Money Blue Book

During tough times, there is always the inevitable flight to quality as investors seek out stable investment options to keep their money safe from loss. Oftentimes these safe investment choices include U.S. Treasury Bills, high interest savings, and money market accounts. However, those who want to shield their money from unnecessary risk during uncertain times but still maintain a very competitive rate of return ought to strongly consider certificate of deposits (CDs). Because CD’s are issued by banks and credit unions, they enjoy the same iron clad FDIC insurance coverage and equivalent that checking accounts and saving deposits enjoy. When you buy a certificate of deposit through a bank and choose to invest your money in a CD, you can rest easy knowing that your money is fully protected up to the full FDIC coverage limit from unexpected loss (the current FDIC limit is $250,000).

While in the long run, investing in the stock market is the best way to earn high growth returns, sometimes the market conditions and wild price swings are too much to handle for some conservative short term investors. Especially for those you looking to preserve your capital and build up emergency fund savings within a short time frame, you may be more comfortable investing your money in a predictable interest bearing asset, like a high yield savings account or a CD. While I frequently solicit the use of safe investments for specialized purposes, I’m still an active bank interest rate chaser at heart – a person who constantly seeks out the best ways to maximize money and earn the most interest bang for one’s buck. This desire to delicately balance protection against risk but at the same time still earn the highest interest rate is how I stumbled upon the use of CDs and CD ladders.

What Is A Certificate Of Deposit (CD) and How Do I Buy It?

A certificate of deposit, or a CD as it’s most commonly called, is an interest bearing fixed time asset offered to consumers and businesses by banks and credit unions. When you buy a CD through a bank, you transfer money into the CD savings account for a fixed amount of time and agree not to withdraw the amount until the time period matures or expires. Upon maturation, you are free to pull your money out along with the accrued interest and decide whether you want to roll it over into another CD or walk away.

The available time periods for CD’s vary from bank to bank, but usually they are offered for periods of 3 months, 6 months, 9 months, and so forth, up to as long as 5 years. However, some banks are extremely flexible and offer CD’s for time periods as short as 1 month. While many banks require a minimum deposit to buy a fixed interest rate CD, some major banks have done away with minimum deposits, and customers are now free to buy a CD for as little as $5 (seems kind of silly to do that though). However, keep in mind that the best CD rates tend to be reserved for CD deposits that have very high minimums – called jumbo CDs, which usually require minimum balances in excess of $100,000.

Buying a CD is pretty straight forward – you can buy them commission-free from most banks and credit unions. For starters, you may want to check out your local credit unions or community banks for the best CD rates. Oftentimes, locally run institutions and online banks tend to offer higher rates for their CDs than more established brick and mortar brand name banks like Citibank, Bank of America, or JP Morgan Chase. Those who prefer online banking may want to consider buying their CDs through popular online banks like ING Direct. ING has been around for a while and has made setting up CD ladders incredibly easy. With just a few keystrokes, an ING Direct CD ladder can be set up simply by selecting the monetary amounts and time periods desired.

Deciding when to purchase and which time period to pursue requires a bit more planning. While market prices and interest rates can never be fully timed with any real precision, there are still generally applicable rules of thumb when pursuing a CD purchasing strategy. If it’s your determination that bank interest rates are very high and appears to be overinflated (prepped to drop in the near future), then it’s in your best interest to purchase a CD through your bank and lock in that high interest rate today for as long as possible. On the flip side, if it’s your current estimation that interest rates are rather low and undervalued (prepped to rise in the near future), you’ll want to be more cautious in locking up your money for extended periods of time. You don’t want to lock up your money in a multi-year CD for something like 3.5% annual percentage yield (APY) and later have to watch helplessly as interest rates soar to 4.5%, and not be able to pursue the higher rates until the CD matures.

Why Buy Or Invest Money In A CD? Why Not Just Keep My Money In A High Yield Savings Account?

As we all know, banks make money by taking our bank deposits and loaning the money out to other consumers and businesses for profit. In return, the bank offers checking and savings account holders an interest rate as compensation for allowing the bank to use their money as loans for other people. Banks love the concept of CDs because it allows them to maintain a more stable and higher balance of cash on hand to loan to others. In return for your agreement not to touch the CD money for the agreed upon period of time, the bank is willing to provide you a higher interest rate for your CD deposit than that offered to traditional checking and savings account deposits. The higher interest rate is to compensate you for the loss of liquidity, which pertains to your ability to utilize your monetary assets as you wish.

In general, the longer you agree not to touch the CD deposit, the higher the rate of return the bank will offer you. Thus, the interest rate offered by your bank for a 5 year CD will almost definitely be much higher than that for a mere 3 month CD deposit. This is the reason why savvy savers, who are not in immediate need of cash, should not merely keep all of their money stashed away in checking or savings accounts. In almost all cases, CDs offer APY interest rates that are frequently 1 to 2 percentage points higher than the best best high yield savings accounts. For example, currently as of the date of this writing – ING Direct is offering 3.00% APY for their popular high interest Orange savings account (a very good savings rate at this time). However in comparison – their 6 month CDs currently have yields of 3.50% APY, their 12 month CD’s have yields of 4.00% APY, and their 24 month CD’s have high interest yields of 4.25%. CDs simply blow savings accounts away in the interest rate department.

