Better Than a Bank Checking Acct

weissI know some of you, like me, have yanked money out of your checking accounts in the last 6 weeks. We’re worried about the safety of the money in the bank and the continuing possibility of “bank holidays.”

Melinda and I have been spending cash instead of writing checks or charging on the credit card, but it’s not as convenient.

The boys at Weiss Research have figured out a pretty neat option for people like us: How to Use a Treasury-Only Fund as a Bank. Here’s an excerpt (read the whole thing here.)
Warning: this action is no substitute for owning gold & silver for wealth protection.

Traditional banking nowadays is not as easy as it appears.

To make sure all your money is insured, you may have to keep close tabs on multiple accounts. And even if you’re comfortably under the FDIC’s insurance limits, bank fees and charges can add up. Banks often charge for regular checking, low balances, writing too many checks, ATM withdrawals and bounced checks. And for businesses, they pay no interest on checking.

You can get better interest with CDs. But there, your liquidity — the access to your funds — is restricted by early withdrawal penalties: Federal law requires a minimum penalty of seven days’ interest for early withdrawal on any account classified as a time deposit, which includes CDs. And since the law doesn’t set a maximum penalty, banks are free to charge more, which they usually do. So it’s not unusual to see early withdrawal penalties of all your interest on 30-day CDs and up to six months’ interest on longer term CDs.

Our recommendation: Use your Treasury-only money market fund for most of your banking needs, including both savings and checking.

A Treasury-only money fund invests your money in short-term U.S. Treasury securities (plus other securities that are 100% backed by U.S. Treasuries). The fund uses a bank, but strictly as a custodian for the securities, and those accounts are completely segregated from the bank’s deposits or assets. Even if the custodian bank fails, your money invested in short-term Treasuries through the fund — and your access to that money — is not affected.

Here’s the key: The Treasury-only money fund provides you with check-writing privileges so that you can use the money fund as your personal or business checking account. Here are the advantages:

Advantage #1. Yield.
Treasury-only money funds have generally yielded substantially more than the yield offered on the average personal checking account in the U.S.

The contrast for business is even greater: Since banks do not pay interest on business checking accounts, Treasury-only money funds invariably give you more yield. Plus, you can also take better advantage of the “float” — the funds remaining in your account while checks written against them have not yet cleared. And unlike bank checking accounts, you don’t have to worry if your balances are over a certain limit. The bigger your balances, the better.

Just remember: In times of acute crisis, when there is a rush to escape financial risk and buy Treasury bills, your yield could be very low. But low yield is the price you pay for maximum safety, and it’s worth every penny.

Advantage #2. Low Fees.
When a bank quotes you yields — on any kind of account — it always quotes you the yields before deducting all its various service fees. And with bank charges and fees currently at high levels, it’s almost impossible for most bank customers to collect anything near the advertised yield.

In contrast, when a Treasury-only money fund (or any money fund, for that matter) quotes you its yield, it is invariably after deducting its fees and expenses. Of course, the past or current yield is no guarantee of future results. But the yield quoted is the net yield that investors in the fund are actually earning.

How much of a difference can this make? In most cases, a significant one. Indeed, we figure that, after deducting myriad bank fees, most Americans today are getting a net yield of close to zero on their accounts, while many wind up losing money.

Advantage #3. One Account for Both Checking and Savings.
At banks, most customers find they need to divide their money between (a) a checking account, where they give up most of their yield, and (b) a savings account or CD, where they give up immediate access and liquidity. No matter what, it’s almost impossible to get both optimal liquidity and the better yield in the same bank account.

In contrast, Treasury-only money funds let you keep nearly all of your cash assets — whether for savings or for checking — in one single account. This means that whether you’re investing $1,000 or $1 million,

  • You have complete access to all your funds at all times.
  • You can withdraw the entire amount, with no penalty whatsoever. Just write a check or request a wire transfer, and it’s done.
  • Your money consistently earns competitive, current market yields.
  • You never have to worry about leaving too much in your checking account at low or zero yield. The full amount is available for checking at all times, earning full interest.
  • You continue earning interest on your money up until the moment your check clears. The longer it takes for your payees to cash their checks, the more interest you earn.

