Sane Personal Banking

The most powerful force in the universe is compound interest. – Albert Einstein

With so much conflicting personal finance information available, it’s hard to know what to do. It’s difficult for me although I’ve read numerous personal finance books and articles, subscribed to Money Magazine, and received an MBA from Duke University. But I’ve discovered a personal banking approach that works well for my family. It may also work well for you given the right assumptions.

I assume you currently have a checking and savings account at a local bank, want to make a good return on your money, and keep things simple. I also assume you live in the United States, but the same principles can probably be applied to other countries.

My personal banking approach involves using an online bank. Why bother with an online bank when you already have a good local bank? There are two reasons: interest rates and portability. Online banks generally pay higher interest rates on savings and CDs than local banks because they don’t have the expense of bricks-and-mortar branches. This keeps their costs down and they share the savings with you. The lack of branches also makes online bank accounts portable - you can move to another city with little banking fuss.

Online banks are useful, but there are many online banks to choose from. Each bank has different advantages and disadvantages, but I recommend ING Direct for three reasons:

1. ING Direct has the right attitude about helping you save. For instance, the ING Direct employees started a “we the savers” campaign where you can sign a Declaration of Financial Independence. They have an online Savers’ Forum, a free savings tips and tools newsletter, and an Online store where you can buy money-saving books and gadgets. They opened Cafes in various cities where you can buy cheap coffee — my wife, a serious coffee drinker, says the coffee is good — and access your account for free. Most importantly, they treat everybody the same. Whether you have $5 or $5,000,000, you get the same rates and service. Finally, as you’ll see in Step 3 below, they make it easy to set up automatic budgets.
2. ING Direct has good rates. You receive good interest rates on your savings, CD, and checking accounts. Of course, bank interest rates change daily and you can always find higher rates. Some people hop between banks faster than a barefooted kid standing on black asphalt during a hot, sunny day. You can do that too, but my advice is to strike a balance between simplifying your life and making a reasonable return on your money. You can make yourself crazy by continuously chasing the highest rates.
3. ING Direct has good service. ING Direct employees provide excellent phone support with local call centers and short wait time. They also provide email support. (Oddly, they don’t provide secure messaging within your account so that you can communicate sensitive information safely.) They have 35,000 free ATM locations via the Allpoint ATM network. When necessary, they’ll write and mail paper checks for free.

If you think that ING Direct is right for you, I have a three step plan that integrates your local bank with ING Direct.

Step 1 – Open a Local Free Checking Account

You already have a checking and savings account at a local bank, but you need to make certain your checking is free even with a low balance. This is important because your going to move most of your money to an online bank. You’ll only use the local free checking account for three things:

1. To help open your ING Direct accounts.
2. To make roundabout deposits to ING Direct.
3. To write paper checks when you’re in a hurry.

We use TD Bank (formerly Commerce Bank) for our local banking because it’s open seven days a week, has branches near us in multiple directions, and is hospitable.

Step 2 – Open ING Direct Accounts

Step 2 is to open an Orange Savings account and an Electric Orange account at ING Direct. You open the Orange Savings account first because it’s the simplest account. When you open your account, you link your local checking account to your ING Savings account so that you can electronically transfer funds between accounts. It typically takes three business days to electronically transfer funds. After you’ve opened your Orange Savings account, you can transfer all your money from your local bank savings account and close the account.

Next, you open the Electric Orange account. The Electric Orange account is a checking account that pays interest. It comes with an Electric Orange ATM debit/credit card, so you’ll no longer need to use your local bank’s ATM card. With Electric Orange, you can pay bills for free, send paper checks, send electric checks, and make deposits. There are more details about using the account than I can explain here, but you can watch the Electric Orange demo to learn more.

One caution about Electric Orange account: you can only open an Electric Orange account if you have a good credit rating. ING Direct does this to keep costs down. Apparently, people with no or poor credit cost more to support (more overdrafts, phone calls, and so on) than people with good credit.

If you decide to open an ING Account, search Google for “ING direct referral” and you’ll find links that’ll give you $25 for opening an account with a minimum deposit of $250. If you’d like to support this site, please send me an email at the following disguised address: roger at acontentlife.com. I’ll send you a referral and you’ll still get $25 when you sign up, but I’ll also get $10.

Step 3 – Manage Your Budget With Multiple Accounts

Step 3 is to manage your budget with multiple ING Direct accounts. Once you’ve opened your ING Direct accounts, you can open new accounts online in about five minutes. Since you can give nicknames to your accounts, you can start creating accounts for specific budgetary purposes. You can see the accounts that I have created below.

Generally, I create an account for irregular, non-monthly, expenses. I have a Travel fund for vacations or trips,  an Emergency Savings fund for job loss or other catastrophe, an Investment fund for buying mutual funds and ETFs, a Housing and Taxes fund for home maintenance and real estate taxes, and an Automobile fund for buying new cars and paying for insurance and repairs. I’ve also created various education savings and CD funds for my children’s college education.

The Nathan Savings account is for my minor son. It’s a joint savings account that he’ll take over after he turns eighteen. It allows him to get good interest on his small savings, but, more importantly, it helps teach him about interest and personal finance.

Now for the really cool part. You can set up automatic transfers between accounts. This is the idea behind paying yourself first to secure your future. For instance, suppose you have $5000 per month direct deposited into your Joint Checking account. Since you know when the money will hit the account, you can setup a recurring monthly transfer to your other funds. For instance, you can have $X transferred to the Investment account, $Y transferred to the Travel account, $Z dollars transferred to the automobile fund, and so on. This allows you to automatically save for the future.

A penny saved is a penny earned. – Benjamin Franklin

How do you manage your personal banking? Do you already use an online bank? Would the approach I described work well for you? Do you have other questions for me?

No related posts.

Tags: Banking, Money, Personal finance, Personal goals