Choosing between interest rate and loss of liquidity (length of duration) is the most important decision when purchasing CD’s. The more liquidity and control of your money you agree to give up, the higher the interest rate you get back in return. In the banking world, checking accounts are the most liquid of accounts as there are usually little restrictions placed on them by banks. But as a result, checking accounts routinely earn the lowest interest income, if any at all for the account holder. Lower on the liquidity scale are high yield savings accounts, which offer more attractive interest rates for deposits. However, savings accounts are constrained by the monthly 6 ACH transfer limitation. At the lowest rung of the liquidity scale are CD’s which generally offer the most attractive interest rates compared to the other two. However, they are frequently the most constrained as the funds must remain off limits until they mature.

The biggest drawback of CDs is the penalty fee you must fork over if you commit an early withdraw. Once you buy a particular CD for a fixed time period, if you withdraw the money or cash out for any reason including a personal financial emergency, you will incur a significant financial penalty – which will likely wipe out any interest income accrued, as well as cut into the principle used to fund the CD in some cases. Because there are rarely exceptions for waiving the withdrawal penalty, you must make sure you are fully comfortable and committed with having that amount of money locked up in a CD account for the agreed upon period of time before making the plunge.

Building A CD Ladder Is A Good Way To Maximize Your APY Interest Rate and Minimize Liquidity Worries

A CD ladder is simply an investment strategy used to manage CD’s that maximizes liquidity and the rate of return, while minimizing the risk and the drawbacks of locking up your investment money for an extended period of time. Laddering CDs require the account holder to initially purchase multiple CD’s with different intervals so that they ultimately mature at fixed regular intervals. By staggering multiple CD investments so that each individual CD matures at set intervals, this gives the deposit holder additional liquidity and control of the otherwise frozen money so that he or she can take advantage of rising interest rates, and still be able to chase the highest rates possible. Similar to dollar cost averaging for stock investments, CD ladders are great investment vehicles for those who want the flexibility to pursue better opportunities as they arise, but still want to maintain a predictable cash flow.

Below are two examples of how you may want to create your CD ladder system. As each individual CD investment matures you should seriously consider reinvesting in a new CD account with a term that’s equal to the longest term CD. Purchasing multiple certificate of deposits with different maturity dates enables you to take advantage of higher interest rates normally associated with longer term CDs while still ensuring frequent access to large portions of your money. By staggering your CD investments across several rungs of this CD ladder, you generally can increase the potential earnings of your CD portfolio, but still maintain some semblance of liquidity and control of your money along with the security of knowing that your money will become fully available within a relatively short time frame. Of course, should you decide to, you can always make the decision to halt the CD laddering process at the end of each individual cycle and eventually free up all of your money:

CD Ladder Example 1 – Money Is Freed Up Every 6 Months

This set up is suited for individuals comfortable with having their money locked up for 6 months or longer and looking to earn a higher rate of return in exchange. Let’s say you wanted to create a CD ladder system that frees up money every 6 months. Here is how you may want to set it up. This arrangement requires an initial one time start up CD funding of $4,000 and will last for 2 years. As always, you are free to play around with the numbers to suit your purpose and savings goals, but this should give you a general idea as to the mathematics behind CD laddering:

• Put $1,000 in a 6 month CD
• Put $1,000 in a 12 month CD
• Put $1,000 in a 18 month CD
• Put $1,000 in a 24 month CD

After you have established a CD ladder with 6 month, 12 month, 18 month and 24 month terms, when the first 6 month CD matures, you would invest the funds in a new 24 month CD. Similarly with the passage of time, when the next 12 month CD matures, you would invest the funds of that particular CD in another new 24 month CD, and continue the process for the 18 month and 24 month CDs as each subsequent CD expires. At the end of two years you’ll have four individual 24 month CDs with a new $1,000 CD maturing every six months.

CD Ladder Example 2 – Money Is Freed Up Every 3 Months

This set up is more suited for individuals with greater liquidity concerns. If you’re worried about locking up your money for periods of 6 months or more, 3 months may be more appropriate for you. Let’s say you wanted to create a CD ladder system that frees up money every 3 months. Here is how you may want to set it up. This arrangement requires an initial one time start up CD funding of $4,000 and will last for 2 years:

• Put $500 in a 3 month CD
• Put $500 in a 6 month CD
• Put $500 in a 9 month CD
• Put $500 in a 12 month CD
• Put $500 in a 15 month CD
• Put $500 in a 18 month CD
• Put $500 in a 21 month CD
• Put $500 in a 24 month CD

After you have you have established a CD ladder with 3 month, 6 month, 9 month and 12 month terms, 15 month, 18 month, 21 month and 24 month terms, when the first 3 month CD matures, you would invest the funds in a new 24 month CD. Similarly with the passage of time, when the next 6 month CD matures, you would invest the funds of that particular CD in another new 24 month CD, and continue the process down the line as each subsequent CD expires. At the end of two years you’ll have eight individual 24 month CDs with a new $500 CD maturing every 3 months, plus interest.