Advantage #4. No Limit to Your Account Size.
When you use banks for your savings or checking, you have to go through a series of contortions to keep your money safe from failure:

  • In each CD, you have to make sure your initial investment is comfortably below the coverage limit. Otherwise, the accumulation of accrued interest could put your balance over the limit, and that portion would not be covered by the FDIC.
  • You may have to spread your CDs among various accounts.
  • With a large checking account, you would have to call your bank almost daily to make sure it’s not over the FDIC limit. Reason: If there are several big checks outstanding, your bank balance could be over the limit; and if the bank fails at that time, any excess amount in your account could be in jeopardy.

With Treasury-only money funds, insurance is a moot point. Your funds are invested strictly in securities that are guaranteed directly by the full faith and credit of the U.S. Treasury Department. And there is no limit on the Treasury’s guarantee of its obligations — whether you’re a beginning saver with just a few thousand or you’re a Bill Gates with billions.

Advantage #5. Exempt From Local and State Taxes.
The income you earn on both Treasury-only money funds and bank accounts is subject to federal income taxes. So there’s no difference between bank deposits and Treasury-only money funds in that regard.

However, when it comes to local and state income taxes, there is a significant difference:

  • The dividends you earn on Treasury-only money funds are generally exempt from local and state income taxes. But …
  • The income earned on bank accounts and CDs is not exempt from local and state income taxes.

Advantage #6. Truly Free Checking.
Nearly all banks charge you — one way or another — for your checking privileges. They may charge you a fee for each check you write. They may charge you a flat monthly service fee. Or they may charge you a combination of both.

Sometimes banks say they’re giving you “free checking,” but require large minimum balances, paying little or no interest. No matter what, you’re paying for checking — and probably too much.

Most Treasury-only money funds do not charge you any extra fee for check-writing privileges. You can write as many checks as you want, as often as you want. When they say “free checking privileges,” they really mean it.

This is not true for all Treasury-only money funds, however. And some do levy certain charges for special services. That’s to be expected. But those fees are almost always lower than the charges at banks.

Advantage #7. Immediate Liquidity.
As with any financial institution, there will be a holding period for the out-of-town checks you deposit to your account. But your money goes to work for you right away, generating interest income immediately. And if you deposit your money via wire transfer, you can avoid the holding period; your funds will be available immediately.

In short, except for the holding period, all of the funds received by your Treasury-only money fund are available to you all of the time. There are four ways you can withdraw your money from your Treasury-only money fund:

  • You can write a check against the balance in your account — to yourself or to another payee.
  • You can call or send a fax to your money fund’s shareholder services department, giving them instructions to issue a wire transfer. (Before the fund can accept your wire instructions, however, you will need to have a signed authorization on file. This can be done when you open your account.)
  • You can request a check be sent to you directly from the fund. You can also authorize telephone instructions for redemption by check when you open your account.
  • You can establish a systematic program to automatically send a set amount to you monthly, quarterly, semi-annually or annually.

One small, annoying disadvantage: Most money funds impose a minimum amount for each check, usually $50 or $100. So you may need a small local checking account for checks under their minimum.


How to Set Up a Treasury-Only Bank Account

Step 1. Decide what type of account you want to open. For your personal checking account, it could be established as an individual, joint, custodian, or trust. (In addition, you can also use your Treasury-only money fund to open a separate account for your IRA or other retirement accounts.)

Step 2. Select a Treasury-only money market fund.

Step 3. On its website, or while you’re on the phone with its customer service department, get answers to a few questions about the costs associated with check-writing privileges:

  • “How many checks will you provide for me at no charge?” For personal accounts, at least the first 20 or 25 checks should be free. If you want additional checks, it’s reasonable to expect a printing charge, but it should be minimal.
  • “Will you charge me a per-check transaction fee?” If the answer is yes and you anticipate a relatively active account, don’t do business with this fund.
  • “What is the minimum dollar amount for which I can make out each of my checks?” It should be no more than $100.
  • “What is the minimum balance that I must maintain in my account, and will you penalize me if my balance falls below the minimum?” If the minimum is too high for you or if there is a penalty, look elsewhere.
  • “Do you accept deposits of second-party checks?” If the answer is no, this may not be the right fund for this plan.

Step 4. Download the prospectus and application from the fund’s website. Then read them carefully before investing. Or you can also ask the fund to send the materials via first-class mail.

