks associated with the credit crisis. Nevertheless, in late January 2009, the three month LIBOR did experience an uptick indicating a possible continuation of credit risk.

Sources:

1. http://www.investopedia.com/terms/l/libor.asp
2. http://www.telegraph.co.uk/finance/economics/2815187/Liquidity-crisis-grows-as-Libor-rates-gap-hits-20-year-high.html
3. http://www.wsjprimerate.us/libor/libor_rates_history.htm
3.  http://tinyurl.com/6339trl (London Evening Standard)

Why Keeping Money In A Bank Can Actually Lose You Money

Keeping money in your bank is actually losing you money because the majority of banks often offer interest rates lower than the rate of inflation, and competing financial products that offer better rates. That's before any fees you might get charged for line of credit interest, extra check fees, multiple withdrawal penalties, ATM costs etc. If the money lost from opportunity cost, or money earned from higher paying financial instruments, is subtracted from this, the loss of money is even greater.

Numerically, inflation rates, also measured by the Consumer Price Index (CPI), vary depending on how it is calculated, the time of year, economic conditions and who you ask. Generally though, inflation averages between one and three percent based on Bureau of Labor Statistics (BLS) records. Bank savings account rates on the other hand, offer rates mostly fractional of inflation. For example, in July 2010, several brick and mortar  banks where paying less than half a percent in annual interest, whereas the average inflation rate between January and May of 2010 was 2.26 percent as per inflation data.(5)

• High yield savings accounts

Many financial instruments offer interest rates higher than savings accounts; an example of this is the high yield online savings account. These types of accounts are similar to savings accounts, but offer higher rates without withdrawal penalties or locked in savings. According to Money-Rates.com, the interest rates for some of these high yield savings accounts was in excess of 2%.(2) However, even at these higher rates, maintaining value rather than beating inflation isn't always the best option, and can lose higher interest earnings from other savings accounts.

• Peer to Peer lending

Peer to Peer lending sites like propser.com or lendingclub.com offer rates far in excess of what banks offer through their savings accounts. The difference between peer to peer lending and banks is that your lending money to people directly rather than through a bank. In this sense you make the same lending decisions as a bank loan officer yourself and are rewarded with a higher rate if the borrower doesn't default. Even the low risk borrowers can pay rates more than double the inflation rate.

• Investment strategy

Investment strategies involve utilizing financial opportunities that maximize potential returns and minimize risk. For those that are tolerant of some risk, investing money opens up a probability of higher earnings on savings. For example, an investor may wish to dollar cost average a blue chip high yield dividend fund while hedging with an inflation protected bonds or bond funds (3). Many different investment strategies exist that may prevent losing money in a savings account.

By keeping money in your bank, there's a good chance you are also losing money to the forces of a rising Consumer Price Index (CPI), and lost savings or investment opportunities. There are both low and high-risk ways to gain interest rates higher than a savings account; some of these such as high yield savings account, are even insured for loss through bank insolvency.

In the case of higher paying accounts that require money to be inaccessible for a period of time, sound financial management of one's finances pays off with higher interest rates. Savings accounts are just one way to hold money, but there are many more ways to allocate money so that it does more for you. To make the most of personal savings, identifying if the money is needed, and how much risk you are willing to take can mean the difference between half a percent and five or more percent in interest rate returns.

Sources:

1. http://bit.ly/4CnR5Z (Bureau of Labor Statistics)
2. http://bit.ly/NbZhc (Money-Rates.com)
3. http://bit.ly/aOfb6N (CNN Money)
4. http://bit.ly/wfvxD (Inflationdata.com)

An overview on new bank fees

Bank fees not constrained by banking regulation are on the rise according to reports across the U.S. Observers claim the new bank fees and fee increases are due to interest and fee restrictions imposed by the Credit Card Act of 2009. However, larger banks may also be trying to offset smaller profit margins and $50 billion in higher aggregate Federal Deposit Insurance Corporation (FDIC) fees arising out of the Financial Regulatory Reform law enacted in July, 2010.

Some of the new bank fees that are beginning to emerge are account transfer fees, inactivity charges and maintenance fees. These are bank fees that are new for some banks seeking to supplement revenue, but are not necessarily new types of fees. Additional fees pointed to by the NASDAQ stock exchange and Investopedia are minimum balance fees, overdraft protection fees, ATM charges, check fees and even miscellaneous fees.