I know it seems quite complicated, but it really is not. By staggering your CDs through this CD ladder system, you’ll be able to ensure you always have money freeing up every fixed interval period, whether it’s every 3 months, 6 months, or even as short as a matter of a month depending on how you set it up. This allows you to use your CD deposits for emergency fund purposes if you ever need it and may even help promote a healthy and active savings habit, allowing you to meet your financial goals.

It’s not too often that I get to travel overseas to visit my parents, but this time I had to. My dad’s job is taking him on a new foreign assignment to another continent, one that might be less accessible, so I decided to make the effort to visit them sooner than later.

Ever since I reached my financial independence milestone and declared freedom from my parents, I’ve thrived in the openness of my own free will, taking fairly decent care of myself. It’s been so long since I’ve had to live under my parents’ shadow and watchful eagle eyes, so having to do so now, even for a few weeks has been rather difficult. I’m not the same little boy who used to depend on my parents’ guidance and tutelage when I lived with them, so living with them now is taking some getting used to. Since we’ve lived so physically apart for numerous years due to the sheer oceanic distances that separate our jobs, I always feel like I need to get to know them again for the first time and get accustomed to their quirky living habits every time I see them. Even for the purposes of a relatively brief couple of weeks stay, I always find I learn something new about them that I didn’t notice before (perhaps it’s because I get to view them through a refreshed set of perspectives).

What Is Compulsive Hoarding and Why Does It Lead To Excess Clutter and Household Planning Inefficiency?

Having lived with my parents for a week now during my little visit, I’ve noticed something very interesting, but rather troubling – they exhibit the traits and qualities of obsessive compulsive hoarders, particularly my mom. This made me re-examine another member of my family – my brother. Only a few weeks ago I had helped my brother move into his new apartment and remarked on the piles of useless trash and excess clutter in his home. The signs and telltale indicators were all too readily apparent, I just hadn’t noticed them before. Apparently, habitual hoarding is a trait that runs in the family.

For those not familiar with the concept or the terminology of hoarding, it’s the practice of collecting, retaining, and stockpiling material possessions and household supplies to great excess, and the refusal to relinquish them despite common-sensical reasons to do so. This type of personality trait seems to affect a lot of older people in my non-professional opinion based on my own personal observations, but then again, I’m not a health expert. But I wouldn’t be surprised if most people can readily cite their own aging parents or grandparents as active practitioners of hoarding. I wonder if it’s because older people tend to be more old fashioned or more set in their ways, making them less open and amicable to adopting new ways of organizing and de-cluttering their lives through technology.

While most of us probably hoard basic household items to some degree by stockpiling today to take advantage of bulk wholesale prices in anticipation of future need, what separates us from pathological hoarders is the great degree to which they often take things. Obsessive compulsive or pathological hoarders tend to stockpile items that have little to no utility, or they obsess about collecting boxes and bags of possibly useful items but simply don’t know when to stop.

My parents’ apartment has huge stacks of brown storage boxes everywhere. While some of the boxes contain priceless family photo albums, expensive jewelry, or various family keepsakes, the vast majority contain pretty useless junk. While helping them pack for the job relocation, I stumbled across many sealed boxes and bags filled with old newspaper clippings, unused department store paper shopping bags, plastic twisty ties, huge containers of rubber bands,  and enough office supply pens, pencils, construction paper, paper clips, and erasers to stock an Office Depot. The tremendous number of boxes are not neatly tucked away in storage closets, but rather, occupy multiple bedrooms to the brim, spilling out completely into the living room, dining room, and partially blocking most hallways and some entrances. You can’t walk into their apartment without immediately noticing the huge stacks of boxes and newspapers everywhere. Some of the newspaper clippings and stacks date as far back as several years.

While I’ve pleaded with them to start throwing useless bags and boxes away that contain items with no foreseeable useful purpose, my parents refuse to budge, clinging onto the outdated notion that it would be terribly wasteful to throw away perfectly good supplies, while simultaneously extolling the virtues of saving, recycling, and not wasting money. Obsessive, old fashioned hoarders like my parents seem to find some irrational comfort or security in knowing that they have an endless supply of everything in the way of home office and home maintenance supplies should the need ever arrive. The problem with their faulty rationale is that as the supplies grow and the stockpiles of boxes and bags pile up, one inevitably starts to lose track of what one has in his or her inventory. My parents at this point have no idea what they have stored away in their massive stockpile of boxes, but yet, they continue to insist on drowning themselves in supplies and recyclables – useless junk in my opinion. After all, what’s the point of keeping around hundreds of pens, rubber bands, staples, and scraps of computer paper if you can’t even remember if you have them when you actually have a need? Despite the numerous boxes of department store and grocery shopping bags my mom already has and despite the fact fresh ones are very readily available from any retail location, she continues to collect them everyday, neatly folding them flat and storing them away, rationalizing by suggesting that they’ll come in handy someday.