Step 5. If you are not sure about what forms and documents you will need to submit to open an account, now is the time to ask. Some typical types of accounts, along with the documentation needed, are:

Type 1. Individual or joint account, minor custodian account: You’ll need the application and the signature card (indicate the number of signatures that will be required to cash a check).

Joint accounts, unless you specify otherwise, will probably be opened as joint tenants with rights of survivorship (JTWROS), meaning that the entire account balance will pass to the survivor in case one of the joint owners dies.

If you want the account to be registered as joint tenants in common (JTIC), be sure to specify that in writing when you open the account. JTIC means that each person owns a set percentage of the account; and if one person dies, his or her percentage does not automatically go to the survivor, but goes into the deceased’s estate to be distributed.

If you wish a custodian account for a minor child (UGMA), don’t forget to use the child’s Social Security number for correct IRS reporting.

Type 2. Trust or guardianship: You will need the application and the signature card (indicate the number of signatures needed to cash a check). Plus, you will need certified copies of the appropriate trust documents or court papers appointing a guardian and any power of attorney forms, if applicable. Hint: Put the trustee name(s) first on the account registration to reduce the paperwork that would be needed whenever an account transaction is requested. Example: Jane S. Doe, TTEE Doe Family Trust.

Type 3. IRA, Roth IRA, or other retirement account or rollover: Ask for the IRA or retirement plan application and agreement. This information should

include a new account application, a transfer authorization and a rollover certification form.

If you’re opening a new retirement account, fill out the new account application only.

If you’re transferring a retirement account directly between custodians, fill out both the application and the transfer authorization. Also be sure to include a copy of the most recent statement from your current custodian.

If it’s an IRA rollover and you have a distribution from a retirement account that you are going to transfer to the Treasury-only money fund, fill out both the new account application and the rollover certification form. (Important: Due to IRS regulations, check writing is not possible on IRA accounts.)

Step 6. With the above documents, also provide the basic wiring instructions to the fund. If there is no space on the application, put the following information in a separate, signed letter:

  • Your bank’s name, city and state
  • Your bank’s “ABA” number
  • Your bank’s wire transfer account number
  • Your account number at the bank
  • All registered names on the account

Note: The account title on your bank account should be the same as the title on your Treasury-only money fund account.

Step 7. Don’t forget to sign the application. Then make your first deposit check payable to the Treasury-only money fund and mail it with your new account materials. You should receive written confirmation of your deposit in the mail within a few days and a checkbook within about two weeks.

Step 8. Keep only a minimal amount in your local bank for petty cash and small, occasional checks.

Step 9. Use a major credit card for as many of your purchases as possible. Then, in order to avoid any interest charges, pay off your credit card, in full,

each month with one check written from your Treasury-only money fund.

Step 10. To maximize your total safety and liquidity, transfer the bulk of your cash funds to the Treasury-only money fund account. These can include any investment funds you wish to keep liquid and available for upcoming opportunities, as well as most of your regular spending money and most of your keep-safe savings.

Step 11. Write all of your checks that are above the fund’s per-check minimum from the Treasury-only money fund account. These could include
checks for paying your mortgage, rent, monthly credit card bills, utility bills and any large purchases at establishments that give you a better price for non-credit card purchases.

Step 12. If you need a large amount of cash or want to buy traveler’s checks, just call your Treasury-only money fund and give them instructions to transfer the money to your local bank. In most cases, if you call before 3 PM Eastern Time, you should have the funds in your account the next business day.

Step 13. At most funds, you may deposit your salary and any checks payable to you directly into your account. Just endorse the checks with your signature on the reverse side and include the words “for deposit to,” followed by your account number at the fund. Then simply mail your deposit to the fund. (You may use the deposit slip and envelope that most funds provide you with your monthly statement.)

As always, do not send cash in the mail. If you have cash deposits, make them at your local bank and then send the funds to your Treasury-only money fund via either a check or wire transfer.

If you want to know if your check has cleared your fund and you don’t want to wait for the written confirmation in the mail, just call the fund’s shareholder services at its toll-free number.

You will receive monthly statements from the fund showing all your checking transactions, plus any other activity including deposits, dividend income credits, etc. (Note: Canceled checks are not usually returned to you automatically, unless you specifically ask for them.)

That’s it! With these steps, you will now have superior safety overall, significantly greater effective yields, greatly reduced bank charges and maximum liquidity.