As most longtime readers know, I’m a very happy customer of ING Direct for both my primary checking account and my primary savings account.

Before I joined ING Direct, though, my primary bank was one of the largest banks in the United States, one that had a branch in the town where I attended college (I won’t name them because of libel concerns, but I’m pretty sure you’ve heard of them). I stuck with them for a long time simply out of habit - the status quo bias at work - but when I started to get my financial life in order, I began to seriously look at the ways that my bank was costing me money:
+ My checking account didn’t earn any interest at all. Just before I moved, they made a big deal about rolling out a 0.25% APY interest rate for the account.
+ The account also had a rather high minimum balance - $300, according to my notes. If you went below that minimum balance at any point during the month, you were dinged with a fee - $2.95 a month, if I recall correctly.
+ They also charged a monthly maintenance fee for a pretty standard online banking service. This fee was $7.95 a month.
+ The savings account offered only a 0.50% APY.
+ While there were a lot of ATMs in town that were fee-free, if you were in a town that didn’t happen to have a bank branch, you got dinged hard with an ATM fee.

These “features” added up to a pretty major money leak, so I went hunting for a new bank. I identified some features I found important (a decent interest rate, free online banking, no fee nightmares) and eventually wound up with ING Direct as my primary bank. Later, I found other features that would be useful (good customer service, a local teller window, etc.) that ING did well in some respects and not so well in others, but they’re still strong enough (and have treated me well enough) that I’m very happy as a customer.

In short, here are the factors I would look for when choosing a primary bank for my personal business, ranked in their order of personal importance. Please, in the comments, if you disagree with the ordering here, let me know why. Quite often, the importance of certain features varies depending on your life situation and experiences.

No (or very low) fees Before I switched to a bank, I’d want to know every fee that I’m going to incur during normal usage of the account. Maintenance fees are an absolute no-no, as they’ll eat all interest I might earn. I also demand a huge network of ATMs that are fee-free, especially in my local area, but also availability nationwide. This is make or break for me - if I get dinged with a fee or two a month, it eats up any interest I might earn and likely also costs me, too.

Some common fees to look for (and avoid) include minimum balance fees, ATM fees, regular maintenance fees, fees for online banking, and excessive overdraft policies. Make sure you know about these fees before you commit to any bank with your account.

Free online banking and bill pay Online banking and bill pay are essential, and the services should be free, too. The ability to pay my bills just by typing in the amount and hitting “submit” not only saves on the cost of stamps, but makes money management easier, too.

Customer service and ease of use Some people tend to pooh-pooh the value of good customer service at a bank. Those who do are ones who have never had a crisis where funds were misdirected by another agency or a similar mess. In those situations, good customer service is worth its weight in gold. For me, I must be able to talk to someone during normal, reasonable business hours. 24 hour customer support is a definite perk, as is the availability of a local teller window.

For day to day use, a bank that’s easy to access at all times without a bunch of hoops to jump through and a clear and easy to use interface makes all the difference. If you use your bank twice a week and a well-designed online banking interface saves you two minutes per session, that’s a savings of three and a half hours over the course of a year.

Generally, this is fairly hard to research when it comes to a bank, as most people generally just complain when service is bad but don’t say much when it’s good. Do some Google searching about the bank’s customer service (like “ING Direct customer service”) and see what you find out.

FDIC insurance This is almost a gimme for any bank in the United States, but it’s still important, and it can be vital if your bank fails, as with the recent trouble with IndyMac. Just make sure that your account is FDIC insured before putting your money in.

Interest rates Almost every article I read online seems to greatly overvalue interest rates, even claiming that one bank is better than another one because of a 0.5% APY difference. In my view, that’s nonsense. Look at it this way: 0.5% of $2,000 is $10. You can easily lose that much to fees in a month. Not having online bill pay can cost you that much in stamps. Poor customer service can cause all sorts of penalties and delays. In my view, all of those are far more valuable than a slight difference in interest rates. A competitive interest rate is required, but once you have that, the minor rate differences are trivial, especially when you consider how often banks alter their interest rates for promotions and in response to Federal Reserve moves. What’s competitive? As of this writing, you should be receiving at least 1% on your checking and at least 3% on your savings. If you’re not clearing that much, then interest is a problem.

