My local bank offers an interesting account each year. It starts on the first Saturday in January and the deal is that if you deposit the same amount each week for 49 weeks, they will make the 50th deposit for you and give you the money at the end of the year just before Christmas. You can’t take the money out of the account and if you miss any payments you don’t get the free 50th payment but they do set it up so you can pay in automatically out of your checking account. It seems worthwhile, but is it worth it?

I’ve heard of this type of savings product before. It’s also been called a “Christmas club,” among other things. Let’s walk through this step by step.

I calculated the interest rate on this account as being roughly 4.15% I calculated this based on an account that you deposit money in each week and that compounds weekly, and on the fiftieth week you don’t make a payment and instead receive the total value of the account at the end of the week. In other words, the money you put into this account earns interest at a rate that’s pretty close to 4.15% per year.

That amount blows away pretty much every savings account available right now. There are some catches, however.

First, this account has a lot more in common with a CD than with a savings account. The biggest difference between a CD and a savings account is that you can’t withdraw the balance of a CD before it matures without suffering a penalty. The same thing is true here – if you withdraw the money before it matures (after fifty weeks), you lose that “free” payment at the end, which reduces the interest rate you earn down to 0%.

There’s also the caveat of having to make a payment every week. If you can’t make that payment each week, then you suffer the same penalty as an early withdrawal – your interest rate essentially drops to 0%.

Not only do you have the money tied into the account, you essentially have to have the next payment tied to the account at least a day or two in advance (and even longer unless you’re really micromanaging things).

What about the return on your money, though? Given the restrictions on deposits and withdrawals, you should expect a return that’s similar to a CD and substantially better than a savings account.

Right now, savings accounts are earning at a rate below 1% in most places. You can find accounts that pay out 1% or, in a few cases, even a bit better than that, but they’re unusual cases.

12 month CDs, on the other hand, pay out somewhere between 1% and 1.5% at the moment, depending on the exact CD you find.

Naturally, both savings and CD rates vary over time. In a few years, when overall interest rates begin to rebound, the rates on both savings accounts and CDs will go up, making this type of “savings club” a bit less lucrative.

For now, though, it’s a very good deal. If you have the chance to get into one of these clubs and can easily afford the weekly contribution, it’s definitely worthwhile. In future years, you’ll want to compare the return to savings accounts and checking accounts to be sure you’re getting your money’s worth, though.

The post Does a “Savings Club” Account Work? appeared first on The Simple Dollar.

Thanks to William Grootonk for the image.

Yesterday, I was stunned to read a news report about how Freddie Mac denied people the ability to refinance, then made investments that earn them more money if people are unable to refinance. “Freddie Mac has invested billions of dollars betting that U.S. homeowners won’t be able to refinance their mortgages at today’s lower rates, according to an investigation by NPR and ProPublica, an independent, nonprofit newsroom. [...] Millions of homeowners wish they could refinance, but their lenders tell them they can’t qualify for today’s low rates because of tight rules. Freddie Mac is one of the gatekeepers with the power to set those rules, and lately, it has been saying no more often to homeowners.”

In other words, the investment arm of the institution is making investments that will profit if people can’t refinance while their lending arm is telling people that they can’t refinance.

They are not your friends.

Do we even need to go into detail about how banks, insurance companies, and lending institutions consistently work against the customer?

Citigroup’s main brokerage subsidiary, its predecessors or its parent company were considered by the SEC to have violated the law against purposeful or negligent fraud of customers under interstate commerce five times: in 2000, 2005, 2006, 2010 and 2011. In each instance, the firm undertook “never to breach the law again”.

Bank of America, which now includes Merrill Lynch, was found by the SEC to have violated security laws some sixteen times and made similar pledges on each occasion.

JPMorganChase, which now includes Bear Stearns, was found by the SEC to have violated security laws some twelve times and made similar pledges on each occasion.

The scorecard for other big financial institutions is: UBS —seven times; Goldman Sachs —three times; Wachovia —three times; AIG —twice. The list goes on.

These businesses are not out to make your financial lives easier. They are out for profit. Sometimes, profit might be in line with what your financial needs are. At other times, the profit of the bank is opposed to what your financial needs are – and profit will win.

These banks are doing exactly what they were designed to do, which was make money for the shareholders. That does not include making money for you unless doing so happens to coincide with making money for the shareholders.

My point is simple. Do not rely on these institutions for your financial future. If you already do, make it a serious focus to reduce your reliance on them.

Every day you’re in debt, you’re handing money to these financial institutions because they loaned you some money in the past. If you put $1,000 on a credit card and wait a year to pay it off, you’re not only paying back the $1,000, you’re giving them $200 more for the privilege. Mortgages are even more painful. A 30 year mortgage for $200,000 at, say, 6% often has several thousand in closing costs right off the bat. Then, over the lifetime of that mortgage, you’ll not only pay back the $200,000, you’ll also pay back $231,676.38 more in interest just for the privilege.

Got a credit card? The terms will likely change on that card on a fairly regular basis as the companies find new ways to earn a profit from you holding that card. Often, that means you’re going to be paying fees on it or high interest rates on it or interest that starts accumulating very quickly or bonus programs that are difficult to use.

Every day, I receive emails from readers that have piles of credit card debt, piles of student loan debt, a big mortgage, car loans, and other forms of consumer debt. Others are thinking of getting deeper into debt because they want that house or that car now.

When you walk in the door of a financial institution, you play by their rules. They do not give you money because they want your dreams to come true. They give you money because they’re going to make far more money from you over the long run.

Your mortgage may be life-changing for you, but it’s just another profit-making revenue stream for your bank. The same goes for your car loan or any other debt you may hold.

