gears

Along with conceptual discussions, I’m sure people would appreciate some explanations of the mechanics behind personal finance such as setting up a high interest rate savings account. And since at this time, my parents are the only ones reading this, and I’ve been telling them about high interest rate savings accounts, it might help walking through the steps of actually setting this up.

There are a number of sites that do this such as ING Direct, HSBC, and Emirates. They all have different rates, which will fluctuate slightly over time such as when the Fed rate changes, but they’re all pretty similar, so pick the one that suits you. These are savings accounts, but most savings accounts have low rates, which are much lower than money market accounts and stocks and bonds as well. The major draw back to traditional savings accounts is that they won’t provide a return greater than inflation, which is how much more things will cost you tomorrow compared to today as prices rise, so the money you keep in that account is worth less tomorrow unless you get a return greater than inflation.

Traditionally, the next step up for better return is a Certificate of Deposit (CD). These are higher return assets that pay interest for a fixed period of time, and like bonds these are considered Fixed Income. The problem with this is that your money is locked away until the maturity date of the CD, which is considered low liquidity.

Solving this problem, some financial institutions have been innovating their business models in ways that reduces their overhead and allow them to offer these much better rate accounts. These are still new in the market, though, and not everyone is sold on them, but they are FDIC secured, so at the least the US gov has you covered for up to $100k. The benefit of these accounts is that they provide near CD returns while maintaining the liquidity of the asset. You can withdraw and deposit money when you like (sorta). One downside to keeping your money in these accounts, like any savings account, is that you pay income tax on your interest earned, which is almost always higher than the taxes you’d pay for capital gains on equity such as from money you make from selling stocks and index funds, but more on taxes another time.

Directions

I have an account with ING Direct, so I’ll explain the basic steps involved with them. Goto http://home.ingdirect.com/, select Open An Account, and under Orange Savings select Open Now. A number of steps are required such as entering your personal information and accepting terms and conditions, which are all pretty standard. The one different step is making an electronic deposit. All that this requires is a check book, you should have a checking account already at some bank, and you enter the routing number and whatever else from the check. Enter the amount you’d like to deposit, and you’re done – almost.

In the next few days, once they’ve processed this information, they’ll deposit two amounts of money – something less than a $1 (mine were something like $0.01 and $0.03) – and you log into your account, and enter those two amounts to verify that they’re attached to the correct checking account. Now, you’re done. The amount you original intended to deposit will be electronically transfered, and from your ING accounts you can transfer money back and forth between your original checking account (or other checking accounts that you attach later), which takes 2-3 days to clear. Now you have a much higher interest rate and you keep the great liquidity.

Note: there aren’t any ING branches to get your money out from, so you’ll still have to rely on your original bank, but these are great for emergency spending accounts where you don’t plan on spending the money, need liquidity, but don’t like getting only 1% or so. Additionally, you might not like the risk of putting that money in the market. I only use this for my emergency funds to keep it as simple a possible. I don’t check up on this account much, so it’s a great out-of-sight out-of-mind barrier to wanting to spend this money.

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