A paper checkbook This is actually less important than you might think. I was very hesitant to switch to a bank that didn’t offer paper checkbooks and, for a long time, I held onto my old checking account just to keep paper checks around. What I eventually found was that I simply didn’t use them very much in the presence of online bill pay. I paid most local bills with cash or with credit cards and used online bill pay for everything else. In fact, after going for several months without writing a check at all, I’m about to close that account.

Putting This to Use
The choice of a bank can seem trivial to some, but it’s a surprisingly important choice. From my own personal experience, switching to a better bank saved me about $40 a month in improved interest and reduced fees - that’s $480 a year. Spending an hour or two now to find a better bank - especially if any of the factors above set off warning bells for you about your current bank - will definitely pay off over the long run.

Use the above checklist of features as a starting point. Decide for yourself which features matter the most to you and focus on them. Use Google to find information about the banks you might be interested in - and stick with reputable banks.

My Personal Experiences
I use ING Direct as my primary bank, but I dabbled with other banks for a period of time in order to try them out. Here are notes on my other experiences.

HSBC Direct I signed up with HSBC Direct simply because their interest rate was higher than ING Direct (it usually runs about 0.3% higher than ING) and I was looking for a savings account to sock away my emergency fund. While it worked well as a place to simply drop cash and leave it, the interface was too clunky to serve as my regular online bank. I had repeated difficulties logging on (their system requires you to use a keyboard-like interface with your mouse that has some compatibility issues) and also had a very difficult time initiating and stopping regular balance transfers. It’s a solid place to set up an emergency fund or a savings account for a specific goal, but it’s frustrating to use as a regular bank.

Washington Mutual had the best competition for ING Direct in my experience, offering a consistently higher interest rate on the savings accounts (as much as 0.75% higher than ING), strong customer service, and free paper checks for life. However, their checking account offered no interest rate at all. If I were to carefully manage the account, I could juggle my way around that, but for me, it wasn’t worth the effort, so I’ve just left the account idle. I have considered using it as an emergency fund, however, but as of yet I’ve stuck with the convenience of multiple savings accounts at ING.

My local bank blows away the others on customer service. I can talk to a teller during normal business hours and get services like cashing in change for free, free and immediate check cashing, and immediate resolution on banking issues (I don’t use this bank personally, but am involved with community organizations that do). Unfortunately, their rates are simply not competitive with some of the online offerings. I have considered opening a checking account there anyway just for the convenience of check cashing and change redemption.

Whatever you choose, choose wisely and carefully and do your own research. A poor banking choice can be a constant small drain on your personal finances, while a good bank can not only patch the leaky holes, but provide good service and drop some additional money in your pocket as well.

As regular readers know, I’m a very happy user of ING Direct. They provide my checking services, my savings services, and all of my online bill pay services. They even allow me to set up sub-accounts so that I can save for specific goals. In my opinion, ING Direct is the best of the full-service online banks, and I’m a happy customer of theirs.

Because they offer all of these useful tools, over time, I’ve begun to use ING Direct as my primary budgeting tool. I can set aside money in specific small pools, automatically transfer money back and forth, set up automatic bill payments, and so on. These tools allow me to effectively manage my money.

Here’s a walkthrough of how I do it.

Step Zero: Get An Account
You don’t necessarily have to have ING Direct as your bank to do the following. You merely have to have a bank that has online checking and savings access and online bill pay. Many banks offer this - Washington Mutual and E*Trade Financial are two well-known national banks that offer similar services, and your local bank may offer it as well.

Switching to a new checking account is easier than it might sound. I’ll quote the steps you need to take from an earlier post:

1. Open the new checking account. The first step is the most obvious one. Open the account and get the information you need: account number and routing number. Order checks if you need them. In other words, be prepared. Your new bank may also need the information for your old checking account so you can transfer money from the old account into the new.

2. Make a list and check it twice. Make a detailed list of all automated withdrawals and deposits from your current primary checking account. The best way to do this is to simply watch the account for a period of two to three months so that you pick up as many of these as possible.

3. Balance your checkbook. Make sure you’ve accounted for everything outstanding so there are no nasty surprises during the transition. Figure out what you have in the old account down to the cent so that you can avoid overdraft dangers.