What’s the solution, then? Debt freedom. It’s a very simple goal, but it’s a powerful one, and until you achieve it, you’re going to be simply handing money to financial institutions.

What’s the biggest part of debt freedom? Self-control. You don’t need everything, and you certainly don’t need it today. Your life will not be made whole or complete by having a big house or a shiny new car. Focus on having just the things you actually need and stand on your own two feet with them.

The best thing you can do if you want better behavior from the banks is to make yourself far less reliant on them and stand on your own two feet financially.

The post Banks Are Not Your Friends appeared first on The Simple Dollar.

Bank of America will begin charging a $5 monthly fee at the beginning of next year for customers who make debit card purchases.

Whether you use your card for one purchase a month or 20, you will pay $5 per month starting in 2012. It doesn’t matter if you select “debit” or “credit” at the point of sale.

If you don’t use your card at all, you won’t be assessed a fee, and you can still use ATMs as much as you want without getting hit with the new charge. Plus, customers with certain premium accounts will be exempt from the charge.

Obviously, this is big news for Bank of America customers, but I think the impact of this will affect the customers of other banks as well.

A few Bank of America customers will jump ship. Most will not. While this type of fee is annoying, most Bank of America customers affected by this fee will largely ignore it and just pay it each month. Some will jump ship, sure, but the bank wouldn’t be charging this fee if they didn’t believe it would be a net gain for them.

Should you jump ship? If you rely on your Bank of America debit card for making purchases, this will essentially become a $60 a year fee. That would be incentive enough for me to jump. However, I probably wouldn’t jump immediately. Why?

I expect some other banks to follow suit. Bank of America wouldn’t be making this move if they didn’t believe it would help their bottom line. Given that, I fully expect other banks to match this move in the next year or so.

Thus, if I were with Bank of America and thinking of jumping, I wouldn’t jump until the end of the year when I can see if any other banks are adding similar fees. The longer you wait, the more time you have to see if the banks you’re eyeing are adding such things.

Other banks will laud their free debit card usage in an effort to attract customers. Over time, fee-free debit card usage at the point of sale will become a feature to promote rather than an expectation, sadly.

This may push people to simply use credit cards exclusively at the point of sale. This is what I do already, so such fees by my bank wouldn’t make any difference to me. I simply use a credit card for all point of sale purchases, then pay off the balance in full every month.

Should you make this leap? Using credit cards as your primary purchasing vehicle requires some level of self-control. If you have a history of getting into debt trouble with credit cards, I wouldn’t make this move.

Of course, my belief is that this type of move is part of what Bank of America is hoping for. They’d rather have people carry a balance on a Bank of America credit card and one way to do that is to gently discourage people using their debit cards to buy things.

All in all, this isn’t a great move for banking customers, but it’s not devastating, either. If I were the customer of a bank making a move like this, I would probably be tempted to switch banks, not just because of the fees, but because it sends something of a signal that I wasn’t a fan of a move like this.

The post Some Thoughts on Bank of America’s Debit Card Fee Plan appeared first on The Simple Dollar.

On Facebook, Patsy asked about “Online Banking… Paperless statements etc… Good idea? Cons: hackers, spouse doesn’t use computer much, so what happens when the other spouse dies?”

Patsy is really asking two separate questions here: how to protect your identity when using online banking and how to plan for account access if the partner using the account heavily dies.

Online Banking and Personal Security
People don’t like to hear it, but it’s true. You alone are the key to avoiding identity theft. In an online world where sophisticated criminals can get a lot of value out of your personal data, you have to protect it. You are aided by the fact that banks do as much as they can to keep you secure, but they’re not infallible. You have to do your part, too. Here are some essential steps.

Use strong passwords – and don’t repeat them. If a site allows you to use a password, use one that is long, does not include common words or names, and does include a variety of letters and numbers. Your best bet is to use a random password generator like this one. Use a strong password like this for all of your vital accounts – and use a different one for each vital account. Take action and change your passwords on your vital accounts right now.

Use antivirus and anti-spyware software on your computer. Good software like this is a great investment. I’m a big fan of AVG, but do your own research and find a great antivirus and anti-spyware package that meets your needs. Take action and get a strong antivirus and anti-spyware package on your computer.

Don’t store your passwords in an easily-accessible place. If you keep your passwords written on a sticky note on your monitor or under your keyboard, your identity is only as secure as the location where your computer is. Don’t leave such information in such an easy-to-access place. Take action and use software like a KeePass to keep all of your passwords secure.

If your bank mails out sensitive information by email, stop getting electronic updates. Most banks have enough sense to keep truly sensitive information (like account numbers and so on) private, but some banks will email out statements with such information on it. If you get such documents in your email, your identity is only as secure as your email (which isn’t really very secure). Take action and if your bank sends out such information, request that they stop sending it to you.

These four steps will go a long way toward making your online banking more secure.

Online Banking and Future Planning
At the same time, what do you do if you use an online bank and your spouse knows nothing about it? Most online banks do have procedures that helps survivors out in the event of an account holder’s passing, but you need to do your part in avoiding this process or at least making sure it goes off without trouble.

Keep basic information, such as a list of your accounts, in a safe and secure place. Simply make a list of your financial accounts, with account numbers, account holder information, and PINs, and keep that list in a very secure place. A safe deposit box at a bank is a good place to keep it, for example. This document will help those you leave behind to go through your accounts and take care of them as needed. Take action and create such a document today, then immediately store it in a secure place.

Update such basic information lists regularly. Account lists and other such information can grow stale over time, so you’ll need to update the list regularly. If you choose to keep an electronic copy of this type of document so you can update it regularly, keep that document on an external storage device that you can also save in a secure place. Never keep it on your main hard drive. Take action and find a secure place for electronic versions of your lists, and update it regularly.

