As featured in The Wall Street Journal, Money Magazine, and more!

Posts tagged as:

savings accounts

14 comments

Email this article Email this article
Print this article Print this article

ING to Sell Online Bank ING Direct By 2013

by Flexo on October 28, 2009

in Banking

Here in the Untied States, ING Direct, a banking arm of the large financial company ING Group from the Netherlands, offers more than just high-yield online savings accounts. The bank also offers investments and mortgages, and some of the latter may have been too risky, like those sold and packaged into securities by domestic banks.

ING Group received a taxpayer bailout of €10 billion ($14.9 billion) and the European Commission is forcing the financial company to restructure in order to repay this loan. Part of this deal involves taking ING’s insurance companies public and selling the United States’ ING Direct by 2013.

The effect of this sale remains to be seen. Some time between today and the end of 2013, ING Direct will be owned by another company. This bank was one of the first to operate without any brick-and-mortar branches and the first to be an unmitigated success. When I first started paying attention to my finances at the start of this decade, the recommendations for ING Direct flowed from every information channel. With the highest interest rates in the savings account business, unusually capable customer service, and a slick and functional website, the bank was a favorite among the die-hard personal finance fans at the Motley Fool discussion boards.

More recently, ING Direct has moved from excellent to very good. I still recommend this bank to people who want a hassle-free experience, but their rates are no longer as competitive and their electronic checking account is not the best in class. For those with more money to put in savings, those who would benefit from a higher interest rate, I usually offer additional options.

ING Direct’s corporate message in response to those customers concerned about recent news of the impending sale is that your money is safe. I don’t think safety is the real concern. Accounts at the bank are insured by the FDIC, so even if the bank fails safety isn’t a problem. These are the questions you should have right now:

  • Who will purchase the bank and will ING Direct’s core values change?
  • If the core values change, will they be for the better (more competitive interest rates, for example) or for the worse (scaled back operations and customer service, for example)?
  • What new account fees will be introduced?
  • ING Direct employs about 1,200 in Delaware and another thousand more across the country. Will they have jobs and for how long?

These questions will not be answered for some time.

I do not see the announcement of this sale as a reason to move money out of ING Direct now. I will be watching developments closely, however. With the bulk of my savings in ING Direct, I am very sensitive to the fact that they do not offer the highest interest rate available. For years, the bank has counted on customers like me: those who first deposited when the interest rates were high and competitive and who have stayed around as other banks consistently offer higher rates. But I do not owe my loyalty to a company and will be quick to shop around if I am no longer getting a good deal considering cost, return, and service.

Photo credit: diaper
ING to sell Delaware-based bank in [sic] 2013, Eric Ruth, The News Journal, October 27, 2009
Post-Bailout Blues as Europe Orders ING Group to Sell 2 Units, Eric Dash, New York Times, October 26, 2009

{ 14 comments }



4 comments

Email this article Email this article
Print this article Print this article

Money Basics: Simple Interest, Compound Interest, APR and APY

by Flexo on April 22, 2009

in Banking

April is National Financial Literacy Month in the United States. In most cases, schools do not extensively teach financial skills. Teenagers, highly susceptible to messages from the media, often do not have guidance from teachers, who are not trained to teach financial skills, or from parents, many of whom do not model healthy financial behavior. This series of articles at Consumerism Commentary serves to help inspire discussion about basic financial concepts. Please feel free to forward this article to someone who might benefit from a basic financial overview.

This article covers the staple financial resource for anyone seeking long-term financial stability, the savings account. This is the third article in the Money Basics series; so far this series has covered checking accounts and savings accounts.

What is interest?

Interest is a fee paid for the use of someone else’s money. Any individual or company that lends money will charge the borrower interest, always designated as a percentage like 5%. This percentage is almost always means “per year.” The most common forms of interest appear in savings accounts, where a bank pays you interest for depositing your money in the account, and credit cards and other loans, where you pay a company for allowing you to use their money for a time. Hundreds of years ago, society frowned upon charging interest, but as lending money became more prevalent for uses other than acquiring goods such as modern commerce, the stigma of interest slowly disappeared in many cultures.

The two main forms of interest are “simple interest” and “compound interest.” Simple interest is easily calculated. If you borrow $1,000 from a bank that charges you 5% simple interest, you will owe 5% more than $1,000, or $1,050, at the end of the year if you do not borrow more and do not pay back part or all of the loan. The $1,000 is a “principal.” Multiply the principal and the rate of interest (5% becomes 0.05 when multiplying) to determine the amount of interest ($50). Adding the interest amount and the principal results in the total due after one year: $1,050. With simple interest, if you don’t pay the loan back until the end of the second year, you will have another $50 to pay for a total of $1,100. Your second year of interest is based on your original principal.