4. Switch over all deposits and withdrawals at once. I find this is easiest to do by switching over the deposits a bit earlier than the withdrawals, so that there is money already in the new account when deposits begin to be set up. I’m also incredibly careful about such things.

5. Leave the old account open for a while with a balance in it to catch any missing deposits or withdrawals. Even though it might feel like the balance in the old account is just sitting there wasting time, it’s actually there to protect you against your own poor memory. Just be patient and give it several months; you might surprise yourself.

6. Close the old account. Be sure to leave a correct address behind. You might also want to end other services at that bank, such as a safety deposit box.

If you’re switching to ING’s Electric Orange checking, it may be useful to skip step #6 and leave the old account open, especially if there are no fees on it. I’ve kept my old checking account open for two conveniences - cashing checks with a teller and the ability to write paper checks (on the rare occasions when I do this any more, maybe once every three months).

Step One: Set Up Automatic Bill Payments For Monthly Bills
For every regular monthly bill you have, you can set up an automatic bill payment for that bill so you don’t have to worry about paying it on time. It’s quite simple.

First, click on the “Electric Orange” tab on the top, then click on “Free Bill Pay.”

Add a new business (with the name, address, and account number) by clicking on the appropriate link, then add that bill in below. You can specify the amount, the date to pay it, or the regular date to pay it.

Once you’ve done this, the next scheduled payment shows up in your basic checking account screen, so you can easily see what’s coming up and when.

Step Two: Set Up A Sub-Account For Each Irregular Bill and Savings Goal
What about the other bills, the ones that only come around every several months and seem to always crunch the budget, like homeowners’ insurance or car insurance? For those, it’s useful to set up a sub-account to slowly set aside money so that when the big bill comes, you’re ready. Here’s how.

Once you’re logged in, in the upper left, click on the “Open Account” option. You can see it clearly in the picture above.

Choose to open a new savings account on the next screen The “Open Now” link in the image above is where you should go.

From there, the process is really straightforward - you can call each account you create whatever nickname you like to identify it as a distinct fund: an emergency fund, a “house maintenance fund,” a “vehicle replacement” fund, a “house insurance” fund - whatever works for you.

After that, you should set up an automatic transfer into that account. You can do that by clicking on the Transfer Money tab along the top.

Then, fill out the information below. As with the automatic bill payments, these will appear on your default checking account view so you can quickly see the money that’s going to be automatically withdrawn from your checking account.

My recommendations? I leave the amounts for the regular but varying monthly bills in my main checking account - things like the cell phone bill and the electric bill just come straight out of the checking. Other bills, especially large ones with longer periods like car insurance and homeowners’ insurance, are handled by having a tiny weekly deduction from my checking account into a special fund just for that purpose. For example, our car insurance is about $400 every six months, so I transfer $15 a week into an account just for that. This way, I don’t really notice that $15 going away, but when the big bill comes, it’s not a panic time - the money’s just sitting there. So I transfer it back into my checking and pay the bill, all online.

Step Three: Pay Your Bills As They Come In
After this is all set up, your only real responsibility is to pay the bills as they come in. I usually pay all outstanding bills once a week, on Sunday afternoon. Keep on top of these bills, so that you’re not dinged with a late fee. With many of the bills handled now by automatic transfer, you won’t have that much to deal with - I usually just have one or two bills a week to pay attention to.

Step Four: Use Your Debit Card as a Mastercard and Use It For Regular Purchases Like Groceries
If you wish to completely centralize all of your spending until you get things under control, ING’s Electric Orange checking service will issue you a debit card that also functions as a Mastercard. If you’re just getting your budgeting under control, it may be useful to spend a few months just running all expenses through that card, so you can keep a careful eye on what you’re really spending. Once you have a strong grip on your spending, you can move on to using other mechanisms for your expenses, but sticking with a check card for a while is a great way to make sure your spending is under control.

These steps, all together, create a centralized view of your day-to-day finances and also form the basics of a budget. This is exactly how I do things right now in terms of day-to-day money management. I use ING Direct to do all of those things, and it’s done wonders for keeping my money in line.

