The Life and the Lifestyle: Credit and Investing In Today's World Part 1: Online Banking
Recently, I've seen a lot of great websites dedicated to credit/debt, banking, and investing. A number of these sites are fantastic resources and the writers are even making a little bit of cash off it. I've decided that it might be time for me to throw my hat into the arena, perhaps not to make money, but maybe to give some insight or help to others who either are going, went through, or will go through the things I have.
I'll try to keep this an ongoing thing. I'll try not to cover too many of the same concepts but what would really help with all of this is feedback. If you have any questions, need anything clarified, leave a comment and I'll set it aside for the next one (I'll try to do these once a week).
With all of that out of the way, let's dive into the first thing I wanted to talk about: ONLINE BANKING.
What BMs Mean to You
Like most people, you probably do all of your banking through a brick and mortar (referred to as a BM from here on out) because of the convinence factor and the fact that you never knew that BMs were technically screwing you out of money. Wait... what? They're screwing you out of money? Well, yes. Technically, anyway.
How can I say such a thing? Well, it's simple, really. You probably have a checking account and savings account through a BM, and, if you've gotten really savvy, a CD (certificate of deposit). Your 401k is probably through whatever provider your employer has and you don't have much else to your name. But you're not making the money you should off of your money... and savings accounts, at least through your BM, are a fabricated lie. You're not saving anything, you're losing money.
The majority of folks grew up thinking the stock market was inaccessible (and to a great many, before 1997, it was) or that corporations were evil entities hell-bent on stealing all of your money and running the world into the ground. Well they aren't... you are. The sad truth is that you haven't taken control of the corporations the way you should, but that's neither here nor there. Let's just say that your bank IS a corporation, you're voting with your money, but you're not getting the procedes from any of the business that bank is doing. This is how your BM is screwing you out of money.
How Interests Rates Work
That caption is a little misleading... it would take a book to write about how interest rates work. I'll make it simple and use general numbers. Inflation is around 3%. It's not a constant, but if you keep that in mind, you'll always be ahead of the game. What this mean is that every dollar you have needs to make at least 3% of it's value for you to always have 1$. With me so far? Anything lower than that means that you're actually LOSING money. Anything more than that means that you're ahead of the game.
It's really not much harder than that. Of course inflation fluctuates and there can be times when inflation is far higher than that (Reganomics anyone?) but 3% is a general consensus because wild swings in the economy almost always end up giving us 3%. 3% is always the sign of a pretty healthy economy, so that's why it's used as a barometer. (I think the current inflation rate is 2.7%)
Interest rates are when your money grows by a certain amount every year. You've heard the terms APY and APR? These are interest rates and define how much your money will grow over the course of a year. APY is the annual yield, or about what you'll get on average. APR is the annual rate for loans, which takes into account one time fees and other things. Why are these important? Well, because you want a higher interest rate to stay ahead of inflation. Remember the 3%? You want 3% or higher so you stay ahead of the curve. Anything lower is just plain unhealthy.
BMs are Probably the Smartest in the World
Now, don't get me wrong. BMs are not evil. In fact, many BMs have great loan rates and what have you. But the problem is that BMs typically charge really low interest rates on your checking and savings account money.
Don't believe me? Check National City. They're a great bank, with some good services. But the problem is they charge exceptionally low rates for their checking and savings accounts. In fact, the only way to get a good above 3% return on your savings account is to suffer a monthly fee. This is typical for BMs, unfortunately. Chances are, right at this moment, your checking account is earning you 0% interest and your savings account is earning in the realm of .5%. (If over a certain monetary value)
What BMs lack in checking and savings accounts, they generally make up for in CDs. Going back to National City, their CD ratings aren't mind-blowing but they are competitive. Who wouldn't like to earn 3.75%-4.20% on money just sitting in an account? Unfortunately, this rate is only competitive and CDs have the disadvantage of locking you out of your money for a specific amount of time. (There are also other, better ways of growing your money such as bonds).
So what do you do? Where is there to go? If BMs are going to do this, how are you going to make any money? Well, there is the stock market, which makes many people's eyes glaze over... or there are online banks. (Which are still part of the damn stock market, as are BMs, but let's not get into the semantics of all of this)
What Online Banking Means to You
I just said the magic words: Online Banking.
You had one of three responses when I said that: 1) you either screamed at the top of your lungs "NO! OMG THEY WILL LOSE MY MONEY", 2) you either smiled smugly and said "I already know this", or 3) you stared at the screen in confusion. Really, there's nothing to be confused about. Online banking is fun... and, honestly, it's just like a BM, with clear advantages.