Thankfully, in the area of personal finance and family accounting, my parents’ obsessive hoarding ways have not completely stifled their ability to manage their financial life properly. However, it has made it very difficult for them to keep track of their financial activities at times. Because of their old fashioned ways, my parents continue to retain paper copies of every conceivable document, receipt, and billing statement. My mom keeps huge filing cabinets filled to the absolute brim with almost every receipt and document she’s ever come into contact with. She simply will not throw anything away, believing that every major purchase receipt needs to be kept for future reference (just in case). She keeps all of her papers neatly archived, despite the fact I highly doubt she ever looks at them anymore. They simply become excess clutter, causing gridlock to what could be an otherwise streamlined and efficient existence.

How To De-Clutter Your Life and Streamline Your Personal Finance By Going Electronic and Digital

Embracing the paperless, digital, and electronic revolution is the key to living an efficient and orderly life in this day and age. It’s time to do away with paper documents, paper receipts, and old fashioned outdated ways of keeping important documents and tracking your finances. While some paper documents ought to be retained – such as birth certificates, passport documentation, and car titles, the vast majority of files and papers should be digitalized and electronically organized. Here are some of the best ways to clean up your household and arrange your financial life to make it more efficient and systemized.

1) Stop Buying Crap and Stop Hoarding Useless Junk – I’m not a big fan of collecting things that cannot be construed as art. For those of you who collect material articles like shoes and purses, I don’t get it. Will you really put those hundreds of purses, hand bags, basketball shoes, or hats to use, or will they end up at the bottom of some dresser drawer someday, lost and forgotten? At the very least, if you insist on shopping and buying lots of stuff, learn to adopt healthy habits to de-clutter your life. Here are some basic tips to help you keep your home, office, and sanity organized when it comes to material possessions:

• Stop Using the “I’ll Use It Someday” Excuse – Trust me, you’re not going to use it someday. More likely than not, you’ll eventually forget you have it in the first place and wind up buying it again. Unless it’s something that’s rapidly consumed in most households like toilet paper, napkins, and certain things like canned foods, there’s no sense hoarding or stockpiling. Don’t buy more than you’ll need at this very moment. Yes, there’s a slim chance you may need it a year from now, but chances are, your taste or needs may very well change during that period of time.
• Stop Holding Onto Nostalgia and the Past – Unless it’s something like photos, baby video tapes and DVD’s, or priceless family heirlooms, there’s no sense clutching onto useless clutter like old clothing or broken items you plan on fixing someday. I’m sure you have fond memories of that old wacky T-shirt or sweater from childhood, but unless you plan to wear them again sometime in the very near future, it’s definitely time to get rid of them. Learn to share the wealth by giving things away – it’ll make you feel all warm and fuzzy inside for having performed something altruistic and beneficial for society. For those of you with boxes and crates filled with old, but still wearable clothing in decent condition, try donating them to a charitable organization like the Salvation Army – you may be able to receive a charitable tax deduction for clothing donations. As for holding onto broken electronic gadgets like busted stereo systems hoping to fix them someday, like my mild hoarder of a brother is currently doing, learn to let them go as well. You’re not going to find time to fix it, and chances are it’s just taking up valuable space and pointlessly occupying your mind and thoughts in the meantime.
• Learn To Throw Things Away As You Buy New Ones – Some call it the “in out rule”, but basically, as you purchase new items, learn to throw away the old versions they replaced. If you buy a new pair of shoe to replace some old, worn out pair, feel free to keep a pair or two for dirty activities like painting or yard work, but please don’t keep every single old, worn out shoe you’ve ever owned. Throw them out or give them new life by donating them away.

2) Understand The Importance Of Going Paperless – Compared to electronic transactions and digital archiving, paper is a terribly inefficient and clutter-prone way to transact business and maintain an organized financial life. Paper products and paper documents have a way of adding up and compounding quickly. By their very nature, they are very heavy and sometimes difficult to keep categorized and stored in a way that is easy to access again. The goal is to get used to the idea that paper is the enemy. Ideally you want to go the way of a paperless office and keep all documents and accounts in electronic and digital form, accessible with a computer. These days, almost all online bank and credit card issuers offer the option to view billing statements online and the choice to opt out of paper bills and transactions through the mail.