Make sure the executor of your will at least knows where such information is. You may want to include a mention of it along with your will, just so that in the event of your passing (or in the event of both you and your partner passing), the information can easily be found by parties who will need it. Take action and amend your will appropriately.

These steps will make sure that your account can be managed upon your passing.

The post Online Banking and Contingency Plans appeared first on The Simple Dollar.

This tactic usually involves carefully watching the yield rates on savings accounts over at Bankrate.com (or a similar service), always signing up for one of the top accounts, and transferring their savings to that highest-yield bank.

For me, at least, I don’t find this tactic of much use at all. Here’s why.

The interest difference between a good bank’s interest rate and the top interest rate is pretty small. I took a look at Bankrate’s 50 newest additions to their database and sorted them by APY. The best rate found on that list was 1.40%; the median one (the one in the middle) was 0.95%. In other words, you’re gaining just 0.45% by choosing the top bank over a random bank.

That’s not much money. Let’s say you have $5,000 sitting around to play with in this fashion. The amount you’ll gain over the course of a year is $22.50 by rate hopping from the median bank above to the top bank above. And, in truth, it’s usually worse than that.

It takes time to locate the right offers. In order to keep up with these offers, you have to visit sites like Bankrate very regularly to find out what’s on top today. This is a small, continual drag on your time as you have to actually evaluate the top offers to make sure there’s not some sort of catch and to make sure that the rate was actually reported correctly to Bankrate.

It takes time to sign up for new accounts. If you do find a new offer, you have to sign up for that account. This can be an arduous process depending on their sign-up procedures, sometimes requiring mailing documents back and forth and waiting quite a while – another source of eating away at your valuable time.

The more accounts you have, the more identity risk concerns you have. While banks have amazingly strong security procedures, no security system is perfect. Each individual bank might have a 99.9% chance of keeping your personal data safe this year, but if you have fifty accounts out there, the chance of all of your accounts being safe this year drops to 95%. Identity theft is a real mess to clean up, so it’s worth your while to minimize the number of access points to your personal data.

Diminishing returns are in effect. Let’s say you’re at a bank offering 0.5% on your savings account. You can earn at least a little by hopping to an account earning 1.3%, right? That’s $80 extra per year on $10,000.

But once you’re in that 1.3% account, the benefit of the next leap is much smaller. You might dig for a while and find a 1.5% account, earning you $20 for the jump per year. The next time, you have to search a long while to get 1.6%, earning you $10 more.

My approach is simple. I usually encourage people to simply get an online savings account with a great customer service reputation and a reasonably competitive rate and just stick there without worrying about what other banks are doing with their rates.

Would I ever rate hop? Yes, in certain situations, I would rate hop. First, the interest rate competition in online banks would have to heat up. If you were seeing a top rate of 6% APY versus a median of 3%, then you’re talking about some significant interest. This is particularly true if you’re dealing with a large balance – say, $50,000 or more. 3% of $50,000 is $1,500 – that’s definitely worth your time.

But that doesn’t reflect the reality of the banking market and it also doesn’t reflect the day-to-day reality of most people. So, for now, I have to say that rate chasing is a pretty ineffective tactic for spinning more money out of your savings.

The post Can You Actually Make Money Chasing Rates? appeared first on The Simple Dollar.

I was wondering if you could do an article on how to set up an online savings account? I remember you mentioned using them and getting a high return on interest, and I think I’d like to switch my savings account over to one. What kind of benefits/penalties have you come across?

The first thing to look at is what the differences between a “normal” bank and an online bank are.

With a normal bank, you have your usual checking and savings accounts. They issue you a checkbook with which to write checks and (usually) an ATM card to access your account. When you need to deposit something into your account, withdraw some cash, or make another transaction, you usually visit a branch location, visit an ATM, or use the bank’s online banking services.

With an online bank, all of the above is (typically) true, except that there is no physical branch location to visit. You conduct all of your business with the account via an ATM or via the online banking service.

What do you get in return for a lack of a physical branch to visit? You usually get a better interest rate than you would at a brick-and-mortar bank. You also usually get a very good online banking system and online bill pay service. Most online-only banks usually have minimal fees – no maintenance fees or other things like that. Typically, you get top-notch phone-based and internet-based customer service, too.

For a lot of people, that’s a trade they’re happy to make. The loss of a physical bank can be a big change, but the other benefits of the account make up for that.

How to Distinguish Between Online Banks
There are several things I look at when considering whether to use an online bank.

First, are the rates offered at least reasonably competitive? Banks change their exact interest rates all the time, so I don’t view it as a requirement that an online bank have the best interest rate in the land on a certain given day. However, the rate should be within a percentage point of that. I usually use BankRate.com when researching banks.

Second, is it FDIC insured? I look for the FDIC logo when I visit the website. I usually also follow up at the FDIC website using their bank search to make sure that the bank is registered with the FDIC. The FDIC is essentially insurance for your savings and checking (and CDs) that guarantees up to $250,000 of your account in the event of a bank failure.

Third, is it well-reviewed? Search Google for online bank reviews, particularly reviews of the banks you’re interested in. Get a diversity of opinions; don’t just rely on the first one you see. I have a series of online bank reviews ready to go for The Simple Dollar and will begin posting them soon (once I have a minor legal issue resolved with regards to them).

Fourth, does it offer all of the services you need? Do you need to have a paper checkbook or will online bill pay and an ATM meet all your needs? Do you need a very wide ATM network? Do you need easy access from your cell phone? Do you need Quicken compatibility? Do you have any other particular needs with regards to the account? Know what exactly you need with regards to the account and keep those needs in mind as you look at a few banks.

Fifth, once you decide on a bank, open the new account, but don’t close the old account. Transition slowly in order to ensure that you didn’t forget about any automatic payments or anything else like that. You may even choose to leave the account at your old bank open, particularly if it does not have any annual fees or maintenance fees, because of the convenience of the local branch.

