banking

I had this on my mind ever since I activated my Electric Orange account at ING Direct. Whenever I log in to my account, it adds my overdraft line of credit to my available balance and happily displays the net result as “Spending Power”. Here is how it looks:

Now, I am all for personal accountability and careful management of one’s own money (and I also love ING in spite of their no-good interest rates of late), but stuff like this sounds like irresponsible marketing, doesn’t it?

I don’t understand this glorification of overdraft privileges. The kind of overdraft that ING is offering, it is a *line of credit* and it should be treated that way - it’s almost like a virtual credit card (a little bit worse because there is no grace period) - you borrow and you pay for what you borrow (ING charges 12.25% as of today on the overdrawn amount). Now, you wouldn’t call a credit card’s credit limit as you *spending power*, would you? So why call a overdraft line of credit as “spending power”. Everybody knows what happens when you assume that a credit card’s credit limit reflects your spending power - DEBT happens (duh!).

Overdraft should be viewed as an emergency *protection* - protection against the odd goof up when your brain thinks you have more money in the bank than your actual balance. Accordingly, ING Direct may term it as “Goof up Margin” or “Emergency Cushion” or “Line of Credit” or “Borrowing Power” or “Margin for Occasional Stupidity” or whatever ..but please stop including it under “Spending Power”.

With that rant out of the way, let me mention here that, in spite of how ING (or other bank) glorifies (and/or encourages) overdraft facilities, it is up to the customers to use (or abuse) such facilities. So, although I dislike the fact that ING calls it’s overdraft line of credit as “spending power”, I would be skeptical of someone who says “I am in debt because ING told me that I have a large *spending power*”.

Some resources on the subject of overdraft fees:

• Protecting Yourself from Overdraft and Bounced-check Fees [The Federal Reserve Board]

• The $10 Billion Overdraft Loan Market - PDF file [Center for Responsible Lending]

• Beware of Abusive Check Overdraft Protection Programs [Bankrate.com]

Here is a question I received yesterday by John Wilks:

I’m having some trouble creating a FNBO direct account.

Firefox 2.0.0.3 - Your Application Timed Out For security, your application has timed out. Please click the button to retrieve your application. If you are unable to retrieve your application, you will need to start over.

Internet Explorer 7.0.5730.11 - same.

Netscape Communicator 7.2 - same.

Any ideas, anyone?

Browser troubles are usually caused by denied JavaScript, but having the same error for all browsers is a bit weird. Has anyone run into something similar? any solutions? All suggestions will be appreciated.

Sometime back, Henry @ Binary Dollar asked this money question: “What do you look for in an online bank account”? and invited responses from a few bloggers. Here is what I had to say about my views in choosing an online bank account.

1. High Interest Rates - This is the juicy part of online savings account; without the high interest rates, there is nothing attractive about them. Higher the better.

2. Easy of synchronization with other bank accounts - the online account should easily (without any hassle) communicate with my brick- and-mortar banks and also with other online savings accounts. In my experience, HSBC Direct is the best in this matter. Also transferring funds from the online bank to other banks must be a zero fee activity.

3. Absolutely zero fees - I don’t have any tolerance for “low” fees so I would look for one that has absolutely no fees at all. I *hate* banks that have $X fees if you balance falls below $Y. All banks we use (HSBC, ING Direct and Emigrant Direct) don’t have any such fees.

4. No minimums - This sort of ties in with “zero fees”. The account shouldn’t have any kind of a minimum balance requirement. Sometimes there is a “minimum account opening amount”. Ideally this should be $1, but anything below $250 is bearable.

5. A good *feel* for online security - Ok, I have to agree that the *feeling* is a bit vague, but if you visit the login page of an online bank account, it should feel solidly designed with sufficient security features. In my experience, ING Direct *feels* the safest followed by HSBC Direct and Emigrant Direct.

6. Goes without saying that any online savings account should be FDIC insured.

Those six points sort of summarized my thoughts, although I do have more things to add to them - important things, but not crucial.

7. Funds transfer times - I need to get a good feel for the time it takes to transfer funds to and from the online bank. Too much time is a bit of a discouragement. Of the three online accounts I have, HSBC tends to be the slowest. In fact if you straddle your HSBC funds transfer over a weekend, it might take as much as 5~6 days to get the funds where you want them. Fortunately, most banks tend to be consistent with these transfer delays - so you can plan your transfers accordingly. For those who keep track of their interest to the pennies, you must understand that the time lost in funds transfer delay is basically translating into lost interest income. Jonathan @ My Money Blog has an interesting experiment on this subject.