Compound interest is more common than simple interest, but there are many nuances. Say the bank charges 5% interest on that $1,000 loan, but it is compounded annually rather than not compounded (simple). At the end of the first year, the first year’s interest, $50, is added (compounded) to the principal. Your second year’s interest is then calculated based on your new principal of $1,050. 5% of $1,050 is $52.50, so rather than owing $1,100 at the end of the second year, you would owe $1,102.50.

If only life were that simple. Interest can also be compounded monthly, daily, or continuously. A 5% interest rate compounded monthly, paid to you by a bank in return for your $1,000 deposit, leaves you with $1,051.16 in your bank account at the end of the year assuming no further deposits or withdrawals. That is a little more than the $1,050 of simple interest or interest compounded annually. If that same 5% interest rate is compounded daily, your ending balance would be $1,051.27. Compounded continuously, the 5% rate would also result in $1,051.27, but a fraction of a cent more than the result of daily compounding.

Banks will usually describe their compounding method in the fine print, but this is only a minor concern for savings accounts, as I’ll explain below.

Don’t be misled by interest rates and terminologies

You would think that all financial terms would carry the same definitions regardless of the circumstances in which they are used. But there is some confusion when comparing interest rates for loans with interest rates for savings accounts. Indeed, there is further confusion when comparing savings account interest rates from one bank to another bank. Here are some tips for discerning the differences.

Loans, like mortgages, are often advertised by interest rate. But sometimes, a secondary rate, is also given. The first rate on the advertisement is the nominal interest rate and the second rate is the effective interest rate; the true cost of borrowing the money including the results of compounding as well as any fees that may be charged. Consider the mortgage loan advertisement I found online yesterday.

Mortgage advertisementThis ad lists an interest rate of 4.625% but the true annual cost is actually 4.879%. This advertiser calls the nominal interest rate the “rate” and the effective interest rate the “APR” (annual percentage rate), and this is common terminology for loans. Lenders are required to clearly display the true annual cost of a loan, the APR, but this often just leads to more confusion.

Unfortunately, savings accounts reverse part of this word usage pattern. A savings account’s APR usually refers to the nominal interest rate, and the true annual result, after compounding based on that particular bank’s method, is called the “APY” (annual percentage yield). For example, in our continuous compounding method mentioned above, while the savings account’s interest rate is 5%, the APY is closer to 5.127%. When banks advertise their savings accounts, they usually include the APY, leaving the nominal interest rate to be found only in fine print if anywhere. The APY is a standard metric that makes it easy to compare savings accounts across banks regardless of the type of interest, and I use APYs to compare high-yield savings rates here.

If you are thoroughly confused, you can always head to dinkytown.net, which offers calculators to help you determine a loan’s APR (true annual cost) if you know the loan’s (nominal) interest rate and fees and to help you compare how much more you would earn by switching to a savings account with a higher interest rate (APY).

Albert Einstein probably never called compound interest “the most powerful force in the universe,” though this quotation or one similar is often attributed to him. If you want to “get rich,” all you need is compound interest, preferably at a rate above inflation, and lots time on your side.

{ 4 comments }

4 comments

Email this article Email this article
Print this article Print this article

Money Basics: Savings Accounts

by Flexo on April 21, 2009

in Banking

April is National Financial Literacy Month in the United States. In most cases, schools do not extensively teach financial skills. Teenagers, highly susceptible to messages from the media, often do not have guidance from teachers, who are not trained to teach financial skills, or from parents, many of whom do not model healthy financial behavior. This series of articles at Consumerism Commentary serves to help inspire discussion about basic financial concepts. Please feel free to forward this article to someone who might benefit from a basic financial overview.

This article covers the staple financial resource for anyone seeking long-term financial stability, the savings account. This is the second article in the Money Basics series; this first article covers checking accounts.

What is a savings account?

Like a checking account, a savings account is a service offered by a bank or credit union for the purposes of keeping your money safe, secure, and accessible. While the purpose of a checking account is to allow frequent transactions, through checks, debit cards, or electronic transfers, the purpose of a savings account is long-term holding. If you have predictable income and predictable expenses, and you aim to spend less than you earn, you should be left with extra money at predictable intervals. This extra cash is the perfect candidate for deposit into a savings account.