If you have an important purchase receipt that you are retaining because you want to protect yourself in the event you need to return the product, by all means do so, but after the lapse of the return period, instead of keeping the receipt for all time, why not use your digital camera to snap a photo image to store away on your computer, or use a digital scanner to convert the paper receipt into an electronic PDF or JPEG image file? I use my scanner and digital camera all the time to keep digital copies of important documents like speeding tickets, paperwork for computer purchases, and certain old school papers and essays for future reference. I organize them into neatly labeled computer desktop folders under My Documents instead of keeping them piled into cumbersome brown boxes or filing cabinets. Currently, because I’ve converted most of my paper documents into computerized digital format, all of the remaining important paperwork I possess easily fit into a single standard size box container, enabling me to have an extremely clutter-free workspace.

3) Switch To Online Banking – If you are not yet banking online, it is time to do so. While concerns about recent online banks going bust and FDIC insurance coverage are legitimate, and worries about bank identity theft, and online scams are very real, they are manageable and easily mitigated with some common sense. I’ve been banking electronically since 1998 – and things likes ACH transfers, automatic debit payments, and online bill pays are all second nature to me now. Like all new technology and new methods, it takes some getting used to, but the learning curve is reasonable and not prohibitively steep.

Online banking allows you to access your money faster and monitor your personal finance with 24 hour precision and real time accuracy, instead of relying on old fashioned paper based checkbook balancing. If you don’t already have one, it’s time to open up an online checking and high yield savings account, and start getting the hang of online banking account management. If you have accounts with multiple banks, discount brokers, and credit cards, you may want to consider managing them with an online account aggregator service like Yodlee or Mint. I personally use Fidelity Full View, which is powered by Yodlee’s account consolidation service, to visually follow my financial account balances on a daily basis. Plus, it’s nice to know where you stand at all times and it’s great for budgeting purposes.

4) Start Using Credit Cards and Learn To Manage Them Responsibly - I’m a proponent of credit card usage. It’s certainly not for everyone, but I think it’s ultimately the best way to spend money and track expenses. Not only do credit cards offer all sorts of unique usage perks like extended credit card warranties, credit card protection against bankruptcy loss, free credit scores, and all types of free airline miles and cash back credit card rewards, all of your transactions are archived into your online account, sorted, and displayed into easy to understand purchase categories for practical management.

Instead of having to dig through piles and mounds of accumulated cash purchase receipts stuffed into folders, filing cabinets, or boxes, I rely heavily on my online credit card accounts to trace, track, and fine tune my purchase habits to fit my budget. Because I use my credit cards to buy almost everything (even for onetime $1 packs of gum), I can always calculate my usage for any given time frame and type of spending – like how much gas I spent this month, or how much I spent eating out at restaurants for example. Of course, I want to strongly emphasize a caveat – credit card usage is not very everyone and some people, due to their uncontrollable shopping habits and irresponsible use of credit, have no business even touching credit cards. However, for the vast majority of consumers, they’re invaluable and powerful tools to have.

5) Stop Using Cash If You Can Help It – Yes you heard me right – stop using cash and learn to use credit or debit cards responsibly from the start. Unless you’re admittedly irresponsible with credit, have a history of credit related troubles, or are simply too immature or financially ill informed to handle revolving debt, it may be time to wean yourself from a cash only lifestyle. For those of you who have had issues with unpaid credit card debt or have a knack for engaging in shopping trips gone wild, you might want to stick with cash only for now. For everyone else, please consider the benefits of credit usage and the downsides of cash. Cash is inherently dirty to handle as it’s often touched and handled by all sorts of people. There’s a reason why our moms always tell us not to put our fingers into our mouths after handling money – cash is incredibly filthy.

For those looking to streamline their finances and promote a clutter free household and office space, a credit card is immensely better at accomplishing that than compared to cash. Cash usage has a knack for creating massive amounts of loose change. Unless you can get in the habit of quickly exchanging those loose coins for consolidated and larger sums of money at free coin counting locations like Coinstar, you might wind up with loose coins all over the place – on kitchen counters, inside sofa cushions, and randomly stashed away in bedroom drawers and forgotten piggy banks – losing precious interest earning income in the process.

Meanwhile, credit cards are not only hygienically cleaner than cash, they are also inherently more streamlined and much more amicable to online and electronic expenditure tracking, resulting in no residual coinage trash like cash does. Not only can the wise use of credit cards help you improve important financial factors like your credit score, but the savvy use of card benefits such as balance transfer periods can also help you weather difficult but temporary financial emergencies without the need to seek out additional loans from banks or resort to something as potentially destructive as loan sharking payday loans. If you can handle the responsibility of using and managing card based payments, they are certainly the way to go in my opinion. Credit cards and bank cards are integral components of how I streamline my paperless life and how I effectively manage my personal finances.