First, let's get the misconceptions out of the way. Online banks are not scams. They are corporations, just like BMs, that invest money, give out loans, and hold money just like BMs. Remember, money is not paper anymore. Money is all electronic. You can trade in your electronic money for paper money when you go to a BM, yes, but you get your check as electronic currency, you use a debit card to pay for things electronically, and you probably go to your BMs website to transfer money to and from your savings account. None of this is paper. Online banks are just less opaque about the whole process.
Second, Online banks are protected just like BMs. If they tank for ANY REASON, you are federally insursed (FDIC) to get up to 100,000$ of your money back.
Third, Online banks aren't really that much more inconvinent other than you need to call someone up when something goes fubar. This happens about as often as BMs, so your mileage will vary.
The beauty of online banking, however, is that they can serve more functions than your typical BM. First, depending on who you go with, they can offer insane interest rates for your checking or savings account, in the relm of 3% to 5.5% straight off the bat. Second, you can manage your IRA, 401k, bonds, mutual funds, and stocks through many of them. Most BMs won't let you do this from their websites.
Are there disadvantages? Of course. Some online banks don't use paper checks, but a complicated system of electronic checks. This has relevance if you pay all of your bills with paper checks, but since most utilities allow you to do online transactions, this is alleviated. (Beware of those utilities that charge convinence fees for online transactions... sneaky dogs) Some online banks will hold your money for a few days after transfer. This SOUNDS like a big deal but it's not... remember that BMs generally don't post transfers or even show a transfer from one account (outside) to another (inside) before the next day or the day after. And sometimes not having a physical branch to go to to complain can be a little nerve wracking when the guy (or gal) on the phone wants to act like you're beneath them. But the advantages easily outweight the disadvantages.
How to get Started
First, do some research. The internet is a vast world with a vast amount of content. Choosing a bank is more than just driving down the street to the nearest one. You need to do research to find out exactly what you need and what's relevant to you. Do you need just a high APY or do you need flexibility with your money? Do you need savings AND checking? Do you need to manage your portfolio? Keep in mind that many of these banks will offer even higher rates if you have your entire portfolio with them.
Second, go to the Better Business Bureau website and look up the company. See what the primary problem with the business is. Don't worry, all businesses are listed on here, because every business has had some complaint lobbied against it at some time in its operating life. Just get a gauge for what the problem was and when it happened. If there aren't too many recent entries, then you can pretty much disregard it.
Third, find an investing forum online to ask questions of people who use that bank regularly. You want to know what their mileage is.
Once you've done all of this, pick your bank. Keep in mind that your money will be in a transfer state for a few days, that the process of opening the account may take 7 to 10 days, and that you should never transfer ALL OF YOUR MONEY at once. Do it in stages, transfering the amount you need to open up the accounts, then doing direct deposit into that account (if it's checking), and when that is finished, transfering the remainder of your money. You need to still be able to cover all of your expenses while you're in the middle of the transfer.
When all is said and done, you'll have opened an account with a higher interest rate, meaning a greater return on your money.
And Just for Example
Let's say you decide to stay with that BM savings account. I'll be a gentleman and say that it returns 2% to you a year (almost unheard of unless you go with maintenance fees and the like). Let's say that you have $5000 in that account and you're going to keep it in there for 20 years. You'll never touch it, not by withdrawing or adding money. At the end of those 20 years, barring that everything stays the same, you'll have $7430. That's not a bad chunk of change after 20 years of the money rolling around. Let's say, however, that I put that same $5000 in a high yield interest account at the 5% rate that is sometimes typical of high yield interest accounts, for the same 20 years. At the end of 20 years, I'll have made $10955. I don't think I need to say more.
So it's prudent to jump into the online banking world. If you're still intimidated by all of it, or unsure, open up a savings account with ING.com or Etrade.com. They have low barriers of entry and exceptionally good rates. Keep your savings account there and put your money into that instead of your BM account. You won't sacrifice your ability to use your BM checking account that you've become accustomed to but you'll have the benefits of actually making some money off of the money you keep in the bank.
It can be a little scary at first. A lot of us were not taught by our parents to manage money in any real respect. My parents told me to put money away, of course, but they didn't get me intimately acquainted with the stock market or interest rates. I had to do that myself. It was scary, I'll admit, and I was scared that I wouldn't understand it all. But once I got into it and realized that the last 10 or so years of my life were spent not letting my money work for me, I felt that the best course of action was to jump in feet first. Baby steps are never a bad thing... but steps, of any kind, must be made for there to be any real change. You can do it just like I did!
