Choosing a bank

When you think about saving money, what's the first thing you think of? Well, probably the bank, right? Most of us believe that keeping a pile of cash under the mattress is a bad plan, so... we have to make use of bank accounts. 

However, the sad truth is that putting money in the bank does not always result in that money working for you. Sometimes, especially in South Africa, you can actually LOSE money by keeping it in a poorly chosen bank account - don't forget that the vampire of inflation is always on the move, and if you add in stupendous bank charges and low interest rates... well, sometimes the mattress starts to seem like a pretty good option.

Not really. Mattresses don't allow you to make payments over the internet. And of course rather vulnerable to theft! But the truth is that in order for your cash to work as hard as possible, you need to pay a lot of attention to where you bank.

Squirrels do well to hoard nuts in secret locations.
You also need to keep your money in the right location!
Photo credit Tomi Tapio K (CC-BY 2.0)

I have always paid considerable attention to bank charges - long before financial independence became a goal. My attitude towards bank charges and interest has always been along the following lines:

Banks exist to pay me money, not the other way around.

Banks should be honoured to have access to my savings in order to loan to others at a high interest rate. At the very least I should break even and the total of all bank charges should be less than the interest that I earn on my savings in a bank account.

Your personal banking package

It is useful to think of your overall "personal banking package" which could consist of one or all of the following components:

1. transactional account - the account from which you are able to perform transactions (deposits, internet banking payments etc.)
2. savings account - a linked account which usually earns higher interest than the transactional account, but has limited transactional functionality
3. credit card - dangerous, but they have their uses as discussed in our post on debt
4. rewards programme - some banks reward you for how you bank with them, how often and how much you use your credit (or debit) card with them such as uCount (Standard Bank), eBucks (FNB), Greenbacks (Nedbank) and Absa Rewards.

The above package may all come from the same bank or it could be something that you construct from different banks and financial institutions (this is the option that we have taken). 

The ideal banking package

Purely from a monetary perspective, the best package is the one that costs the least (if interest and rewards earnings are less than your bank charges) or the one that earns the most (if interest and rewards earnings are greater than your bank charges). Ease of use, location of branches and other features such as sms alerts, mobile apps etc. should not be neglected, but make sure you think very carefully about what you actually need out of a banking package as opposed to the nice extras that a bank will try to sell you or hook you with.

The following is what I consider the ideal banking package for my family:

1. Internet banking! Being able to make payments online is a non-negotiable for us.
2. A single account from which to transact that also earns interest at a high rate.
3. A simple fee structure at the lowest possible cost.
4. A credit card for managing cash flow - the actual interest rate on the card is not important as we never plan on paying interest on it. What's important is that we have at least one month interest free and that any costs involved are less than the interest we earn on the money that stays in our bank account.
5. A rewards programme if and only if it earns more than it costs and if it falls in line with our usual spending habits (how much money we spend, what we spend it on and where we spend it: in other words, so we don't spend more by trying to save money).

Fee structures

Most bank accounts have a fixed monthly cost in addition to costs per transaction. Some bank accounts are "pay-as-you-transact" (with a low fixed monthly fee) and others come with "bundled transactions" (a higher fixed monthly fee, but with either a near-unlimited or fixed number of transactions included).

In order to determine which is best for you, it is important to determine what types of transaction and how many of those transactions you would typically perform every month. The main transaction types to consider are:

1. External debit orders (retirement annuity contributions, credit card repayments etc.)
2. Internet banking payments / EFTs (rent, monthly donations etc.)
3. Cash withdrawals at till points (smaller amounts).
4. Cash withdrawals at your bank's ATM (larger amounts).

Think about how many transactions you really use, and whether the bundled transactions are worth it. Although each transaction may be cheaper if you transact a lot, the fewer transactions you make, the less likely it is to be worth  your while. This is certainly what we found when we switched to a much cheaper pay-as-you-transact account. Although each transaction was theoretically more expensive, we still came out ahead. 

Interest earned on your bank account

Surprisingly, most transactional bank accounts don't actually pay you interest (or pay a very low interest rate) on any money you have in them. Instead, the bank offers you a linked savings account into which you need to transfer your money and then you can earn interest on that money. But you can't easily access those funds directly: they first have to be moved back into the transactional account. 