This plan requires you to do some basic math with a calculator. Since you’re already at the computer, using the simple calculator tool on your computer for addition and subtraction should do the trick quite nicely. I tend to use Excel because I usually already have it open in order to update my net worth calculations.

Good luck!

First of all, a disclaimer: while I’m not directly involved with SmartyPig, I did speak with the development team in detail during the development process and offered a number of suggestions and ideas, and I was kept abreast with their development along the way. This group sought my input during their process of growing from concept to public release, but I am not directly involved with SmartyPig in any fashion. I do, however, think the product turned out quite well and I’ve been looking forward to telling you about it - I had to wait until after its recent public launch to do so.

Several months ago, I went out to lunch with a couple people who wanted to tell me about a project that they were working on that they thought I might be interested in. They knew of me via The Simple Dollar and, because they were based in Des Moines and I happen to live near Des Moines, they thought it was a great opportunity to get my opinions and thoughts.

Since the lunch was free and I had the afternoon off anyway, I thought, “Why not?” The worst that could happen is that I get a free lunch and listen to some boring conversation. I had heard a few pitches like this before from various people and groups and most of the time I saw very little that would get me excited.

That group was the SmartyPig team, and the set of ideas they’ve come up with is genius.

What’s SmartyPig?
Right now, I use ING Direct as my primary bank. They provide my checking services, my savings services, and all of my online bill pay services. They even allow me to set up sub-accounts so that I can save for specific goals. In my opinion, ING Direct is the best of the full-service online banks, and I’m a happy customer of theirs.

Still, when I look at online services like mint.com, I’m jealous: the idea of sharing saving goals with others is very intriguing. Personal finance and saving money has the potential to be as social as any other activity - we can involve our friends and family in the process and make it a point of conversation and a point of pride.

I can’t help but think back to when I was a teenager and saving for a car. My family was intimately involved in this process, and they encouraged me all the time to keep saving. My dad would occasionally put a few dollars into the account, and my mom would sometimes slip me $5 towards the car when I would take out the trash. Other family members, particularly my grandmother, were quite encouraging as well, and even a few of my friends were in on the story. When I finally got the car (and got it fixed up and road-worthy), it felt like not only a goal I had achieved personally, but a goal I had shared with my family, too - they were happy for me as well as they had seen the progress all the way along.

I’ve often thought that this type of thing would be a very cool feature for an online bank. Why not allow people to set up “public” savings accounts for such goals and then allow others to contribute money to that account and watch the progress? When we were buying a crib for my son, for example, both grandparents wanted to contribute and wanted to know how we were doing in saving for that crib (we were getting a gorgeous one that would be perfect not just for our children, but for their children and so on). One of them even suggested that we have a baby shower themed around the crib we had in mind, but there was no intuitive way to put the pieces together for it.

SmartyPig is basically the solution to this. SmartyPig is basically an online front end for West Bank, a bank chain here in Iowa. It basically allows you to set up savings accounts for specific goals and make these accounts “public” so that others can track the progress in the account. You go in, define a savings goal, set up an automatic savings plan that pulls from your checking account, and then watch your progress towards that goal. The account offers a pretty competitive interest rate, too. When you’ve reached a savings goal, SmartyPig issues you a MasterCard debit card that contains the full balance of your account, and you take it to wherever you want to go to spend it.

SmartyPig took the next logical step, too. They hooked in a number of retailers to kick it up a bit more. Let’s say, for example, you’re saving for a KitchenAid Pro stand mixer and you’re going to buy it off of Amazon when you reach your $300 target. If you specify that as your savings goal on SmartyPig, you’ll get the option of getting that $300 as an Amazon gift card - and they’ll kick on a few extra percent towards the purchase. So, for example, you might get an Amazon gift card at the end with a value of $315 or a MasterCard debit card with a value of $300 - your choice.

My Concerns
SmartyPig is a combination of two very good ideas - the social sharing of an online savings account, plus the option to roll it into a gift certificate for extra savings. I’m left with just a few minor concerns.

First, any time you sign up for another bank account, you’re giving your personal information to at least one more source. While the risk is slight, it does exist - there is no perfect security in the world and your best protection is to always minimize the number of places where your information exists. In a nutshell, I usually need a compelling reason to share my personal information - if it’s there, I’m okay with going forward, but I don’t hand out my information unless I can clearly state the reason and it’s a worthwhile one.