I'll try to keep this an ongoing thing. I'll try not to cover too many of the same concepts but what would really help with all of this is feedback. If you have any questions, need anything clarified, leave a comment and I'll set it aside for the next one (I'll try to do these once a week).
With all of that out of the way, let's dive into the first thing I wanted to talk about: ONLINE BANKING.
What BMs Mean to You
Like most people, you probably do all of your banking through a brick and mortar (referred to as a BM from here on out) because of the convinence factor and the fact that you never knew that BMs were technically screwing you out of money. Wait... what? They're screwing you out of money? Well, yes. Technically, anyway.
How can I say such a thing? Well, it's simple, really. You probably have a checking account and savings account through a BM, and, if you've gotten really savvy, a CD (certificate of deposit). Your 401k is probably through whatever provider your employer has and you don't have much else to your name. But you're not making the money you should off of your money... and savings accounts, at least through your BM, are a fabricated lie. You're not saving anything, you're losing money.
The majority of folks grew up thinking the stock market was inaccessible (and to a great many, before 1997, it was) or that corporations were evil entities hell-bent on stealing all of your money and running the world into the ground. Well they aren't... you are. The sad truth is that you haven't taken control of the corporations the way you should, but that's neither here nor there. Let's just say that your bank IS a corporation, you're voting with your money, but you're not getting the procedes from any of the business that bank is doing. This is how your BM is screwing you out of money.
How Interests Rates Work
That caption is a little misleading... it would take a book to write about how interest rates work. I'll make it simple and use general numbers. Inflation is around 3%. It's not a constant, but if you keep that in mind, you'll always be ahead of the game. What this mean is that every dollar you have needs to make at least 3% of it's value for you to always have 1$. With me so far? Anything lower than that means that you're actually LOSING money. Anything more than that means that you're ahead of the game.
It's really not much harder than that. Of course inflation fluctuates and there can be times when inflation is far higher than that (Reganomics anyone?) but 3% is a general consensus because wild swings in the economy almost always end up giving us 3%. 3% is always the sign of a pretty healthy economy, so that's why it's used as a barometer. (I think the current inflation rate is 2.7%)
Interest rates are when your money grows by a certain amount every year. You've heard the terms APY and APR? These are interest rates and define how much your money will grow over the course of a year. APY is the annual yield, or about what you'll get on average. APR is the annual rate for loans, which takes into account one time fees and other things. Why are these important? Well, because you want a higher interest rate to stay ahead of inflation. Remember the 3%? You want 3% or higher so you stay ahead of the curve. Anything lower is just plain unhealthy.
BMs are Probably the Smartest in the World
Now, don't get me wrong. BMs are not evil. In fact, many BMs have great loan rates and what have you. But the problem is that BMs typically charge really low interest rates on your checking and savings account money.
Don't believe me? Check National City. They're a great bank, with some good services. But the problem is they charge exceptionally low rates for their checking and savings accounts. In fact, the only way to get a good above 3% return on your savings account is to suffer a monthly fee. This is typical for BMs, unfortunately. Chances are, right at this moment, your checking account is earning you 0% interest and your savings account is earning in the realm of .5%. (If over a certain monetary value)
What BMs lack in checking and savings accounts, they generally make up for in CDs. Going back to National City, their CD ratings aren't mind-blowing but they are competitive. Who wouldn't like to earn 3.75%-4.20% on money just sitting in an account? Unfortunately, this rate is only competitive and CDs have the disadvantage of locking you out of your money for a specific amount of time. (There are also other, better ways of growing your money such as bonds).
So what do you do? Where is there to go? If BMs are going to do this, how are you going to make any money? Well, there is the stock market, which makes many people's eyes glaze over... or there are online banks. (Which are still part of the damn stock market, as are BMs, but let's not get into the semantics of all of this)
What Online Banking Means to You
I just said the magic words: Online Banking.
You had one of three responses when I said that: 1) you either screamed at the top of your lungs "NO! OMG THEY WILL LOSE MY MONEY", 2) you either smiled smugly and said "I already know this", or 3) you stared at the screen in confusion. Really, there's nothing to be confused about. Online banking is fun... and, honestly, it's just like a BM, with clear advantages.