8. Recurring/Automatic Transfer facility - This wasn’t on my list in the past, but recently, I have been regularly using HSBC’s recurring transfer facility - it has sort of helped me save some money. If I open an account in future, I would definitely want such a facility.

9. ATM/Debit Card - Again, this is not crucial, but it helps to have this facility available so that you can access your funds in an emergency. Before HSBC offered it’s high yield savings account, we had our money in ING Direct - and ING didn’t have a ATM Card (or a debit card) with it’s online savings account. As a result, I used to transfer funds to our ING account with caution - after accounting for sufficient liquid cash in the brick and mortar bank for emergencies. However, once we got set up with HSBC Direct, and had access to it’s ATM card, our need for the liquid cash in the local bank has decreased - as a result we transfer more per month to our online savings account.

Now-a-days, ING issues debit cards with it’s online checking account - Electric Orange; and you can link Electric Orange to ING’s savings account - so basically you can have instant access to your savings account money through the debit card. That’s good.

As far as I know, Emigrant Direct doesn’t have any such facility. May be there is, but I don’t know about it.

10. Reviews - It’s a good idea to look for online reviews about certain unheard banks. Sometimes, the interest rates may be very good, but the whole process of opening an account and then operating it might be a big PITA. Probably, a bank with slightly lower interest rate might be a better choice in that case. The best way to find out about these things is to look for reviews from current customers and the easiest way to get reviews is to search for them on Google.

Before I let you go, here is something important.

If you are in the market for an online savings account, always read the find print carefully for hidden fees and charges. For example, look out for things like these:

• $3,000 minimum deposit to open account
• Minimum balances: $3,000 minimum daily balance or $5,000 average daily balance in account. $15 monthly service charge if balance requirements are not met

Those are the conditions for an online account (money market account) at New Dominion Bank which is boasting an interest rate of 5.07% (APY).

Updated: Click here for the current list of banks offering high interest savings accounts.

Btw, just to be clear, all links in this post are for information only - there are NO referral links in this post.

Feel free to share your thoughts on what you would look for in an online bank account.

This is not a new invention or anything; smart people have been increasingly stashing (saving) away money from themselves ever since the advent of the concept of “pay yourself first” (which has existed forever). However, in our case, we sort of *accidentally* extended the concept to suit our purposes - we call it the “pay yourself first - and then keep stealing” concept. I prefer to call it “stealing”, because it involves small amounts of money disappearing from one account (and appearing in other accounts) without we being aware of it (it’s different than just “pay yourself first” - which implies a very conscious effort).

Let me try to explain how it works in our case.

Here is a flowchart of our money-path that summarizes the whole story:

The brick and mortar bank is just a transit point for our money. Over the last few years, we have been tracking our expenses and we have a fair idea of how much money we spend every month on bills and other expenses. We just keep that much in the checking account at the brick and mortar bank and the rest of it goes to our HSBC Direct savings account.

The HSBC account acts as the hub for our financial network - this is in part because of the three online banks that we have accounts with (the other two are ING Direct and Emigrant Direct), only HSBC allows easy addition of other bank accounts - ING and Emigrant require a paper check from the bank you want to add - which I think is stupid given the current popularity of online no-paper-check savings accounts. Since all our bill-payment transactions take place through the brick and mortar bank, we don’t check the status of our online savings accounts regularly - every few months at best (earlier, I used to compulsively check the balances in all accounts almost daily…but gradually I got rid of that habit).

Anyways, sometime in the past, we had to transfer some money to our ING direct sub-accounts for some reason and we used the recurring (scheduled) transaction option at HSBC. I set it up with the intention of canceling it after the required amount of money was transfered. However, things got busy and I forgot about it. A few months later, when I logged in to my ING Direct account, there was a surprise waiting for me there - an extra few hundred dollars among the sub-accounts. I made haste to check the transaction descriptions (to see if there was some mistake) and realized that the HSBC account was steadily pouring in small amounts every month.

At HSBC’s end, our account didn’t feel the pain because the transfer amounts were smaller than our monthly savings rate (so the savings were on the rise even while we were siphoning out some money) - and at ING’s end, the balances shot up from almost zero to hundreds of dollars. Although, it’s our own money, the element of surprise played a pivotal role in making us feel good (it’s like tax returns making people happy even though it’s their own money that they are getting back).