Second, the maximum benefit of SmartyPig comes from consumerism-oriented goals. While you can use it for things like a $5,000 emergency fund, SmartyPig doesn’t lend itself well to goals like that. By its very nature, SmartyPig is for saving for item-oriented goals. While this can be good - it’s a great way to save up for a new washer and dryer, for instance - it can also be bad if you use it to save for extra stuff you don’t really need.

Will I Use It?
For the exact purpose that it fills, SmartyPig is a wonderful online savings option, and I’m using it to save for at least one specific future purchase - a new dryer. Our old one is on the fritz, and this is a very subtle way to get the cash for a new one. My wife is considering adding a new washer to that goal as well. I have not yet shared any goals, mostly because I can’t think of a good idea for one to share.

I will admit to being tempted to set up a savings goal to save for a few frivolous things - and I think that’s one of the dangers of SmartyPig. It’s fun to play with, and my natural instincts are encouraging me to set up savings goals for things like a digital video camera setup.

Should You Use It?
SmartyPig excels at facilitating goal-oriented saving - if you’re saving up for a specific item, this is perhaps the best way I’ve ever seen to self-motivate to get it done and earn some solid returns in the process, both from the interest earned in the account and in the potential gift card you can get when you cash out. If that’s something you struggle with, SmartyPig is a very useful tool for taking that journey. The real question is whether you see a role in your life for such goal-oriented saving - not everyone does, and if it seems pointless and consumeristic to you (which has been the reaction of at least one person I’ve described SmartyPig to), then there’s no need to sign up for an account.

Personally, I think it’s a big help if you’re slowly socking away money for a specific large purchase, and it can be a compelling tool if you’re wanting to share a savings goal with others.

Whenever the Federal Reserve makes a move, it dominates headlines. I watched CNN for a while yesterday while waiting for a meeting and they kept going back to the big news that the Federal Reserve cut the prime lending rate by 0.75%. Most news stories make it clear that this is theoretically beneficial to stocks, and it did prevent a stock market collapse, turning a potentially terrible day on the stock market into just a mildly bad one.

However, for most people the actions of the Federal Reserve seem to have no connection to their day to day life. The prime lending rate? What does that have to do with my day to day life?

First of all, the prime lending rate is the interest rate that banks charge each other for short term loans. If a bank needs some quick cash, it can always borrow it from a bank down the road for that prime lending rate. Thus, most banks use this rate as the baseline for the interest rates they can give on savings accounts (they should be less than the prime rate, or at least close to it) and also on the interest rates they can give on loans (these should be above the prime rate, but competition keeps them low).

Thus, many, many other rates that do affect your life are affected by the prime lending rate. Let’s look at them.

The interest rates on your savings accounts will drop. Your local bank probably won’t change much - they offer so little on the average savings account that it doesn’t matter too much. However, over the next few weeks, a lot of online savings accounts will adjust downwards - probably something close to 0.75% in their savings rate. Some banks will change faster than others, so the next month is a bad time to do any rate jumping. Just stick with where you’re at, know that rates will go down, and wait it out for a bit.

The interest rates on mortgages will drop, perhaps convincing you to refinance. If you were looking at buying a house with a nice, stable thirty year fixed mortgage, this is amazing news because your mortgage rate will drop around 0.75%. On a $200,000 thirty year loan, Ben Bernanke just saved you $71 a month for the next thirty years - a total of $25,635.

That’s a lot of cash, and people out there with a fixed rate mortgage might be interested in refinancing if they can save $15,000 over the life of their loan. It might cost $3,000 or so to refinance, but if the total savings is $12,000 over the loan’s life, that’s plenty of incentive for most people. Incidentally, this will drive a lot of cash into the coffers of mortgage lenders, which will help with the subprime mess.

The interest rates on car loans will drop. This means that if you buy a car in the next few months, the payments will be substantially lower than they would have been without this drop. Since I’m personally thinking about purchasing a van in the early summer, this is good news for me.

The interest rates on variable rate credit cards will drop. Most credit cards have their rate fixed at the prime rate plus some specific percentage - prime plus 11.9%, for example. Since the prime rate just dropped by 0.75%, many credit card rates just dropped 0.75%, which will help a bit if you have a large credit card balance.