What this system has in its favour, is that your money earns interest in a place that is slightly harder to access - so if you don't have very good money discipline (yet!) then this could be a helpful feature. However, this feature is also the biggest downside of this system. You need to estimate very carefully how much you actually need in the transactional account so that you can maximise the amount that earns interest in the savings account and you're usually limited to how many times you can transfer from the savings account into the transactional account. What a schlep! 

What we need is something simple - a single account from which we can transact and earns a decent rate of interest.

Credit cards

As mentioned in a previous post, we don't have the luxury of choice in credit cards that they seem to have in the US. So instead of choosing the card that gives you the best rewards we're looking for the card that costs the least. Things to consider when choosing a credit card:

1. Credit cards usually have a fixed monthly fee or a fixed annual fee. (Choose one that is zero! Credit cards aren't actually worth paying for.)
2. Make sure you have access to either internet banking or emailed statements.
3. Make sure that you have at least one month (most in South Africa give 55 days) interest free.
4. Using your credit card for cash withdrawals or for purchasing petrol will cost from the very first day - rather use your debit card for these.
5. If you get your credit card from the same place you have your bank account these are sometimes bundled together. Make sure that the bundled cost is less than the cost of a stand-alone credit card from one institution and a bank account from another.
6. Credit cards are often an integral part of banking reward programmes. Again, you'll need to perform some calculations to see if paying the associated fixed monthly fee in order to have access to the rewards programme is actually worth it. (Spoiler: in most cases, it isn't!)

Rewards programmes

It's important to perform the detailed calculations for yourself to see if belonging to a rewards programme is worth it. I'll give you some of the major things to consider here, but you'll need to factor in your own spending patterns. 

The best approach to calculating if a reward programme is worth it looks something like this:

1. Work out your ideal banking package and spending patterns while ignoring the existence of any possible rewards programmes. 
2. Then see how much extra joining the bank and the reward programme will cost.
3. See how much you would need to alter your spending pattern to get certain benefits from the rewards programme:
• Do you need to spend more than you would without the existence of the rewards programme?
• Will you be limiting your freedom because you're required to change most or all of your banking habits just to get certain rewards or achieve a certain level of rewards?
• Do you need to do your shopping somewhere inconvenient or further away? If you need to drive further away than your closest shopping centre then this will add to the cost of joining the rewards programme.

It is really important to remember that rewards programmes are essentially marketing tools. This means that in most situations, the company is going to make more money out of your participation in the programme - otherwise they wouldn't offer it. It can be win-win, but the company is always going to come out ahead; after all it is their game. 

Also, by their very nature these programmes reward consumption: something which we are trying to cut down on. If you are being very frugal, they will have nothing to reward you on. So you need to be very sure that you can game the system before going for a programme like this.

So what is our personal package?

We do our banking with Capitec and we have a credit card from Virgin Money. We haven't bothered with any banking rewards programmes.

Without actually specifically advertising either of these institutions (if their packages change we will always be willing to move) I'm happy to go through our logic about how we came to the above combination:

1. Capitec charges low fees, the fee structure is simple.
2. Capitec offers very good interest on your bank balance - and they don't bother with a separate transactional and savings account.
3. Virgin Money costs us absolutely nothing.
4. The combination of the above means that our banking package earns us more than it costs us which is just how I like it.
5. We'd need to adapt our spending far too much for any of the banking reward programmes to make sense for us - although they certainly are better value than they were a few years ago.

Something to note about your bank account: regardless of who you bank with, you shouldn't get too excited about their interest rates as only the essential day-to-day cash should be kept in your transactional account. The rest of your cash that is set aside to be easily accessible in case of emergency should be in a money market fund - safer and it will achieve slightly higher growth. Plus, it is never a good idea to keep all your eggs in one basket.

I'll admit, constructing the "optimal personal banking package" can be quite a complicated and demanding task. The "best package" can also change from time to time as the banks compete with each other and change their offerings. Don't let the perfect be the enemy of the good - find a banking solution that works for you and gives you only what you actually need. If the offering with the next bank is only slightly better, the hassle of switching banks is probably not worth it. 

But if the differences become significant, don't be afraid of going through the motions of switching. Don't be suckered by special platinum cards or loyalty rewards: a bank is a business, and you are a customer. If they are not fulfilling your needs, you need to move.

Going through the above process of evaluating your banking solution can be time consuming, but the potential savings are worth it. You can bank on it.