One important aspect of savings accounts should be mentioned up front, and I emphasize this because it was never brought to my attention until I received a nasty letter of warning from a bank at which I broke this rule: you may only make up to six withdrawals per month (or statement cycle) from a savings account. If you choose to break this regulation or otherwise neglect to acknowledge it, your bank may penalize you by charging you a fee, disallowing the transaction, or even closing your account.

Savings accounts also earn interest. Every month, if you do not withdraw from your savings account, your money will grow. By giving your money to a banking institution in the form of a savings account, you are allowing that company to lend a portion your money to businesses and other individuals. Banks pay you for granting this privilege through interest payments to you.

Why do I need a savings account?

Any money that you do not need for immediate and expected expenses within one month, but that you might need in less than a year should be deposited in a savings account. This is the perfect place for a good portion of your emergency fund, money that you will use to pay your expenses if your income were to unexpectedly disappear or if an unpredictable expense were to arise.

For a suburban teenager in the United States, the first major expense might be a car. If you are like many, the first car will be purchased used (or “previously owned” as the salesmen like to euphemize). As you earn money from working during spring break or the summer, put as much from your paycheck into the savings account as possible. The more you keep in the bank, the more interest you will earn.

How do I manage my savings account?

My girlfriend has a passbook savings account. Every time she visits the bank to make a deposit, withdrawal, or transfer from or to her checking account, she hands the teller a booklet about the size of a passport. The teller uses a special printer to record the new transaction, any transactions that have not been recorded since the last printing like earned interest or ATM transactions, and the current account balance. While old-fashioned, this is a convenient way of managing a savings account. As more transactions are performed electronically or otherwise without the aid of a teller, the passbook is falling out of favor.

The popular alternative to the passbook is to receive a statement, mailed from the bank, each month. Like with the checking account, I recommend keeping your own record of every transaction that takes place within your savings account. Computer software like Quicken will allow you to do this, and in many cases, automatically compare what you have entered with the bank’s own records once they are available.

Almost all banks now offer online access, as well. If you ever want to check your bank balances, not trusting what you have entered in Quicken, your bank will allow you to visit a website where you may pass a security test and be granted access to view your account online.

How do I choose a savings account?

If you have previously opened a checking account, you may wish to open your first savings account at the same bank. This will allow you to perform immediate transfers from your checking account to your savings account. The benefit is your money will begin earning interest much faster than if you transferred money from one bank to another. The unfortunate down side is that most brick and mortar banks offer low rates of interest.

For this reason, I suggest opening a second savings account at a bank that offers high-yield online savings accounts. This option did not exist much more than ten years ago. A number of new online-only banks have been established since the dawn of the World Wide Web, offering great products and services with low overhead costs, creating an opportunity for them to offer better interest rates. Not to be outdone, old-fashioned brick and mortar banks are determined to compete in this new environment and have established online-only subsidiary companies or simply created savings accounts to compete with these higher interest rates.

When choosing a bank account, the interest rate offered should not be the only factor you consider, but it should be one of the most important. Look for a history of offering competitive rates as well as highly-rated customer service and an online interface with which you feel comfortable. I have reviewed the best online savings accounts, and my favorites include FNBO Direct for its consistently high interest rates and ING Direct for its above average rates and customer service record.

Once again, work to avoid fees. Some banks, particularly the antiquated branch-based banks, want you to maintain a minimum balance every month in order to avoid a monthly fee, while others don’t offer this avoidance option. These rules can get tricky. Some banks want you to have a combined balance between your checking account, savings account, and possibly even a line of credit for avoiding a fee.

Another popular fee is related to software. I mentioned Quicken above for keeping track of your savings account, but some banks will charge you a monthly fee if you connect to your bank’s electronic records directly from the program. In 2007, Wachovia charged me a surprise $5.95 for using Quicken, as I had been for several years. The bank changed their policy for some types of accounts, but the policy wasn’t intended to apply to the type of account I had. I was able to talk to a customer service representative to have the fee removed and a note placed on my account that would supposedly prevent that fee from ever being charged to me again. You might be able to talk your away out of these fees as well, but it’s better to avoid them in the first place.

When you compare interest rates between banks, you should look for the annual percentage yield (APY), not the annual percentage rate (APR) of interest. This allows a fair comparison between banks thanks to differences in compounding methods. This and more about interest will be explained in further detail later within the Money Basics series.

{ 4 comments }