In a nutshell, when the Federal Reserve drops the prime lending rate, they’re encouraging you to spend money. Savings accounts become less of a bargain while, at the same time, loans become cheaper. This encourages people to go out and buy stuff.

In terms of stocks, when it looks like people are going to be buying more in the next few months, the stock market goes up, as that means a lot of companies that sell stuff are going to be getting more business.

In short, now is a good time to start thinking about larger purchases that you may need to execute soon. If your car is having troubles, you may want to start investigating good deals on cars, for example, or if you’re looking to buy a home, consider moving forward with that process. That doesn’t mean that you should go out and spend, but instead realize that it may be a frugal time to make a necessary big purchase.

For the last week, there have been numerous reports of individuals who have opened Electric Orange checking accounts and after sixty days have had a credit check run on them. Here’s a typical example of such a report at Consumerism Commentary. In some cases, apparently, after this credit check, the Electric Orange account is closed. To me, at least, this is rather ominous behavior as initial descriptions of the account indicated that there would be no credit checks, so I began investigating.

First of all, from their FAQ:

Do you pull my credit if I apply for Electric Orange and the Overdraft Line of Credit?
Yes. As part of your application, ING DIRECT will obtain information about you from a consumer credit reporting agency (a “hard pull”) to confirm that you are eligible for Electric Orange.

So, indeed, the standard practice for people who sign up for an Electric Orange account is that they check your credit report with a hard pull. A “hard pull” generally means about a -5 on your credit score that lasts for about six months, then goes away. MyMoneyBlog has an extensive explanation of hard pulls versus soft pulls.

So where did the idea that ING did not pull one’s credit come from? The story that I have been able to piece together is that when ING first sent out press releases for the account, their official policy was to give everyone a $1,000 line of credit without a credit check. Most of this initial information was sent out in January 2007 and was posted on various banking sites that post press releases and such.

Sometime shortly thereafter, ING changed their policy for new accounts. I spoke to a customer service representative at ING who basically said that this change happened a few months ago, implying that it was likely in February or March 2007. The change stated that ING did have the option to run a credit check at their discretion. Now, the policy is as stated above.

Why did they make this change? I have read many, many reports of people signing up for Electric Orange, immediately “overdrafting” their checking account, and using the overdraft protection as another credit card, which was not the purpose of the account at all - it was intended as an occasional protection against overdrafts. I would strongly speculate that this behavior warranted the change in policy from ING.

What can we learn from this? First of all, know what you’re signing up for, no matter what. If you read a four month old press release on a product, sign up for it without reading the documentation, and find out that things have changed, you’ve made a bad move. Don’t rely on second-hand information ever - investigate for yourself. Blogs like these are meant to get you thinking and point you in the right direction, but you have to do the investigation yourself.

Second, you need to ask yourself if a credit check like this is an issue for you. The credit protection offered by this account is exactly what I want. I’ve overdrafted once in my life and it was due to a mathematical error - but it ended up costing me almost $100 to deal with. With Electric Orange, it wouldn’t cost me a thing other than a few cents in interest. Plus, the account balance itself earns a 4.00% APY. My credit is stellar, so I’m not bothered by the credit check, but if your credit is poor or you’re sweating every single point on your score, this could be an issue for you.

About a month ago, I switched my primary checking account from my local brick and mortar bank to ING Direct’s Electric Orange online checking.

What is Electric Orange?

Electric Orange is an online-only checking account offered by ING Direct. In short, that means you do all of your checking account business either online or with a debit card. For some people, this sounds like complete craziness, but bear me out.

What’s Good?

A 4.0% APY interest rate This checking account earns an interest rate higher than inflation. My average checking account balance over 2006 was just north of $4,000. In this account, that’s an earnings of $160, just for having Electric Orange.

A strong fee-free ATM network My ATM card has no fees if I use an ATM in the AllPoint network, which has several locations nearby and apparently has one in all Target stores. My previous bank had an extremely limited fee-free ATM card network.