Since then, we have created more sub-accounts at ING Direct for various purposes (like electronics, clothes, etc.) and have started stealing a little bit more from our HSBC accounts. We plan on checking the balance in the ING accounts only around Christmas - by then we would probably have hundreds of saved dollars towards various purposes. Those dollars will be used to pay off our inflated credit card bills in full during the holiday season. Some no-guilt shopping there.

Sometimes, I think it works for us because it’s a bit complicated in our case with so many accounts and money moving all around us - some of it just hides at places and we don’t notice it. [An effect similar to the one in which lots of credit card bills move around some people and then they end up not noticing some of them] - fortunately, we are on the positive side of complications.

Of course, people who are fully aware of their own financial condition and are in total control of their money, hardly need such hacks - personally, even we are doing it just for the surprise element. However, there are a great many people who just can’t keep the money in their savings account and tend to spend it as soon as it shows some signs of growth - this kind of technique would probably work for them - or something along these lines.

Feel free to share your experience with us if you have tried (or are trying) something similar - and whether it is working for you or not.

Some HOW-TO tips for the newbies

To set up recurring transfers from HSBC Direct savings account to any other account :

• Follow this path: Log in to HSBC Direct –> Bank to Bank Transfer –> Transfer funds; at the bottom of that window there is a “Recurring Transfer” option.

To set up recurring transfers from ING Direct savings account to brick and mortar accounts (or other account paper-check-issuing account that ING can verify):

• Account main page –> Transfer Money –> Automatic Savings Plan (this is fairly popular among many folks who have ING Direct accounts)

More tips

• Here is an updated list of high-yield online savings accounts being currently offered by top banks. Feel free to explore them and make the most of your saving habit.

I got an email yesterday, supposedly from Bank of America, notifying me that my online account access is blocked. Incidently, I was messing with some alert settings on BoA website the previous night and thought this email might be a result of that..and almost fell for it. Here is a screen shot of the email.

For a moment I thought “Ok, look’s like I clicked something and screwed something up…or BoA hasn’t recovered from it’s recent website fiasco” and was about to click on the link in the email when I started noticing the fishy stuff (see image below). Also, this is the first time I came across a BoA scam…they might have been floating around, but I never got them till now. However, this one was better than some other crappy scam emails I have seen in the past.

Fishy stuff is almost invariably in the form of some typos and stuff that conveys an unnecessary sense of urgency. Also, that link was intended to be masked but it wasn’t apparent from the email directly. I checked up the html and got this code:

Most bloggers are familiar with html and will immediately notice that it’s sort of a botched attempt. Bad job scammers :). For those who are not familiar with html here is what the scammers were trying to do. This link example.com here seems as if it points to “example.com” but if you click on it, it will take you to my archives page. In a similar way, the scammers were trying to fradulently link me to that “http://zicada.com….” stuff by falsely masking it by the Bank of America link. I don’t think they got it right. Anyways, to check where the link would have taken me, I copy-pasted the address in my browser and got this (click on the image to enlarge it):

Ok, now this is not a bad job at all except the “Mother Maiden Name” thing. The only other things that easily blow this off are the url in the address bar (notice the “zicada.com…” whatever), and the lack of a padlock image that is usually present near the right hand bottom corner of your browser window and looks like this: .

Watch out for this scam.I will write about some more tricky scams in future posts. Till then here are some quick tips to avoid getting scammed:

1. If you don’t see this padlock image , never put your sensitive information on such a website/webpage.

2. Watch out for typos and grammar errors. Scammers always seem to be horrible at these things.

3. Don’t click on links in your email unless you have solicited them yourselves. (I won’t add “or unless you get them from a trustworthy source”. I have had utter crap links from very trustworthy people).

There are some more finer points, but that will be a topic for another post.

ING Direct has announced an increase in the interest rate for its Orange Savings Account from 4.40% (APY) to 4.50%(APY). Saw this ad on their website today.

While the rate increase is not that exciting, I am hoping that this rate increase signals an increasing trend. A few years ago, when I opened my ING Direct account, it was offering the highest rate in the market and was aptly called the “leader”. Now, at least 30 banks offer more than what ING has to offer. At this rate it should be aptly called as the “lagger”. I really love ING for how they make things simple, but this is not helping!
Click here to check out what other banks are offering. Click on the “Search By 100 Highest Yields” option.

