Online Savings Account - Are They Safe?
One of the nice things about a brick and mortar bank is that you can always go to a brick and mortar bank no matter what. When IndyMac bank failed and was taken over by the FDIC, you could at least go to an IndyMac branch. Sure the lines were long, the people were miserable, but your money was inside and you could get to it.
Actually, your money was not inside. Your money was in the ether, a series of 1’s and 0’s, and you couldn’t actually touch it unless it was locked inside a safe deposit box. Your money was with all the other money, a line item in an electronic register on the bank’s mainframe computers. It was just as safe as having it on an online savings account.
Your money is no safer at a “regular” bank than an entirely online bank.
The only thing that protects your assets at a bank is FDIC insurance. If the Federal Deposit Insurance Corporation is insuring the funds at your bank, and you can confirm this with the FDIC Bank Find tool, then your assets are protected up to $100,000 no matter what.
This means that you’re making a mistake if you don’t open an account at a bank like FNBO Direct or HSBC Direct because they’re just as safe and they offer much higher interest rates.
Using An Online Bank Account Firewall
I’m pretty comfortable with banking online, linking my accounts together, and doing what would have been considered “crazy” only a few short years ago. The interconnectedness of my online services is so widespread that my bank accounts often see only one or two degrees of separation from one another. This level of comfort helps my financials be more fluid but it does introduce a certain level of risk.
Several years ago, I remember reading reports that Paypal was freezing accounts and withdrawing funds directly from bank accounts in fraud investigations. It was something that spurred me to build what I call an online bank account firewall.
A regular firewall in a home is a flame retardant material that separates two connected homes. In the event of a fire in one home, the firewall would prevent the fire from spreading to the other. They’re standard in rowhomes, townhomes, and duplexes these days. The computer version of the firewall is similar, it keeps the bad stuff out. The financial firewall seeks to achieve the same goal.
If there are some untrusted or somewhat risky accounts out there, simply link them to an empty bank account at ING Direct. I chose them because opening a second account there was trivial and, three years ago, they had the best rates in the high yield savings account world. All you do is create an account and link Paypal to that account.
As funds are transferred into the firewall account, move them to another account immediately. If you need to get funds to PayPal, transfer them into the firewall account first, then initiate the transfer. The account has a $0 balance at all times and so you run no risk of having your funds withdrawn without your knowledge!
ING Direct Increases CD Rates
ING Direct has updated and increased their CD rates:
| Term | Rate | Effective Date |
| 6 Month | 3.50% | 08/12/08 |
| 9 Month | 3.60% | 08/12/08 |
| 12 Month | 3.70% | 08/12/08 |
| 18 Month | 3.75% | 08/12/08 |
| 24 Month | 3.80% | 08/12/08 |
| 30 Month | 3.85% | 08/12/08 |
| 36 Month | 3.90% | 08/12/08 |
| 48 Month | 3.95% | 08/12/08 |
| 60 Month | 4.00% | 06/11/08 |
Get your CDs! Piping hot CDs!
ABA Routing Codes to Link Online Accounts Together
If you have multiple online accounts, one good trick is to electronically link the two accounts together to facilitate the transfer of funds between them. All you need to do this is each bank’s ABA routing number and your account number to set up the link.
Some banks, like ING Direct, will require that you provide a paper check in order to create the link whereas others, like FNBO Direct and HSBC Direct, don’t require a paper check. So, if you want to link ING Direct to FNBO or HSBC, simply create the link on the FNBO/HSBC side and initiate transfers that way.
Here are the ABA routing numbers for the major online banks:
- FNBO Direct: 104000016
- HSBC Direct: 022000020
- ING Direct: 031176110
- Emigrant Direct: 226070319
- Virtual Bank: 067092200
- E*Trade Bank: 256072691
- WaMu: 322271627
By establishing the links, you give yourself the opportunity to transfer funds easily between accounts as you need them.
Save Online, Learn The Markets, Then Invest
If you have a few extra dollars and are considering investing in the stock market but find yourself a little scared, don’t worry. Everyone new to the stock market is always wary of it because it’s such a huge beast. Millions of shares trade hands each day, billions of dollars fly around, and that’s just on the New York Stock Exchange. There’s the NASDAQ, Chicago, and countless other international stock exchanges. When you add in foreign exchange opportunities, options, derivatives, futures… it’ll make your head spin and give you a good reason to hold on for a minute. And that’s OK.
Take your time, there’s no rush, the market will be there once you’ve had an opportunity to read up more about how the markets operate and how you can best protect yourself against disaster. While you learn, put your funds in an online bank and it’ll earn a competitive interest rate that won’t make your retirement, but it won’t break it either.
Some people recommend putting your money in an index fund while you spend time learning, I think that’s a mistake unless you plan on learning for about five years. If the market takes a nosedive, as it did last October, you’ll have to leave your money in there and all your research will be put on hold until it recovers. While that’s not necessarily a bad thing, it’s simply not what you planned to do.