An overdraft line of credit Instead of incurring a big fee if you overdraft, the account instead offers a line of credit and they just begin charging you interest on that credit line. The credit line seems to be set differently for different people depending on their initial deposit and any balances they might have in other ING Direct accounts, but the interest rate on the line is 12.25%. Thus, if you accidentally overdraft your checking, instead of charging you a big fee (my old bank charged $40), you just start owing interest on the amount that you overdrafted. If you deal with it quickly, it’s just a few pennies.

Extremely user friendly online banking ING Direct has very good customer service and the best overall online banking interface I’ve used. Online bill pay with them was incredibly easy - I was paying my bills online very quickly and it all worked smooth as silk, even to rather local institutions like the local telecommunications cooperative.

What’s Bad?

No paper checks This is probably the worst drawback, but so far it hasn’t been as bad as I feared. I left my old account open with about $100 in it for small incidental checks (the nearest grocery store to my residence only accepts cash and checks from local banks as payment). For other checks, the online interface allows you to fill out a form that looks like a check and then they will mail you a check first class the following day. For me, I receive the check about four postal days after filling out the form online. This works for some larger check situations, but it’s not the most flexible system in the world. So far, it has worked fine for me, but I can envision a situation or two that might cause me trouble.

No branches The biggest reason for this for me was that my local bank allowed me to deposit pocket change directly into the account using their counting machine. Thus, I would save up pocket change in a jar for several months, then deposit it all at once. By keeping the old account, I retain this service. Other than this service, I never used a branch, so for me, this issue with Electric Orange is basically nonexistent.

Am I Going To Stick With It?

I have been very happy with ING Direct’s online savings in the past in terms of customer service and their nice interest rate, so it was a no-brainer for me to give this a try. So far, I love the account. I haven’t been hit with a single fee of any kind as of yet (and they used to come in all the time with my old bank) and I’ve earned a pretty nice little piece of interest. If you figure the losses on the fees at my old bank (and the lack of interest) versus the lack of fees at this bank and the solid interest rate, it is a very good deal.

What about a recommendation? If you’re comfortable with online bill pay, then this is the type of checking account you should be moving to. If you prefer to write checks for your bills, then this account will cause you much frustration and isn’t worth it. The online bill pay factor is really the deciding factor here.

Regular compound interest is (basically) the way most loans and savings accounts work, including home mortgages. Here, we’re going to use a spreadsheet to calculate a home mortgage payment estimator (and even a full payment schedule) using the principles of compound interest.

Fire up your spreadsheet and enter the following information into cells:
In A1, enter Simple Mortgage Calculator
In A3, enter Amount Borrowed
In A4, enter Length (in Years)
In A5, enter Interest Rate
In A7, enter Monthly Payment
In A8, enter Number of Payments
In A9, enter Total Interest
And in A10, enter Total Loan Cost

That’s a lot of labels. We’re going to use the first three numbers to calculate the last four, so enter some dummy values in B3, B4, and B5. I used $180,000, 30, and 8.00%. Then we begin setting up the calculations:

The piece in B7 looks really strange. This is what should be typed in:

=-PMT(B5/12;B4*12;B3)

If you’re using Excel instead of OpenOffice, it will look just a bit different:

=-PMT(B5/12,B4*12,B3)

This PMT function is a part of the spreadsheet that calculates how much a monthly payment will be for you. The interest on each payment will be 1/12th of the annual rate (hence the B5/12 part) but you’ll be making 12 payments a year (hence the B4*12 part). The number that appears here is the actual cost of a monthly payment given the terms you set up in B3, B4, and B5.

The other three numbers are fairly straightforward:
To calculate the number of payments (in cell B8), enter =B4*12
To calculate the total interest paid over the loan’s lifetime (in cell B9), enter =(B7*B8)-B3
To calculate the total cost of the loan (in cell B10), enter =B7*B8

In the end, you’ll get something that looks like this:

You can change the first three numbers however you want to look at various different possibilities. Want to make it even cooler? In cell A13, write Month 1, then click and drag the black square down from that cell until you can see month 360. Then, in B12 through E12, add these labels: Starting Balance, Payment, Interest Paid, Principal Paid, and Ending Balance. Yep, we’re going to see what exactly each payment is doing.

To set up the numbers, you’re going to have to enter some more formulas into the first couple rows of this little table, but after that, you can just drag down to fill in the rest.