Essentially, if it comprises a financial service and it's legal, there's little reason to think some financial institutions won't consider implementing new account cost structures. So which financial institutions are less likely to charge new bank fees and why? According to the Financial Reform law and the Baltimore Biz Journal, smaller community banks and credit unions are less targeted by the new financial reform law.  However,  a smaller financial institution such as a credit union with limited assets, is also more likely to issue smaller loans and provide more limited financial service options.

Ways to determine which banks are charging what fees, and if a financial institution is worth banking at include reading customer bank reviews such as the full reports at consumersearch, consulting the Federal Reserve Bank's website about Bank Accounts and Services, and mortgage loan shopping,  and by contacting financial institutions directly with questions. The Federal Deposit Insurance Corporation (FDIC) recommends keeping a close eye on banking correspondence and seeking alternative ways to receive the same services at lower cost such as withdrawing money with purchases rather than through an ATM. 

According to Qcitymetro, new and higher bank fees charged by Wachovia and Bank of America include paper statement fees with copies of canceled checks, printed account summaries, flat rate fees for some types of checking accounts, higher monthly account charges and fees for using ATMs from other banks. Still more fees to watch out for are paying credit cards off in full and line of credit fees. For example, HSBC bank charges its clients $10 for each day of overdraft protection used according to a September 25th report by Blake Ellis of CNN Money.

Sources: 

1. http://bit.ly/b3tOtN (FDIC)
2. http://bit.ly/aTYdIQ (U.S. Senate)
3. http://bit.ly/aV2TKG (NASDAQ)
4. http://bit.ly/bsmF7G (Baltimore Biz Journal)
5. http://bit.ly/cI6Uv2 (Qcitymetro)

How to open a money market account

Money market accounts are a type of savings account that can be opened at financial institutions were you do your day-to-day banking. These types of accounts may also be opened at banks that provide brokerage account services.

Essentially all that is needed to open a money market account is an account at a financial institution and an initial deposit. A separate application with personal information and acknowledgement of account terms of service may also be necessary.

To open a money market account, one can either go to a bank in person or utilize online banking services. Some online banks may offer better rates on their money market accounts due to lower overhead costs of operating online. 

When two or more accounts are grouped with other accounts under the same account number, they are insured together under the same Federal Deposit Insurance Corporation (FDIC) or National Credit Union Administration (NCUA) insurance.

Before opening a money market account, it can be a good idea to be aware of the requirements and limitations of these accounts. For example, 'Regulation D', a U.S banking law contained within Title 12, Chapter 2 of the U.S. Code only allows a specific amount of withdrawals and transfers out of money market accounts.

Another thing to be aware of is that money market accounts may require varying amounts of minimum deposit. Some money market accounts may have no minimum requirement while others might have minimum deposits as low as $10 or as high as $25,000 depending on the services offered by a particular bank or credit union.

Interest payments on money market accounts are typically higher than savings accounts, and interest may be calculated more frequently. Higher deposit money market accounts offer better interest rates. However, in comparison to Certificates of Deposits and some Treasury Bonds, the interest on money market accounts is still relatively low.

These types of accounts, as most, are not protected from tax levies or court orders. However, if the money market account is held within a retirement plan it may be subject to certain tax restrictions such as deferred income tax. Also, depending on how the money market account is managed, interest may avoid income tax altogether.

The money earned through money market accounts is tied to economic cycle and other interest rates such as the London Interbank Offered Rate (LIBOR), the Prime rate or the Fed Funds Rate which is the cost of money for banks borrowing from the Federal Reserve.  Money market accounts are considered reliable and safe places to put money.

Sources:

1. http://bit.ly/bd9p0d (NCUA)
2. http://bit.ly/diND3q (FDIC)
3. http://bit.ly/awWPeT (Regulation D)
4. http://bit.ly/bPiRKi (Office of Thrift Supervision)
5. http://bit.ly/cWdFy0 (Kravitz)

Advantages of Interstate Banking For Personal Accounts

Interstate banking provides financial security, increases banking services, and provides more efficient, cost effective banking to clients with personal accounts. Moreover, advantages of interstate banking emerge out of increased competition and effectiveness among banks that have utilized interstate banking privileges and competitive financing options for consumers.