Funding your new account is done electronically. You simply request a transfer using your new bank’s online banking system and the money moves automatically.

Good luck!

The post Personal Finance 101: An Online Banking Primer appeared first on The Simple Dollar.

A few months ago (yep, one of those New Years Resolutions!) I pledged to get a better grip on my finances. I found some personal finance blogs to read and decided to start off by simply tracking where our money went.

But it’s impossible!! Every time I sit down with our bank and credit card statements, a big chunk of the money is going away to places I can’t figure out. There are vague entries on the bills and so on.

What can I do?

I’m going to assume Kimberly is single. If she’s not single, the first thing she needs to do is sit down with her partner along with a copy of all of their bills and the suggestions in this post and come up with a game plan they can approach together.

First of all, it’s absolutely the right move to sit down at the end of the month and review your spending. Simply knowing where your money goes can help you figure out some very simple things to do to improve your personal finance situation.

That being said, I think Kimberly’s problem could be a very common one. It’s due to the fact that the statement at the end of the month can only provide so much data.

Take ATM use, for example. If you stop by an ATM and withdraw some cash, you’re suddenly finding yourself with money that can be spent without any real paper trail. If you want to keep track of what you spent that money on at the end of the month, you have to keep the record. Your bank statement won’t be able to help you a bit. Counter withdrawals from a bank have the same problem, as does “extra” cash taken off of your debit card when you make a purchase with it.

To put it simply, whenever you spend cash, there is no paper trail unless you create that trail yourself. Your bank and credit card statements can’t keep track of your cash for you – and if you use cash quite often, you’ll find such statement use pretty much impossible.

You have two choices here.

On one hand, you can change your habits and stop using cash. If you rely on your bank card for most of your purchases, your statement becomes your paper trail for you. It will identify, at the very least, where all of your purchases took place, which, for me, is usually good enough.

On the other hand, you can start keeping a money diary. Just pick up a small notebook and keep it on hand. Whenever you spend money for any reason, jot down the date, the amount, and what it was in your pocket notebook. This might not catch everything (you might just forget about it sometimes), but if you have most of your spending in there as an entry, it can often create the picture you need if used hand-in-hand with your statements.

Which solution is better? It really depends on your comfort level. Try the one that seems the most appealing to you and see if it works. If it doesn’t, try the other one.

Another problem that might be causing this is poorly-worded entries on the bank statement and/or the credit card statement. If Kimberly can’t decipher what some of the entries mean, the data is useless.

If you find yourself with a lot of entries that should have meaning, but do not, you may want to seek assistance with reading your statement. If you still have trouble, you should consider seeking another financial institution. Such entries will always cause you trouble – and they certainly don’t need to be vague or unclear.

Good luck! You’re on the right path to taking control of your finances. Don’t let this little road bump deter you!

The post Where Does All of Our Money Go? appeared first on The Simple Dollar.

Cash Contributions (optional retirement and cash savings) – $1,821

The average American family contributes $150 a month to their retirement plans and/or to their personal savings – and that’s a commendable thing. In fact, this is one part of a budget that should grow bigger while other parts grow smaller.

So, rather than focusing on “trimming” this section of the budget, I’ll instead mention strong techniques for maximizing the “bang for the buck” one can get from their personal savings and retirement dollars.

Start (and maintain) a cash emergency fund. Having some cash in a savings account at your bank can make an enormous difference when an actual crisis comes about. If your car breaks down and you have $1,000 saved up in cash, it’s not a worry – but if you don’t, you’re going to be paying some serious finance charges. Saving a bit now for emergencies actually saves you a ton of money later on.

Find a bank that doesn’t bleed your savings with fees. ATM fees, maintenance fees, access fees – banks love these fees. It’s one way banks make money. Of course, some banks put fewer fees on the backs of their customers – and if your bank is loading you down, you can find financial benefits from finding a better bank.

Open a Roth IRA. For most people (those earning under $100,000 a year, roughly), the Roth IRA is a great way to start saving for retirement, even if you don’t have much to save. It’s easy to set one up through Vanguard or Fidelity or your investment house of choice. They’ll just take a bit of money from your checking or savings account each month and invest it for you for your retirement. Then, when you’re 59 1/2, it’s all yours – tax free.

If you’re unsure of your retirement investments, choose a “target retirement” fund. If you’re trying to piece through complex and confusing investment choices in your retirement plan and can’t make heads or tails of it, a “target retirement” plan is usually the best choice for you. It automatically maximizes your risk when you’re young – keeping you heavy in stocks – and then scales back to more safe investments when you get closer to retirement. It does the leg work so you don’t have to.

Automate as much of your savings as possible. Automatic savings plans make it incredibly easy to start saving. Simply instruct your bank to take a small amount from your checking account and put it into your savings account (even if they’re at different banks) each week. You won’t miss $10, but at the end of the year, it’s turned into $520.

Set up savings plans today for your big goals tomorrow. Dreaming of taking your whole family to Disneyworld in a few summers? Start saving now. Set up a savings account at an online bank and instruct the bank to take $40 from your checking account a week. In two and a half years, you’ll have $5,000 for that trip. You won’t have to go into debt to do the things you want to do – and starting now means you only have to spend lunch money each week to get there.

Look for a bank that offers a strong interest rate on savings – and keep much of your savings there. You don’t have to keep your savings at the same bank as your checking account. You need good customer service and low fees for your checking account. For savings, the interest rate matters a lot more. Shop around and find an account that offers a great interest rate, then open a savings account there. Not only will your money earn more, but you’ll find it’s much easier to save if it’s not easily accessible at the ATM with the card in your pocket.

