What Financial Services Do You Need? — Textbook Personal Finance

This post is part of the textbook personal finance series which covers basic personal finance skills by going through an actual textbook, chapter-by-chapter. Check out the intro post for more information.

Having finished the last month of tax posts, we turn to financial services. Not only do you need a spending plan to effectively manage your money, you also need to choose where you’re going to put it in order to move toward your financial goals. You can’t just stick it all in a checking account or in savings…at least that’s not the smartest way to handle it.

Frequent Money Management Mistakes

1. Overspending on impulse buying or using credit without planning ahead.
2. Having insufficient liquid assets to pay current bills.
3. Using savings or borrowing money to pay monthly expenses.
4. Failing to put unneeded funds in an interest-earning savings account or in an investment plan.

Essentially, the most common failings are not preparing for the expenses you will have and over-preparing so that your money loses value due to inflation.

Sources of Quick Cash

Either you have the money or you don’t. And if you need it in a hurry and don’t have it ready-to-hand then you’re either going to have to liquidate savings or use credit. Both are potentially detrimental to your net worth.

Money in savings builds value (so you not only use up the money but you use up the interest you could have earned on it) and credit saps value by its very nature. Also, some types of savings (like CDs) may have a fee to access the money early and drain even more of your resources.

Types of Financial Services

The book lists four main varieties of financial services. Often the same institution will provide several kinds.

1. Savings – safe storage of funds accruing interest for future use. This includes savings accounts and certificates of deposit (CDs).
2. Payment services – easy-to-access funds. These have been called “demand deposits” (because you can have them back when you demand them) but the term is rarely used in everyday speech. This includes checking and any other kind of account where you have unlimited access to your money (savings accounts may do instant transfers, but they’re required to limit the number of times you access them per month).
3. Credit – everything from credit cards to payday loans to mortgages to student loans.
4. Other financial services – includes insurance, investments, tax assistance, and financial planning.

Electronic & Online Banking

When this edition of the book was published, most traditional banks already offered electronic banking services and a few online banks had started. Nowadays, it’s unheard of for a bank not to offer a full array of electronic banking services from bill pay to integration with money management tools to easy transfers between accounts.

Most online banks offer exactly the same services as brick-and-mortar ones. I use both and I haven’t set foot in a bank in ages.

This was the chapter’s introduction to financial services. Next week promises to be a bit more interesting, looking into the varieties of financial institution and what they’re good for.

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