Improved and efficient interstate banking advantages was the reasoning for interstate banking back in the 1980's when banking deregulation was taking its early steps.(1)  By 1994, interstate banking had become a legislative reality with the passing of the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994. (4)

• Interstate check deposits

Before interstate banking was allowed, interstate banks owned by the same company had to be subject to interstate agreements allow acquisition of the out of state banks, and  individuals could not make check deposits despite the interstate bank ownership.(2) Moreover, this restricted individuals from making deposits into their personal accounts at bank branches that did not have an interstate agreement even if they were owned by the same firm according to the St. Louis Federal Reserve Bank. Interstate deposits allow business people, travelers,  and people who work and live in different states more convenient banking options.

• Competitive interest rates

With interstate banking comes economies of scale, combining of banking assets for increased loan activity, and more competitive interest rates due to the cost savings banks incur from profitably expanding their operations across state lines.(3) In other words, when banks are able to lower their costs by efficiently branching out management across state lines the costs can be passed on to consumers through interest rates that attract more profitability for the bank and better returns for clients.

• More banking locations

A clear advantage of interstate banking is the number of possible branch locations at which banking services can be rendered to clients.(2) This convenience not only can increase banks revenue but also better facilitates interstate banking activities that can grow consumer wealth. For example, individual proprietors that can spend less time making deposits and taking care of personal/business banking transactions can also increase their efficiency, and potentially their profitability as well.

• Increased service options

Another advantage of interstate banking is increased services. These service can arise out of more resources that become available to the bank through interstate banking acquisitions and branches. (3) Additionally, a wider range of clientele also puts increased pressure on banks to provide a greater range of services. Examples of enhanced services may include personal account electronic banking, expanded loan products, and more voluminous transaction types.

• Financial security

In his book 'Banking Across State Lines' Peter Rose asserts Interstate banking can benefit consumers by improving financial security regarding funds within their personal accounts. More specifically, Rose claims that the consolidation of banks to form larger corporations tends to have a stabilizing affect on bank assets thereby better protecting consumers from bank insolvency. Even though bank deposits are insured by the Federal Deposit Insurance Corporation (FDIC), having to claim such insurance against lost assets is generally not a slight inconvenience, but rather potentially financially debilitating to banking customers who rely on one bank for all their banking needs.

Sources:

1. http://bit.ly/4xOpuh (Time)
2. http://bit.ly/dhZSRs (St. Louis Federal Reserve Bank)
3. http://bit.ly/c1I1pJ (Rose: Banking Across State Lines)
4. http://bit.ly/b2yGXU (FDIC)

A Guide to Bank Card Numbers

Bank cards include 1) automated teller machine (ATM) cards, 2) debit cards, and 3) credit cards. The use of the word bankcard in this article refers to one or more of the above types of cards. In some cases additional cards may be considered bankcards such as employee pay cards and unemployment insurance (UI) debit cards.

In all these cases, the cards have numbers on them that are used for a number of banking purposes including user identification, purchase security, protected use, and internal issuer classification(s). This article will discuss the types of bankcard numbers and their different uses.

Types of bank card numbers

1. Complete card number: The complete bankcard number itself is divided into number groupings that include 1) the issuer number, 2) the algorithm validity number and 3) the security check number. (merriampark.com)

2.  Account number: The account number on a bank card is usually around 9 digits in length. However, the length can vary between different cards or card types. The reason(s) for this variation in length include number of clients, issuer security standards, and varying internal codes and number classifications.

3.  Issuer number: The first digits in the card that typically 6 in number on the credit card identifies the bank or card issuer.

4.  Algorithm number: The numbers after the issuer number and before the last number that are used in verification of the card. This algorithm is used to prevent fraudulent creation of card numbers and often follows a simple key where every second number starting at the end of the number is doubled with the new number or 2 digit sum thereof placed beside the numbers that are not doubled. (theartofmakingmoney.com)

5. Check number: The last number of the card used to validate the card number via algorithm.

6.  Card Security Code(s) (CVC): The security code on some bankcards are numbers on the back or front of a card that add a layer of protection for the consumer. Security codes provide protection in cases where the numbers other than the card security code have been stolen. (securebmtmicro.com)

7.  Expiration date: Expiration date is simply the date in terms of day, month and year at which the card becomes invalid and cannot be used. Expiration dates can be 1 or 2 years from the date of issue and vary depending on the bank's policy. Expiration dates are used because

Bank card number applications

Bankcard number security is very important in protecting consumers and the economy. The combinations of card numbers and features help ensure theft and fraud are reduced by 1) increasing the amount of information a potential thief would have to obtain 2) complicating the creation of bankcard numbers, and 3) matching and confirming identity of user, account holder and issuer. As mentioned previously there are several specific uses for bankcard numbers.