Lock up some of your savings in CDs. If you have quite a bit of savings – more than a couple months’ worth of living expenses – consider putting the extras into CDs. CDs – certificates of deposit – are basically like special savings accounts with your bank. In exchange for agreeing to not touch the money for a certain period of time (say, a year), the bank gives you a much better rate of return on your money. If you don’t need that cash right away, put some of that extra cash into CDs and earn a little more with it.

I want your help! In the comments, please let me know which of the tips you find most useful for trimming these costs. I’ll include the top choices in a comprehensive budget trimming guide at the conclusion of the series.

The post Trimming the Average Budget: Savings appeared first on The Simple Dollar.

And we had to figure it out. How should we pick a bank? How do we move the money over? What should we put in our checking account? Our savings account? What are these CD things?

Michael writes in:

I’m a student, just trying to firm up my financial situation after having read your blog. For the last several years, I’ve used Washington Mutual largely because my parents had an account there but since being taken over by Chase, customer service has gone downhill, and the interest rate on my savings account is ridiculously low.

I’m looking at having an interest-bearing checking account and a savings account at different banks, to maximize my savings. However, how easy is it to transfer money from an account at one bank to one at another? Also, I’ve seen money market accounts, savings accounts, and no penalty CDs? What’s the difference, and how would you allocate money between them?

My first comment would be that I would value customer service strongly at the bank where I held my checking account, but view it as more of a secondary factor at the bank where I held my savings account. The bank with the checking account will handle the vast majority of your transactions for you, while the savings account bank will just handle a small number. So, when you evaluate your checking account bank, ask around and Google for information on their customer service.

Transferring Money Between Accounts
How does transferring money between accounts at different banks work? If a bank features online banking, it’s usually just as easy as logging on and requesting such a transfer. Most likely, if you’re seeking a high-interest savings account, you’ll be getting an account that’s managed primarily online, as most of the best interest rates are offered by online banks such as ING Direct, HSBC Direct, and so on.

In those cases, the online account is often “linked” to your checking account. That means you record the information about your checking account (the account number and the bank’s routing number, which you can get from them upon request or often simply from their website or from Google. Once that’s set up, you will be able to initiate transactions either way – both from checking to savings and from savings to checking – with just a few mouse clicks.

Such transactions are done electronically and usually take around two business days to complete.

Choices for Savings
Michael also wondered about several different options for saving his money. Let’s look at them.

Savings accounts are the default choice. Savings accounts allow you to deposit money as you please and withdraw money up to six times a month. Savings accounts usually have a fixed rate of return that doesn’t change all that often. Usually, high interest savings accounts change their rates whenever the Federal Reserve changes rates, so if you hear about Ben Bernanke on the news, pay attention to your rates.

Money market accounts sometimes offer a higher rate of return than straight savings accounts, but the rate of return on a money market account is variable and is quite often not as high as the online offerings. It changes based on the state of the money market – to put it simply, the money you put into that account is invested by the bank in highly secure government investments. Those investments change rates regularly (based on what the government is offering at a given time, which is usually related to the demand of the market) and thus the rates you get in the account go up and down. On (extremely) rare occasions, money markets will return nothing at all or just a tiny, tiny fraction of a percent – at other times, they’ll blow savings accounts away. Most of the positive legacy of money market accounts comes from the early 1980s, when they returned money hand over fist because treasuries had absurdly high rates of return.

CDs are much like savings accounts, except they have a higher rate of return. The big difference is that you can’t actually touch the money you’re saving during the life of the CD. So, if you picked up a one year CD with a sweet interest rate that’s much higher than your savings or money market options, you wouldn’t be able to touch that money for a year without a stiff penalty. The “no fee” part you mention is something that’s offered by a lot of banks today – the days of charging fees to buy a CD are rolling into the past.

Splitting Up the Money
So what should Michael do?

In my experience, money market accounts and online savings accounts are usually very comparable. If anything, I’ve consistently seen online savings accounts offer a slightly larger return over the years I’ve been following them, but money market accounts at your local bank will likely trounce their savings account rates.

When compared rates between maoney market accounts and online savings accounts are close (say, within half a percent or so), I generally stick with banks that have a good customer service reputation, but I don’t view it as being as important as it is with my primary bank that holds my checking account and handles most of my transactions. Rate-hopping (or rate arbitrage, as some call it) isn’t worth the effort, in my opinion, unless you’re moving around high five-figure or six-figure amounts, in which case I wouldn’t have a large portion of that in a savings account.

What about CDs? CDs can be a really great way to tack on a bit more return for your savings, but it’s often easy to get caught up in CDs and put more of your savings into it than you should. I would make sure that I had a healthy emergency fund in my cash savings (a savings account or a money market account). If you’re single, this would probably be about two months’ worth of living expenses. The ability to just grab cash when you need it to deal with an emergency is vital.

The big question I’d ask myself is why I would want to put money in CDs. This goes beyond just earning a higher rate of return – if you just want that, put the money in a CD that will mature within a year and keep recycling it (unless you have a year or more worth of living expenses in your savings account, then you can shoot for longer ones). Are you saving for a particular goal? When do you expect that goal to come to fruition? If you have a goal in mind, buy the highest rate CD that matures before that goal.

Of course, if you’re finding that you want to get more aggressive with saving for goals, you can begin to look into index funds… but that’s another story entirely.

Good luck, Michael.

The post Personal Finance 101: Getting Started with Banking appeared first on The Simple Dollar.

But what exactly is it?

Charlie writes in:

What exactly is FDIC insurance? How does it work? [A local bank] went under recently and seems to have been bought out by another bank and from what I understand the accounts are intact. Is that FDIC insurance at work?

(I edited out the bank in Charlie’s question for privacy reasons.)

