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Confession: We’re still using the same checking account that we had as a college freshman. But, in our defense, we’re currently deciding whether to switch. Although other banks offer better rates than ours does, switching seems like a giant hassle. After all, our bank account is linked to direct deposit, PayPal, our brokerage account, and more.
Switching accounts might earn us a couple extra dollars in interest, but our time is valuable, too!
Here’s how to walk the fine line:
Should You Switch Bank Accounts?
There are a few components of a good bank account; if your current account doesn’t have the following attributes, you should switch:
1. A good A.T.M. network in your area (ask the bank for a list of locations).
2. Low minimum balance requirement. We don’t want you to get hit by fees whenever your balance dips.
3. No monthly fees.
4. Online banking—the ability to check your balance and make transfers over the internet.
5. FDIC coverage, so the government will insure a portion of your money if the bank goes bust.
6. Free check writing. At the very least, as many free checks per month as possible.
7. Interest-bearing. Rates are low nowadays, but we’d like you to get some reward for storing your money with an institution.
Should You Switch Brokerages?
The reason for doing this is to save on transaction fees. Switching brokerages may sound like a pain, but it’s not all that bad. We’ll help you figure out if the switch is worth your time.
1. Does the new brokerage offer all of the securities you already own? If you own a mutual fund that isn’t offered at the new brokerage, you’d have to liquidate what you have and then buy something similar at the new place. Probably isn’t worth it unless we’re talking about a pretty huge difference between the brokerages.
2. Are there fees for the switch? Usually. You can open the account for free, but generally you have to pay to transfer all of your current securities to the new brokerage. Usually, this is in the ballpark of $50, though some brokerages will reimburse your fees as a promotion.
3. Does your current brokerage offer no-transaction-fee funds? If so, we recommend staying put and simply going with no-transaction-fee index funds at your current brokerage. Just look through the no-fee funds that are offered and choose the ones with the lowest expense ratios (operating expenses).
4. How much money will you save by switching? Estimate the number of transactions you make each year and multiply that by your transaction fee. Now, multiply that by the number of years you’ll be investing—probably until retirement.
5. How much is your time worth? Give yourself an hourly rate—what you make at work, what you’d charge someone who asked you to do busywork, or simply what you think you’re worth. Note that switching brokerages may require paperwork that can’t be done online (we know, fax machines are a pain). The paperwork will probably take less than two or three hours. Use our calculation to make sure that the gains outweigh the annoyance.
6. Calculate.
Current avg. transaction fees per year – avg. transaction fees per year at new brokerage = annual saved
Annual saved x number of years until retirement = total saved
Total saved – [fees for the switch + (your hourly rate x 2)]
If you get a positive number, then it’s worthwhile for you to make the switch. Otherwise, hang on tight and keep looking for the best mutual funds with the lowest fees.
If You Use a Full-Service Brokerage
These brokerages have lots of high fees, but you might be told that you can’t go it alone. If you’ve inherited a lot of money and need the personal touch, just make sure that your advisor is properly credentialed as a CFP (Certified Financial Planner).