Ask yourself this question – when was the last time you balanced your checkbook? Do you even know what balancing a  checkbook entails? The fact of the matter is, writing checks and issuing payments in the form of paper checks is a steadily dying practice, thanks to the tremendous growth of the Internet and all of the new fangled technological advancements in the area of electronic and automated telephone banking (even phone banking is getting phased out in favor of the web). Much the same way the future of newspapers and the outlook of traditional forms of written news are being called into serious question, and much the same way they are being slowly rendered irrelevant by the overwhelming convenience and cost efficient benefits of the World Wide Web, so too will the practice of check writing and manually balancing accounts ultimately go the way of the dodo bird.

Personally, I can barely recall the last time I actually went through the hassle of balancing my checkbook manually. The tedious bean counting practice of manually comparing my own personal account records with the recordation information provided by monthly bank statements is simply not something I’ve readily adopted over the years. The last time was probably in high school when my mom sought to teach me about basic account management by forcing me to watch her go through the motion of recording transactions neatly on the gridded transaction register that comes with each set of checks. But other than that first initial lesson, I don’t think I’ve ever done it in real practice. After all, I bank online almost exclusively, and other than the monthly rent checks I write, I seldom glance at my checkbooks anymore. In fact, I highly recommend readers do the same. We are entering the new technological age where efficiency, speed, and identity security are paramount concerns. Electronic banking and online bill pay offer the type of convenience and security benefits that paper checks and manual payment systems simply are unable to provide.

Write Personal Checks Sparingly To Minimize The Risks Of Becoming An Identity Theft Victim

If you asked me, checks are nothing but potential identity fraud cases waiting to happen. After all, you wouldn’t go about your daily life randomly handing out slips of paper with your complete personal identification and financial information scrawled on them would you? But that’s basically what you’re doing when you open up your checkbook and issue a personal check. Personally, I write very few checks nowadays, and here’s why. When you write a personal check at your local Safeway or CVS, or when you cut out a check to your local pizza delivery guy, you are opening up a tremendous security risk by leaving the check behind. On that check is your name, address, phone number, bank’s name and address, bank account number, bank routing number, and even your actual handwritten signature. Oftentimes, as is the case at most supermarkets and department stores, cashiers even request additional identification from you and write the information directly on the face of the check. This additional ID request can include sensitive information such as your driver’s license number, your social security number, and even your birth date.

While many banks eventually mail the used canceled check back to you, not all banks do. Some merely scan the checks and upload the displays onto your online account for you to see. It’s almost impossible to know how many sets of eyes have viewed the check and how many scans or copies were made. What’s exceedingly apparent is that anyone who sees the front of your personal check has sufficient information to open fraudulent bank and credit accounts in your name. One very unknown fact about checks is that anyone can take an account number and routing number off the bottom of a personal check and create new fake checks with them. The name displayed on the check doesn’t even have to match the actual customer name on the underlying bank account in question. Oftentimes, retailers and banks simply don’t check to see if the numbers on the check match up with the right names for that account.

While I personally abhor writing checks, viewing the practice as not only archaic but outdated, there are still limited circumstances when I simply can’t get around it. Because I lease my current condo apartment from an ordinary pair of mom and pop landlords, they’re not properly equipped to handle credit card payments. As such, each month I’m obligated to mail a personal check out to them to cover my monthly rent. Sometimes, you have few alternatives and must write out checks, and that’s acceptable in limited circumstances like paying your rent, your mortgage, or paying your monthly credit card bill. But if some traveling salesman or pizza delivery guy comes to your door, don’t write him a check, because all you’re doing is giving him a potential tool (a blank check if you will) for trouble. Even if it’s the seemingly innocent girl scouts selling cookies at your door, I recommend paying by cash instead of paying by check so long as the sum is not too prohibitive. Avoid check payments if you can unless you’ve already established a history or measure of trust with the person or company.

Online Banking Is Truly A Much More Efficient Way To Balance Your Checkbook and Track Your Account Finances

The actual practice of balancing your checkbook is a method to verify and confirm that your own personal records accurately match your monthly bank statement transactions. The purpose is to catch mistakes and unauthorized transactions as they happen. While most bank transactions are processed and recorded accurately, sometimes mistakes occur. Usually, bank customers have anywhere from 30-60 days to bring the accounting error or unauthorized transaction details to the attention of their bank. Failure to notify the bank in time about any account discrepancies may result in forfeiture of the bank’s liability to pay you money to make up for the difference. That’s why it’s generally important to balance your checkbook, or reconcile your account balances as accountants like to put it. The best way to do that is to get in the habit of banking online, particularly with the aid of Internet banking aggregators. Online banking not only affords you accurate and real-time updates of your bank accounts on demand, it also provides a variety of account history information to help you budget your spending.

By giving you instant access to your account balances at all times, online banking  helps you plan accordingly. Failure to know how much money you have in your checking or savings account on a regular basis may lead you to blindly spend more money than you have, through ATM withdrawals, excess check writing, and debit card purchases, causing you to incur unnecessary bank fees and charges. Protecting yourself from overdraft and bounced check fees is a must when it comes to sound financial planning.