What Is FDIC Insurance?
FDIC insurance refers to insurance policies created by the Federal Deposit Insurance Corporation, which is an organization wholly run by the government of the United States. The FDIC sells insurance policies to banks which insures the checking and savings accounts at those banks against the failure of those banks. Thus, when you open an account with a bank, that bank purchases insurance on that account for you from the FDIC.

FDIC insurance covers checking accounts, savings accounts, certificates of deposit, money market accounts, and cashier’s checks. It does not cover stocks, bonds, mutual funds, money market accounts, US treasuries, safe deposit box contents, or other such items.

Most banks that operate in the United States buy this insurance. When they do, they’re required to display the FDIC logo on signs in their business as well as on their websites.

FDIC insurance insures deposits up to $250,000 per depositor. This means that if your bank fails, the first $250,000 in your account is insured by the FDIC and will be returned to you in the event of a bank failure.

What Happens If My FDIC Insured Bank Goes Under?
If a bank that offers FDIC insurance becomes insolvent, the FDIC takes over that bank and all of the accounts held there. One of two things then happens.

In one type of takeover, called the “purchase and assumption” method, an already-existing bank takes over the accounts of that bank as well as some (or all) of the loans that bank has given out to customers. This purchase is usually done quickly. For you, the customer, this means that one morning, you’ll wake up and your bank account will be with a new bank. This is what happened when Wachovia failed and was taken over by Wells Fargo, for example.

In another type of takeover, called the “payout” method, the FDIC liquidates everything that’s left in the bank and then issues payouts for insured amounts to customers. So, if you have less than $250,000 in your accounts, you’d receive the full amount – if you had more, you’d just receive $250,000.

In either case, the process is really straightforward, usually involving minimal hassle from the customer. At most, you’ll simply need to open an account at a different bank (if your bank isn’t bought out or if you don’t like the new bank).

What If My Bank Doesn’t Have FDIC Insurance?
If your bank fails, you’re out of luck. You get nothing at all.

This is the reason why I encourage people to use banks that provide FDIC insurance. Luckily, almost all banks in the United States do offer it, but it’s worth checking just to make sure.

The post Personal Finance 101: What Does FDIC Insurance Really Mean? appeared first on The Simple Dollar.

I’m curious what your thoughts are on fractional reserve banking. It seems to me that this method of banking is a high risk form of financial management on the part of the banks. The difference (sort of) between Maddoff and FRB seems only different by institution: as long as there is more money coming in it doesn’t matter that a small percentage is going out. This system seems based entirely on debt, which is not ideal for a country, I wouldn’t think.

What Ronnie is really asking about is fractional reserve banking, which is the standard practice of pretty much every bank in the modern world.

What’s fractional reserve banking? It’s easiest to illustrate fractional reserve banking by giving an example.

Let’s say a new bank opens up in town and you’re the first person to open an account there. You deposit $100. Then, another person stops in seeking a loan of $80. The bank gives the person that loan, leaving only $20 in their reserves. Of course, the interest rate they’re paying you on your account is low – say, 2% – and the interest rate they’re charging on the loan is likely higher – say, 6%. At the end of the year, they’ll earn $4.80 in interest on their loan to the customer, and then pay you $2 in interest on your deposit, keeping $2.80 for themselves.

Now, if you were to decide that you wanted your full balance back, the bank would obviously be in trouble. They wouldn’t have the money to give back to you, and thus they’d go bankrupt (and you’d have to rely on FDIC insurance).

What actually happens is that a bank has a lot of depositors. Let’s say 1,000 people all deposit $100 in the account, then the bank lends out $80 to a different group of 1,000 people. This would leave $20,000 in their coffers. Thus, even if 150 of the original depositors came in and asked for their money back, the bank would be completely fine.

Fractional reserve banking simply means that a bank is only required to keep a fraction of their deposits on hand – they’re allowed to lend out the rest to people who want to borrow money.

The benefits Without this system, it would be almost impossible to borrow money for any purpose. Loans would basically only exist between individuals – you wouldn’t be able to just go to a bank to borrow money for a car, a home, or to start a business.

At the same time, the idea of a checking or savings account as we know them would go away. We would have to pay a sharp fee for such services – or else keep all of our money at home.

The risks The biggest risk in such a system is the potential for bank runs. If the bank is making poor decisions with the money they’re lending out (or investing), then people who hold accounts at that bank might get nervous and start demanding their money in droves. If enough people tried to withdraw their money at once, the bank would eventually not have enough to pay the depositors and would go out of business. This happened with the Northern Rock bank in 2007 and with IndyMac and Washington Mutual in 2008 – in both cases, the bank showed signs of holding a lot of bad investments, causing depositors to start clearing out their accounts very quickly, driving the banks out of business.

My take On one level, I do understand Ronnie’s comparison of fractional reserve banking to the Ponzi scheme perpetuated by Bernie Madoff – both of them relied on a continual flow of deposits and both collapse if the deposits stop flowing.

The difference between the two is simple, though: Madoff’s scheme could not earn money without new depositors constantly entering the system. He needed new investors so that he could keep paying old ones – and that meant that it was inevitably going to fail.

This system, though, can work forever provided that a large number of depositors don’t demand all of their money at once. Since the rate of interest the banks pay to checking and savings accounts is lower than the rate of interest the banks charge borrowers, the system also earns money in perpetuity, something that Madoff’s scheme doesn’t do.

In short, I think fractional reserve banking is something of a necessary evil, given the benefits (individuals are able to borrow money, banking services are free and often earn depositors some interest).