First, let's get the misconceptions out of the way. Online banks are not scams. They are corporations, just like BMs, that invest money, give out loans, and hold money just like BMs. Remember, money is not paper anymore. Money is all electronic. You can trade in your electronic money for paper money when you go to a BM, yes, but you get your check as electronic currency, you use a debit card to pay for things electronically, and you probably go to your BMs website to transfer money to and from your savings account. None of this is paper. Online banks are just less opaque about the whole process.
Second, Online banks are protected just like BMs. If they tank for ANY REASON, you are federally insursed (FDIC) to get up to 100,000$ of your money back.
Third, Online banks aren't really that much more inconvinent other than you need to call someone up when something goes fubar. This happens about as often as BMs, so your mileage will vary.
The beauty of online banking, however, is that they can serve more functions than your typical BM. First, depending on who you go with, they can offer insane interest rates for your checking or savings account, in the relm of 3% to 5.5% straight off the bat. Second, you can manage your IRA, 401k, bonds, mutual funds, and stocks through many of them. Most BMs won't let you do this from their websites.
Are there disadvantages? Of course. Some online banks don't use paper checks, but a complicated system of electronic checks. This has relevance if you pay all of your bills with paper checks, but since most utilities allow you to do online transactions, this is alleviated. (Beware of those utilities that charge convinence fees for online transactions... sneaky dogs) Some online banks will hold your money for a few days after transfer. This SOUNDS like a big deal but it's not... remember that BMs generally don't post transfers or even show a transfer from one account (outside) to another (inside) before the next day or the day after. And sometimes not having a physical branch to go to to complain can be a little nerve wracking when the guy (or gal) on the phone wants to act like you're beneath them. But the advantages easily outweight the disadvantages.
How to get Started
First, do some research. The internet is a vast world with a vast amount of content. Choosing a bank is more than just driving down the street to the nearest one. You need to do research to find out exactly what you need and what's relevant to you. Do you need just a high APY or do you need flexibility with your money? Do you need savings AND checking? Do you need to manage your portfolio? Keep in mind that many of these banks will offer even higher rates if you have your entire portfolio with them.
Second, go to the Better Business Bureau website and look up the company. See what the primary problem with the business is. Don't worry, all businesses are listed on here, because every business has had some complaint lobbied against it at some time in its operating life. Just get a gauge for what the problem was and when it happened. If there aren't too many recent entries, then you can pretty much disregard it.
Third, find an investing forum online to ask questions of people who use that bank regularly. You want to know what their mileage is.
Once you've done all of this, pick your bank. Keep in mind that your money will be in a transfer state for a few days, that the process of opening the account may take 7 to 10 days, and that you should never transfer ALL OF YOUR MONEY at once. Do it in stages, transfering the amount you need to open up the accounts, then doing direct deposit into that account (if it's checking), and when that is finished, transfering the remainder of your money. You need to still be able to cover all of your expenses while you're in the middle of the transfer.
When all is said and done, you'll have opened an account with a higher interest rate, meaning a greater return on your money.
And Just for Example
Let's say you decide to stay with that BM savings account. I'll be a gentleman and say that it returns 2% to you a year (almost unheard of unless you go with maintenance fees and the like). Let's say that you have $5000 in that account and you're going to keep it in there for 20 years. You'll never touch it, not by withdrawing or adding money. At the end of those 20 years, barring that everything stays the same, you'll have $7430. That's not a bad chunk of change after 20 years of the money rolling around. Let's say, however, that I put that same $5000 in a high yield interest account at the 5% rate that is sometimes typical of high yield interest accounts, for the same 20 years. At the end of 20 years, I'll have made $10955. I don't think I need to say more.
So it's prudent to jump into the online banking world. If you're still intimidated by all of it, or unsure, open up a savings account with ING.com or Etrade.com. They have low barriers of entry and exceptionally good rates. Keep your savings account there and put your money into that instead of your BM account. You won't sacrifice your ability to use your BM checking account that you've become accustomed to but you'll have the benefits of actually making some money off of the money you keep in the bank.
It can be a little scary at first. A lot of us were not taught by our parents to manage money in any real respect. My parents told me to put money away, of course, but they didn't get me intimately acquainted with the stock market or interest rates. I had to do that myself. It was scary, I'll admit, and I was scared that I wouldn't understand it all. But once I got into it and realized that the last 10 or so years of my life were spent not letting my money work for me, I felt that the best course of action was to jump in feet first. Baby steps are never a bad thing... but steps, of any kind, must be made for there to be any real change. You can do it just like I did!