One great place to do this is E*Trade because you can have a bank linked to a brokerage account. While your cash is waiting for a good place to go, it can earn a competitive interest rate and be instantly transferred to your brokerage account if you need it for a trade.
Are CD’s Worth It?
Countrywide is currently offering a 7 month, 4.1% APY Certificate of Deposit, is that worth investing in?
If you have an account at Countrywide and you don’t have to move any assets to take advantage, I think that a 7 month Certificate of Deposit offering 4.1% APY is not a bad idea. You lose very little by taking advantage of it. Even if rates do spike up within the next 7 months (the highest rate at a brand name bank is 3.75% at Washington Mutual) such that they exceed 4.1% APY (which is unlikely), you are only locked in for 7 months.
Otherwise, I’d wait.
Personally, given a choice between a 3.75% APY and flexibility or a 4.1% APY without flexibility, I’ll take the 3.75% APY every time. I prefer the flexibility but the main point here is that the difference isn’t significant enough to warrant the effort. There are also financial considerations as well because you don’t earn interest on funds that are “in transit,” which is really just the banks playing the float because money never actually moves from one bank to another.
If you have to move new funds over to Countrywide, I wouldn’t do it. If you have funds there, by all means snatch up the opportunity.
Is Rate Chasing Bad?
“Rate chasing” is when you shift your funds between high yield online savings banks in an attempt to get the highest possible interest rate for your savings. The question on the table is whether rate chasing is “bad” for you, either from a savings or a credit perspective.
The answer is no. The act of opening a new bank account isn’t a negative event on your credit history. Some banks will do a hard inquiry, some will do a soft inquiry, but in general it is not seen as a negative event on your report. If you were to open a line of credit, that would be seen as a more negative event than opening a bank account.
As for whether it’s bad for your savings, it’s a little bad. You lose interest on the funds as they are being transferred so it takes a pretty big interest rate difference to make it worth it. However, it’s good to have a couple of them available for when you are moving new funds into the “high yield savings account” group. That way you can push it to the largest yielding account.
Who are the leaders now (As of August 1st, 2008)?
- Washington Mutual - 3.75% APY
- FNBO Direct - 3.50% APY
- HSBC Direct - 3.50% APY
HSBC Direct Extends Promotion
The 3.50% APY offer for HSBC Direct’s online savings account is a “promotional” offer that was extended from August 15th to September 15th. This is good news for those who pushed their funds to the higher offer. There’s still no hint as to where the rates will go after the promotion ends but with so many other banks increasing their rates, there’s a good chance the 3.50% APY will stick.
My strategy has always been to keep several of these accounts open and shift funds from my checking account into the highest rate when they are available. I don’t “rate chase” because the interest lost in the transfer can easily wipe away any additional interest earnings, but it’s good to always push to the highest bar available.
$25 ING Direct Referral Promotion
One of the best features of ING Direct’s Orange Savings Account is the referral bonus. All it takes is for an existing customer to send you an email through their system, you sign up, deposit at least $250, and you get a $25 referral bonus. Your friend get $10 for their trouble. Everyone wins!
It’s a great way to cut your teeth on high yield online savings accounts as ING Direct is one of the oldest banks around (ING is a Dutch company, they bought the great Barings Bank when it went under. Barings funded the Napoleonic Wars and was the Queen of England’s bank!) and they are here to stay (even if they aren’t, your deposits are FDIC insured).
If you don’t know anyone with an ING account or you don’t want to wait, you can get a list of links for $25 ING Direct Referrals here.
Are Online Banks FDIC Insured?
All online banks are able to be FDIC insured but that doesn’t mean that all banks are FDIC insured. High yield savings accounts at online banks aren’t any different than savings accounts at traditional brick and mortar banks, they are subject to the same rules and regulations of banks and thus are able to be FDIC insured.
Does that mean they’re all insured because they’re a bank? No. Just as you would any regular bank, you should always check that the bank is FDIC insured by using the FDIC’s Bank Find tool. A bank isn’t insured unless it’s listed in the FDIC Bank Find tool and has a certificate number.
For example, if you were looking for HSBC Direct, you wouldn’t find it under “HSBC Direct.” To find the official name, visit the website and look for it, usually at the bottom. On HSBC Direct’s homepage you will see this:
Issued by HSBC Bank USA, N.A. ©2008 HSBC Bank USA, N.A. All Rights Reserved.
That means you’ll want to find HSBC Bank USA in FDIC Bank Find, I just put in HSBC and found several hits, only one of which was “HSBC BANK USA, NATIONAL ASSOCIATION.” It’s located in Delaware and the FDIC Insurance certificate was #57890. You can click on the name for more information including office locations, main website, etc.
Too bad there isn’t anyway to search by certificate number, that would be a nice addition.