There are a variety of bounced check and insufficient fund fees that banks and merchants levy when there isn’t enough money in your bank account to cover your authorized checks. A single bounced check can easily cause $50 or more as not only the bank will charge you a $20-30 processing fee, but the merchant who received the paper check from you is likely to charge you an additional $20-30 merchant fee as well for passing a non sufficient fund check. Without knowledge and daily tracking of your checking account balance, insufficient fund and late payment fees can quickly add up and spiral out of control. For the overdraft prone, many banks currently offer overdraft protection to ensure that your checks never bounce and that all ATM and debit transactions still go through. While you’ll still have to pay the bank’s overdraft or bounced check fee, at least with overdraft protection you can avoid having to pay the merchant’s return check cost, and stay in good standing with the payee and the people you do business with.

Another service many banks now offer is the option for customers to link their checking accounts with a savings account. In the event the customer accidentally exceeds his or her available checking account balance, funds from the linked savings account will automatically be used to satisfy the shortfall. While there is usually a small transaction fee for this automatic coverage via the savings account, the charge (around $5-10) is often substantially less than having to pay a non sufficient fund charge to the bank and an additional bounced check fee to the merchant.

While some banks also allow checking accounts to be linked up to credit cards as a backup source of funds in the event of a cash shortfall, I don’t recommend this option. In the event of insufficient checking account funds, the overdraft becomes a cash advance on your credit card. Oftentimes the cash advance fee is levied immediately and cash advance interest charges start accruing immediately. The better option is to utilize the linked savings account alternative, mentioned above.

View Your Online Bank Accounts Daily and Mentally Keep Track Of Your Balances Throughout The Day As You Spend Money

When I speak of balancing my own checkbook, I’m not actually talking about sitting down with wads of purchase receipts and manually matching handwritten checkbook transactions to information found on my monthly bank statements. That would be much too unwieldy and time consuming of a regular task to undertake. In this day and age, between writing checks, swiping credit and debit cards, and using online bill pay, it’s simply too much work and too cumbersome to carry around a paper register and write down every single transaction. However, that doesn’t mean I am not tracking my finances and transactions at all times – I’m simply using a broad mental tracking method to keep tabs on my check, debit, and credit expenditures as opposed to using a manual recordation approach.

The whole point of keeping those accounts balanced is primary to catch those rare but pesky bank recordation mistakes and to ensure that you have even funds in your actively used checking accounts at all times to handle payment requests. For those who want to adopt the same mental tracking method that I use, it’s actually quite simple – all you have to do is get in the habit of viewing your online account balances on a regular basis. Ideally, you’ll want to check your bank account balances every single day. There’s nothing particularly obsessive or compulsive about that. After all for example, if you’re looking to lose weight or count your calories, you would want to step on that bathroom scale regularly to track your progress. In the same way, you want to know where your bank account balances stand at all times. You want to always have a mental figure for the day and make sure you spend well below that amount. If you are new to the practice of mental tracking, you may want to keep a small transaction log (like the ones used for checkbooks) on your person until you get the hang of it. But ultimately, the goal is to rely on mental tracking instead of wasting time and effort writing down every single day to day transaction.

Since all of my credit card, checking, CD, and online high yield savings accounts are linked together on the web and enabled to make automatic monthly debit payments without my continuous oversight, I always make sure I have sufficient funds in my checking account to satisfy all upcoming bill pays. For those who utilize automatic debit payments to handle recurring bills as I do, It’s important to establish a sufficient monetary cushion in your checking account to handle unexpected ATM withdraws and debit card uses to avoid having to pay insufficient fund charges or late fees.

Some banks like Bank of America offer special enrollment programs to help customers better track their spending by rounding up purchase amounts to the nearest dollar. With the Bank of America Keep The Change program, each time you use your Bank of America check card (essentially a debit card) to buy something, the purchase amount is rounded up to the nearest dollar denomination and the difference is automatically deposited into a linked savings account. Not does only does the program greatly promote savings, it makes it a lot easier to mentally keep track of daily purchase transactions as you don’t have to contend with adding up cents.

Using Credit Cards Is Actually A Smarter Way To Manage Your Money Than Using Checks or Debit Cards

The practice of using bank debit cards to manage money is a growing trend as society steadily moves away from cash and check transactions. However, the reality is that most people don’t manage their debit card spending very well and most don’t balance their debit transactions daily, either in written form or mentally, like I do. Personally I’m not a big fan of using debit cards. In my opinion, debit cards are simply check writing in glorified plastic form, minus some of the potential identity theft issues discussed earlier. While it’s substantially safer and more secure than writing paper checks, debit cards still come with the same problems inherent in check writing – payment amounts are withdrawn from your checking account immediately and thus you have to make sure you stay within your checking account limit at all times or face having to pay over the limit fees.