If this still concerns you… Some people are still left feeling pretty uncomfortable when they learn about fractional reserve banking. If you’re left feeling this way, keep two things in mind:

Your checking and savings accounts are insured by the FDIC. Currently, that insurance is for up to $250,000 – it’s scheduled to drop back to $100,000 at the end of 2009, but that may change. Make sure your account is insured (if it’s in an American bank, it probably is) and hold on to your bank statements, as those may be the proof you need to get your money if your bank were to fail.

You shouldn’t have all of your eggs in one basket. I would personally feel concerned if my account balances were pushing the FDIC limit. Instead, I would be investing some of that money in real estate, stocks, government bonds, or other things – the money will work much better for you there.

The post A Reader Asks About His Checking Account and Bernie Madoff appeared first on The Simple Dollar.

However, instead of simply closing out our old checking accounts, we made the active decision to leave both of these open as free basic checking accounts. We left a couple hundred dollars in each account, put the checkbooks from these accounts into storage, and moved on with things.

Why would we leave these old accounts open? It’s simple – they’re backups.

The Purpose of a Backup Checking Account A backup checking account is exactly what it sounds like – it provides an easy solution in the event of an emergency. Here are some situations where it might come in handy.

Identity theft Let’s say your identity is stolen and someone drains all of the money from your primary checking account. During the interim period where you’re trying to get that situation resolved, you’re likely going to continue to need to carry on many banking activities – writing checks, using online banking, hitting the ATM, and so on. This is where your backup account can be useful. Just simply re-route many of your automatic deposits to this backup account for a while and use it as your primary account for a month or two until the situation is resolved.

Emergency money needs Another useful purpose for a backup checking account is for emergency money needs – the balance in the account can act as something of an emergency fund. In a true pinch, you can utilize the balance of this otherwise untouched account to help you make ends meet.

Teller access As more and more people move to using online banking services such as ING Direct (which is the bank I use), they’re often losing some of the convenience that comes with having a live teller available. For simple services such as cashing checks, exchanging currency (turning pennies into dollars, for example), and so on, a live teller can be invaluable. Thus, maintaining a checking account at a brick-and-mortar bank in your community can not only provide a great backup account, but it can leave the door open to many services one might otherwise lose out on.

Getting One Yourself (Without Switching Banks) It isn’t necessary to switch banks to get a backup checking account, although a bank switch is a great opportunity to get one (by leaving your old account in place).

My suggestion? Simply open a very basic free checking account at your local credit union. Get a checkbook for the account, then put those checks in a safe place and then forget about the account unless you have a specific need for it (teller usage, emergencies, or so on).

In effect, this is exactly what I’ve done with my old checking account. It’s now a very basic free checking account, with no maintenance fees or anything else. The account holds a small balance, and the checkbook for the account now resides in a hidden spot in our home. If there’s ever a reason for needing the account, I can simply go grab the checkbook and conduct business as usual, almost seamlessly.

A backup checking account is a personal security measure worth considering. It offers several little advantages at virtually no cost to you, and those advantages tend to shine when you need them the most. Think of it as a bit of security in the face of identity theft risk.

The post The Backup Checking Account appeared first on The Simple Dollar.

Quite often, though, I had the itch to find something better to do with the money. I eyed putting some of it in CDs (certificate of deposit, which basically means you give a certain amount of cash to a bank for a specified period of time – it earns a higher interest rate than a savings account, but you’re penalized most of that return if you cash it in early), but I didn’t want to lock up a huge amount of it for a long period of time. I wanted to always be able to have that cash when I needed it. After doing some investigation, I decided that a CD ladder was the right move for me.

What’s a CD Ladder?
Simply put, a CD ladder is a collection of CDs bought at regular intervals so that they’ll mature at regular intervals as well. Let’s say I wanted to create a simple CD ladder out of six month CDs. I buy one on the first of each month for six months. Then, on the first day of the seventh month, that first CD I bought matures and I collect a nice return. I can then either buy a new CD for the original amount and pocket the return, just keep all of the return and the original amount for some purchase, or I can buy a new CD for the total return. After that, each month, a CD matures and I can either buy a new one or use it for something else.

If you’re doing this with your emergency fund, you can set it up so that you always have a month’s worth of living expenses available in cash and each of the CDs represents a month’s worth of living expenses. Thus, each month, you’ll have a CD mature, collect a higher interest rate, and you can use the returns to buy another CD (if you don’t need it for an emergency), leaving you with a month’s worth of emergency fund at all times.

Why do this? Why not just keep all of it in cash? The biggest reason is that CDs often return a percent or two higher than your savings account. At ING Direct, for example, the CD rates range from 3.75% to 4.5%, while the savings rate is at 3%. Another reason is that by locking it into a CD, you’re not tempted to spend it.

How Are You Doing It?
I started my CD ladder in September by purchasing three $1,000 CDs out of my cash emergency fund. The total was a bit less than a month’s worth of living expenses. I bought a 6 month CD that returns 3.75%, a 12 month CD that returns 4%, and an 18 month CD that returns 4.5%.

So, in September, I held these CDs:
A $1,000 CD that matures in March 2009 at 3.75%
A $1,000 CD that matures in September 2009 at 4.00%
A $1,000 CD that matures in March 2010 at 4.50%

Notice that the shorter-term CDs don’t return quite as well. Specific rates vary all the time, but it’s a rather constant rule of thumb that longer term CDs return better than shorter term CDs. Thus, instead of just buying a single six month CD, I decided to spread things out to get a better return on at least some of the money.

During September, I kept building our emergency fund as I usually do, putting around 10% of our income into it (which is around 15-20% of our monthly living expenses). I’ll keep doing this for the time being.