User identification: The specific account number is unique to the account holder and thus helps identify and match the card number to the account holder.

Issuer identification: Bank card numbers also identify where the card account was originated. For example, the bank itself.

Purchase security: To assist the account holder, bank card numbers help prevent theft via 1) number of card number combinations, and 2) additional security code.

Fraud protection: Card issuers also protect themselves from fraud by using a specific number algorithm and number combination.

Bankcard number tips

Bankcard numbers involve more than just the numbers on the card. For the most part the bankcard numbers are for security and identification. To protect these numbers from theft or misuse it can be a good idea to practice a few methods of precaution, some of which are listed below. Bankcard theft, identity theft and bankcard fraud are all serious problems that can cause a lot of trouble if they occur. Taking the correct preventative steps help prevent these things from happening.

• Utilize secure websites for online purchases: Some websites do less to protect purchasers than others. Websites that use secure online purchasing will indicate this on their website.

• Separate numbers: Always keep pin numbers separate from the bankcard; card issuers repeatedly mention this with pin statements and new card information guides.

• Store number in a safe place: It goes without saying a bankcard should be stored in a place only accessible to its user. Otherwise theft of the card is easier for would be thieves.

• Shred statements and documentation: When documentation with card numbers and information are no longer needed, dispose of them safely by shredding them.

Sources:

1. http://www.thetaoofmakingmoney.com/2007/04/12/324.html
2. http://www.merriampark.com/anatomycc.htm#Account
3. https://secure.bmtmicro.com/resources/info/CVV.html

Disadvantages of Having a Joint Checking Account

Disadvantages of having a joint checking account revolve around 1) legal and regulatory management of the account, 2) account usage complications, 3) the type of checking account contract, and 4) the type of checking account.

Understanding the potential disadvantages of joint checking accounts involves foresight into how and why the account is necessary and whether or not the regulation, contract and use of such is favorable to all account holders. Several potential factors regarding joint checking accounts may present a disadvantage for joint checking account holders.

• Funds may still be subject to garnishment

The legal disadvantages of having a joint checking account pertains to the treatment of money within the account under specific circumstances such as death, withdrawal, transfer of funds, closing of account etc. Each checking account is subject to State and Federal regulations, and contractual terms between the owners and the financial institution at which the account is held. Depending on the circumstances, rules governing the use of the joint checking account may be disadvantageous. For example, different States have different classification of ownership which can affect whether or not funds within a joint checking account can be garnished.



• Wrong type of account contract

Disadvantages of having a joint checking account may also relate to the type of account contract. These contract may be either joint tenancy, tenancy in common or tenancy in common with rights of survivorship. This distinction determines how many joint account holders exist and what authority those account holders have in relation to the account(s) and the funds within it. If a checking account is designated tenancy in common only can affect whether or not money within a checking account automatically become the property of the second owner. In such case, joint tenancy can be a disadvantage if the other account holder passes away and the account does not have rights of survivorship.

• Differences in authorizations afforded to account holders

Being fully aware of account holder authorizations is helpful in preventing potential disadvantage related to such. Account holder status can affect access to information and the ability to make decisions regarding the account. In cases where a joint checking account consists of both a primary and secondary account holder, further disadvantage may arise for the secondary account holder. This is because secondary account holders are not necessarily granted the same usage rights of the account even though the funds may be jointly owned.

• Weak agreement between account holders

Usage disadvantages of having a joint checking accounts varies between account holders, the importance of the money in the account, how the account is managed and how effective the agreement between account holders, if any, is. In other words, although joint checking accounts are not necessarily disadvantageous, the potential disadvantages of the account increase if an agreement regarding the accounts management does not exist between the owners.

• Misuse of privileges within the account

In addition to the categories of joint accounts described above are the different account designations and how they are made use of i.e. type of account rather than type of contract. To illustrate further, suppose a married couple holds a joint checking account as joint tenants with rights of survivorship but later get separated. In such case the agreement between the account holders may change and not be as anticipated. This may cause misuse and/or unanticipated or agreed upon use of the account without further agreement between the account holders. In other words, situations can change in which case the account holders are vulnerable to abuse of agreement.