When I logged in to HSBC today, I was greeted with a message about it’s security feature update and the “migration” from the old interface to a new one. I say “finally” because I have been getting this update message since 11th October saying that I will come across some of these features when I log in…but that never happened until today. In case you haven’t logged in after the change, here is what to expect:

- A long..very long agreement/disclosures document with an “I Agree” button at the bottom.
- You will be asked to create a keypad-style security key. Most of you must already have a security key in place for the “bank-to-bank transfer” module of the old interface. You can use that as a new one (read below why this is ok).
-You will be asked two security questions. Sorry, no creative stuff here; its a rigid list of 4 or 5 questions to choose from.
- You can use your old security key as the new login key because, in the new interface “bank-to-bank transfer” module does not require a separate security key anymore. It’s a pity they did that; I liked the old system better because somehow having a separate security key for “bank-to-bank transfer” made me feel more secure.
-For future logins, you will need a username, password, and the security key to login to your account.

By the way, in case you miss reading this detail when you next login to HSBC, there are only three login instances and a deadline for you to accept the terms of the new interface and enroll using the new features.

Fed is holding the rate constant at 5.25% again after today’s meeting. This was expected after not-so-strong economic predictions and cooling housing markets. However, at least one panel member (Jeffrey Lacker) voted for a quarter point increase in the rate (probably due to inflation worries?).

There is some speculation that the Fed might start cutting rate sometime next near.
Read more about it here on MSN.

Is it time to lock up on those CDs?
[Image courtesy: http://msnbc.msn.com/]

[Do let me know if you have seen the calculations behind the "Rule of 72" before this :)]

I am sure almost everyone on the personal finance blogging scene must be knowing about this rule of thumb…sort of. Here, I am just revisiting the idea behind this deceptively simple concept from ground up.

This is the “Rule of 72″: to quickly estimate the number of years it will take your initial invested amount to double, just divide 72 by the interest rate. For example, if your interest rate (APY APR) is 12%, the time it will take to double your investment is 72 divided by 12 equal to 6 years.

So is this rule applicable to all interest rates?

For the mathematically inclined, here is a check on how accurate this rule is (If you have an HSBC Direct or Emigrant Direct or ING Direct account and are not interested in the math just scroll towards the end of the article:) )

We start with the compound interest formula:

Where, P is the initial investment, A is compounded amount after t years, r is the rate of interest in decimal form, n is the number of times the interest is compounded in a year.

For simplicity, we will assume n=1 (I will discuss what happens when n varies from 1 to 365 in a later post).

Now, we are interested in doubling the amount so we substitue A=2P in the above formula to get:

We now take logarithm of both sides of the equation to get:

Then, t can be written as:

Now, the rule of 72 says:

(Note: Here r is in %, not in decimal form; in decimal form it will be 0.72/r). We have to check if the expression we derived for t above evaluates to 72/r. In other words, we can check if t multiplied by r gives us 72.
There is no easy way to do this, so I will explain it graphically. From our expression for t we can write:

We are going to check if this “Factor” turns out to be 72 (Note: in this last logarithmic formula, r must be in decimal form. We will then multiply the result by 100). Below is a graph drawn using the above equation and shows the relationship between the “Factor” and interest rate %.

We can easily observe from the graph that the factor 72 is not constant ! that means the rule is valid ONLY for one particular interest rate !! The factor of 72 is valid only for a rate of 7.8% !

However, since most of the investments are within the shaded region shown on the graph, the number 72 works for us as a rough estimate.

And now it’s show-me-the-money-already-damn-it time
For those of us who have accounts in HSBC Direct and Emigrant Direct, the rule is more like “Rule of 71″ and you will double you initial investment in about 14.3 years and 14.1 years respectively (now they will be same, read about it here on Blueprint for Financial Prosperity), at their current rates of interest. If you bank with ING Direct, the rule is more like “Rule of 70.8″ and you will double your money in about 16.4 years. Keep in mind that these are estimates and that we made some assumptions above (like n = 1) so the real numbers will vary a bit.

Now hopefully, after the above calculations, some of you will look at the “Rule of 72″ with a little more respect in future :).

Feel free to point out any mistakes or suggest improvements to the calculations above.