At the start of October, I bought three $1,000 CDs again out of the cash emergency fund. This left me with six CDs:
A $1,000 CD that matures in March 2009 at 3.75%
A $1,000 CD that matures in April 2009 at 3.75%
A $1,000 CD that matures in September 2009 at 4.00%
A $1,000 CD that matures in October 2009 at 4.25%
A $1,000 CD that matures in March 2010 at 4.50%
A $1,000 CD that matures in April 2010 at 4.25%

You can probably see where this is going. According to my calculations, we’ll have about four months’ worth of cash living expenses in our emergency fund in February 2009 after buying the CDs each month (remember, I’m still adding cash to my emergency fund). Each month after that, a $1,000 CD matures. I’ll then buy a single 18 month CD for $3,000, which would be enough to sustain my family for a month. And I’ll repeat that for eighteen months.

In August 2010, I’ll own eighteen 18 month CDs which will mature in one month intervals, just like clockwork. If I have my calculations correct, we should still have roughly a month’s worth of cash emergency fund at that point. So, I’ll basically have 19 months worth of emergency fund, almost all of it returning 4.25-4.5% or so.

Here’s what things will look like at that point. I’ll have a savings account with one month worth of living funds in it. Each month, an 18 month CD will mature and the proceeds will go into that account – both the principal and the interest on that CD. At the start of the next month, I’ll buy another 18 month CD worth roughly a month’s worth of living expenses. And as long as we’re able to get by just fine on our normal income, I’ll keep this cycle going, as it’ll serve as a huge emergency fund that also returns at a pretty solid rate.

Why not invest it? This is the typical question I hear about cash emergency funds. Usually, such questions are implying that I should put that cash into the stock market and maybe earn a bigger return. I view this as an investment. Since I’m not saving this money for the long term – it’s a cash emergency fund, after all – I want it to be safe, secure, and stable. It needs to be there for me if I need it.

Another reason for doing things this way Following this plan enables something else interesting as well. When this is actually set up and working, it would enable either me or my wife, without skipping a beat, to go back to school. In truth, my wife is considering the move – she’s looking at perhaps going back to school for a master’s degree in 2010 or 2011. Putting this in place makes such a move quite possible.

If you have a big emergency fund that you won’t need all at once, consider starting a CD ladder with the money. Even a six month CD ladder can create a nice bump in your interest on your emergency fund without adding any risk.

The post Creating a CD Ladder for Your Emergency Fund or Other Savings to Earn a Better, Safe Return appeared first on The Simple Dollar.

A lot of personal finance books I read suggest putting your savings – especially stuff like emergency funds – in money market accounts. I’ve looked into them but I can’t figure out what the difference is between a money market account and a savings account. Why is a money market account preferable? What’s the difference?

First of all, let’s get some terminology straight. Most of the time, when a personal finance book refers to a “money market account,” they’re talking about a money market deposit account. A money market deposit account is a specific variation on a savings account that many banks offer. Sometimes, the term “money market” is used to describe money market funds, which are an investment vehicle not insured or backed by the FDIC and thus not a place you want to put your liquid cash savings.

Normally, when you deposit money in a savings account, the bank is extremely limited on what they can do with that money. For the most part, the only thing they’re allowed to do with normal savings account deposits is loan that money out to people who need to borrow money, charge the person borrowing a solid rate, and then pay you a part of that rate when it’s paid back. For example, the bank gets deposits that they charge 1% interest on, lend that money out at a 6% interest rate, then keep the 5% difference as their own income (gotta pay the bills, after all).

A money market deposit account is a bit different. The restrictions on what a bank can do with that money are somewhat looser – they can often invest that money in things such as treasury notes, certificates of deposit, municipal bonds, and so on in addition to the tight restrictions of a normal savings accounts. In other words, the bank can take your money and invest it in other investments that are very safe.

For you, the consumer, the differences aren’t that big. Both a normal savings account and a money market account are FDIC insured, meaning the federal government guarantees your deposits up to $100,000. Both types of accounts have some basic restrictions on how often you can withdraw from them, set by a mix of government regulations and bank policies, but for the most part, you’re limited to six withdrawals a month from either type of account.

Commonly, savings accounts at your local brick-and-mortar bank have a pretty low interest rate, but online-only banks (such as my bank, ING Direct) offer rates between 3 and 4% on deposits, with introductory rates sometimes higher than that. Money market accounts offer a rather wide range of rates and these rates often go up and down pretty regularly depending on the investments available to the bank.

Also, money market deposit accounts often have a few additional restrictions and benefits. Some may require a minimum balance; others require you to wait a few days (up to seven) for withdrawals. Some money market accounts, however, allow you to write checks from the account – often up to three a month. Consult the specific policies of any money market account you’re considering to see whether these restrictions and features are present.

In the end, for most people, a money market deposit account is essentially equivalent to a savings account. At your local bank, the money market account is probably a substantially better deal, as local brick-and-mortar savings accounts offer atrociously low interest rates. If you’re comparing with online offerings, though, quite often normal savings accounts offer rates very competitive with money market accounts and offer solid rate stability with no minimums.

Either way you go, savings accounts and money market accounts are the place you should keep your savings, especially if the money is for an emergency fund or another short term goal.

The post Personal Finance 101: Money Market Accounts Versus Normal Savings Accounts appeared first on The Simple Dollar.

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.

The post What Features Are Most Important For Your Primary Bank? My Thoughts and Recommendations appeared first on The Simple Dollar.

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!

The post How to Budget Using ING Direct (Or Another Full-Service Online Bank) appeared first on The Simple Dollar.

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.

The post Some Notes on SmartyPig appeared first on The Simple Dollar.

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.

The post The Fed Cuts Rates – What Does That Mean For Me? appeared first on The Simple Dollar.

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.

The post Investigating The Electric Orange Credit Check Situation appeared first on The Simple Dollar.

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.

The post The Big Switch: My Thoughts On Electric Orange After Moving My Primary Checking Account There appeared first on The Simple Dollar.