Joint checking accounts aren't always a bad idea, but do have the potential to be disadvantageous. This is because when two or more people are involved with a checking account, the number of requirements, restrictions, actions and abuses can increase. In light of this, taking into account the disadvantages of having a joint checking account can be beneficial in determining if this type of account is useful, and in being cognizant and preventing possible disadvantages associated with the account.

More specifically, disadvantages of having a joint checking account can pertain to account holder rights and authorizations, rules and regulations regarding the account and funds within it and the contractual terms and designation of the account, financial institution and account holders.

Investing in Tenancy in Common

Tenancy in Common is joint ownership of property where property ownership does not pass to other joint tenants in the event of death unless specifically stated through legal documentation. Joint tenancy in common is not the same as joint tenancy which is subject to 'rights of survivorship' by the other joint tenant(s) regardless of willed property.

Joint tenancy in common ownership can be subject to more extensive legal stipulations than more rudimentary forms of ownership. Taxation of property held in joint tenancy in common may also be regulated by different tax codes depending on the type of property.. Two typical examples of joint tenancy in common are illustrated below:

• Joint Tenancy of Real Estate: When two or more people have joint tenancy of a property they may both own a percentage share of the asset value of the home but not a distinct portion of the physical property.

• Liquid Capital Joint Tenancy: Unlike joint tenancy in housing, joint tenancy of liquid assets such as stock investments is not always subject to the same requirements. In this case joint tenancy may only imply joint ownership with no distinction of how much of the asset each owner owns.

Joint tenancy is subject to various benefits and disadvantages that are not typical of other types of asset ownership. These factors are ideally considered before entering joint tenancy contract(s) and are illustrated as follows:

Benefits of Tenancy in Common:

• Tax advantages: Joint tenancy in common has post-mortum tax advantages. That is, if one is planning from after (s)he dies, there can be an increase in the applicable property deductions an inheritor of the property is able to utilize. More deductions usually mean lower taxation.

• Leveraged Investment: Since joint tenancy is not full ownership it does not require the same amount of financing. This can allow one to become ownership in multiple properties, in affect leveraging the money one would have used for one home for ownership in several homes.

• Financing: Obtaining mortgages for joint tenancy may be easier due to the smaller amount of capital required. This can make home ownership a more realizable goal for those with less capital.

Disadvantages of Tenancy in Common

• Beneficiaries: Unlike in joint tenancy, joint tenancy in common may pass property onto heirs, beneficiaries or family members as with traditional ownership. While this may be an advantage to those stated in a will, it may be a disadvantage to other joint tenants who's interest do not match that of the new owner.

• Complication: Since joint tenancy may involve many owners, the rules of ownership can become complex as each owners interest must be represented and adhered to within the parameters of the contract.

• Financial Risk: If one owner in the joint tenancy experiences financial difficulties requiring a financial institution to seize assets or foreclose property this could adversely affect other joint tenants. This applies to joint ownership of both home property and liquid assets.

Items to Consider Before Joint Tenancy in Common

Joint tenancy is a form of asset ownership that requires certain prerequisites to ensure a financially stable ownership. Generally, this type of ownership should meet the following pre-conditions:

• Mutual Trust: Joint tenants ideally trust each other as they are more or less business partners.

• Financial Stability: Each partner in the joint tenancy will likely be more stable joint tenants if their financial situation is strong to begin with.

• Contract Specifications: To prevent future problems and complications, the tenants should have at least a verbal agreement as to how the property will managed and utilized. A written contract is preferable and more legally binding.

• Team Work: The larger the pool of tenants in the agreement, the more amount of cooperation and understanding may be needed. The ability to perform as a team could be beneficial in this type of ownership.

When making the decision to become a joint tenant it is important to realize it is not a solo venture and may involve some complex legal caveats and provisos. Knowing as much as possible before entering a contract of joint tenancy in common could be advisable to avoid mis-judgment or faulty ownership intention.

Having sufficient foreknowledge of potential circumstances is especially true in regard to real estate which can involve title issues, easements, mortgage insurance, natural hazards etc. The same freedoms and benefits of sole ownership are not present within a joint tenancy in common ownership. However, once the initial 'disadvantages' of joint tenancy in common are understood, this type of ownership agreement can be a potentially profitable and rewarding venture.