In B13, in order to set the starting balance for the first month, you want it equal to what you entered above, so enter =B3
In C13, you’ll want it to always equal the payment calculated above, so enter =$B$7
In D13, you want to see how much interest you paid that month, which would be 1/12th of the annual interest (set permanently in B5) on the current balance, so enter =B13*$B$5/12
In E13, you’ll want the amount of principal paid this month, which is just the difference between the total payment and the interest paid, so enter =C13-D13
In F13, you’ll want to calculate the balance at the end of the month, which is the starting balance minus the principal paid, so enter =B13-E13
And finally, in B14, you just want the same starting value as the ending value from last month, so enter =F13

You can click on the cells B14, C13, D13, E13, and F13 and drag the black square in the lower right of each one all the way down until it lines up with Month 360. Don’t worry about weird values until you’ve done all five columns.

When you’re done, you’ve got a full mortgage amortization calculator - and you understand completely how the math works! Be sure to save this file for later - it’s useful!

Now that you’ve assembled your own mortgage calculator, you can see that the possibilities of using spreadsheets to do personal finance calculations are endless. Good luck!

Previously, we discussed how compound interest works on a year-by-year basis, but in the real world, interest is usually compounded more often than that. For many purposes, monthly compounding is used, so let’s look at monthly compounding. Fire up your spreadsheet and enter a few labels:
In A1, enter Monthly Compound Interest Example
In A3, enter Amount
In A4, enter Annual Interest Rate
In A6, enter Monthly Interest Rate
In B3, enter $20,000
In B4, enter 5.00%

You’ll end up with something that looks like this.

You’ll notice that in B6, I’m about to enter =B4/12 … what does that mean? That’s simply how to figure 1/12th of the annual rate of interest, or the piece of the annual interest that happens in a single month. When you enter that formula in the cell, you’ll see the number zero. Don’t worry, just click on that cell, go up to the Format menu above, choose the Cells option on that list, then in the popup box choose Percent and have it show two decimal places. After you do that, you’ll see a value of 0.42%, which is the actual monthly interest rate if the annual rate is 5%.

Now, if you’re doing annual compounding, a calculation is very easy. In cell A8, write If annual, interest is: and then in B8, enter =B3*B4 … you’ll see that with annual compounding, you’ll earn $1,000 in a year.

If you’re doing monthly compounding, though, it’s a little different. To see this in action, you’re going to have to set up some more labels:
In A10, enter If monthly:
In B10, enter Balance
In C10, enter Interest
In A11, enter Month 1, then click on the cell and drag the little black square in the lower right of the cell downwards until you can see all the months up to Month 12.
In B23, enter interest is:

You should have something that looks like this:

Now, the math. For the first month, the balance is the same as the amount, so enter =B3 in cell B11. How much interest will that earn in a month? Enter =B11*$B$6 in cell C11 to find out; for our example, it’s $83.33. If you were to multiply this amount by 12, you’d find that it is $1,000, which is the same as the annual interest earnings.

But things change at the start of the next month: it compounds. In B12, enter =B11+C11 … and then click on that cell and drag the black square down until it’s lined up with Month 12. Do the same in the C column, starting with cell C11. You’ll notice that each month, the interest earned is a little higher.

So how much did you actually earn in the year using monthly compounding? In cell C23, enter =SUM(C11:C22) … this formula basically says add up everything between C11 and C22. The total in our example is $1,023.24.

Right now, you’re seeing the difference between APR and APY. APR is the annual percentage listed above: 5.00%. However, APY is not equal to that. If you want to figure out the APY here, type APY in cell B25, and in cell C25, enter =C23/B3 … and then reformat the cell to be a percentage, as mentioned above. You’ll get a value of 5.12%.

Whenever a bank mentions an interest rate to you, they’ll give you the APR when they’re lending you money but give you the APY when you deposit money with them. To the uneducated, it makes the offer seem better, because almost everyone outside of the financial industry uses these values interchangeably. Thus, when you see a savings account with a 5.05% APY, the actual interest rate they’re giving you is lower; you can just earn a 5.05% overall return if you don’t touch the money at all.

Next time, we’ll take a look at mortgages and build a simple mortgage calculator.