The better solution is to go with a payment mechanism that does not rely on immediate account debits – like credit cards. Due to grace periods inherent with credit cards, compared to debit and check payments, there is less worry when it comes to insufficient fund requirements and bounced payment requests. Credit cards also offer substantially stronger fraud protections against unauthorized transactions and charge mistakes. Oftentimes a quick phone call or an explanation letter is enough to get unauthorized credit card charges removed from your bill, and the best part is that you don’t lose any money while the billing dispute is going on.

Ideally, credit card usage usage is the way to go in an otherwise perfect world. In a perfect world, all cardholders would be responsible credit users with the self control to not spend wildly beyond their means, and would be able to always make sure they have enough money to pay off their credit card balances every month. Unfortunately, this is not a perfect world we live in and not everyone is qualified to use credit cards as their primary method to pay for things.

I consider myself one of many rate chasers out there – savvy savers who hunt for the best annual percentage yield (APY) interest rates at banks and credit unions, and who are keen on quickly moving large sums of money from one account to another in pursuit of that financial ideal. High yield interest rate chasers seek out the highest available interest rate offerings possible, whether available at popular brick and mortar branches or whether available only through obscure online banks. We keep tabs on them all regularly and shift our bank balances around in pursuit of that elusive, but perfect high yield savings account. Rather than be content with letting our savings accounts sit idle, earning stable, yet passive interest growth, rate chasers such as myself prefer to actively manage our bank accounts to maximize interest earnings. Interest rates periodically change, thus so should we. Currently, I use my compiled list of the Best High Yield Savings Accounts to actively keep tabs on bank rate updates and changes.

High Yield Savings Accounts Offer Not Only Liquidity, But Rock Solid Financial Security and Reliable Growth As Well

While I have a diversified investment portfolio made up of high performing stocks, bonds, exchange traded funds, and mutual funds, I still try to put a sizable amount of what I own in cash form, invested in stable interest bearing savings accounts. The type of money I put in a savings account is money I can’t afford to risk or jeopardize, and the type of funds that I may need to call upon to weather difficult financial times or unexpected financial emergencies. While I personally use credit cards for emergency fund purposes at least in the short term, stable savings account funds make up the bulk of my long term emergency money strategy. I try to keep at least 6 months worth of liquid assets on hand at all times – money that can be quickly converted into usable cash to pay current bills and liabilities on a moment’s notice. You never know what type of sudden unemployment, cash flow, car trouble, or health problems might befall you that might necessitate the need to call upon such an emergency influx of readily available funds. I choose to invest my emergency fund money into savings and money market accounts because they not only provide a modest degree of interest growth that usually outpaces or at least keeps up with inflation, the invested funds are liquid and extremely well protected from loss. I plan to work certificate of deposits (CD’s) into my emergency fund planning approach in the future, but wish to save up more in my savings before dabbling with higher yielding, but less liquid assets like CD’s.

Some people call rate chasers – day traders of the banking world, but I think that’s a terrible analogy. Unlike day traders who trade on short term, violent swings in the stock market, we do not take actions that could even remotely be construed as gambling or high risk stakes. Interest rate chasers tend to be risk adverse, and are almost always play-it-safe type investors and emergency fund builders who seek safety and pursue predictable rates of return, rather than high flying, speculative investments.

Besides, bank accounts, whether checking, savings, or money market accounts are one of the most stable, reliable, and dependent sources of asset preservation. While most traditional banking institutions do not provide investment assets that will make one rich as their rates of return are generally lower than that offered by other investment options such as stocks, bonds, options, or foreign currency exchange, they do provide a very stable and predictable rate of return. Insured by the Federal Deposit Insurance Corporation (FDIC), the potential risk of loss of assets stored in a banking account is virtually nil. The FDIC, an independent agency of the United States government utilizes the full faith and credit of the federal government to protect the assets of all insured banks. Most major savings and banking associations are FDIC insured, and as such most traditional accounts offered by the insured bank, including checking, savings, money market accounts, CD’s, and even IRA retirement accounts are protected from loss. Even if the bank fails, goes bankrupt, goes out of business, gets robbed, burns down, or succumbs to some market catastrophe like the mortgage meltdown or credit crisis, the money stored in a FDIC insured high yield savings account remains 100% safe, up to the coverage amount. For savings accounts, the legal coverage limit is $100,000. If you own substantial assets that exceed this basic coverage limit and want to be 100% safe, you may want to consider spreading your assets among difference asset categories or banks.

Register With The Top High Yield Savings Accounts And Manage Your Fund Transfers As Interest Rates Periodically Fluctuate

There are certain basic steps savvy rate chasers and high yield online bank arbitrage seekers (as I like to them sometimes) take to properly manage their pursuit of high interest savings rates:

1) Open High Yield Accounts With Online Banks That Consistently Offer the Highest APY Interest Rates For Savings Accounts

I currently own several savings and money market accounts with the top online banks that have consistently offered the best APY interest rates. Personally, I avoid savings accounts from major brick and mortar retail banks like Wachovia, Wells Fargo, Bank of America, or even Citibank, since most rarely offer attractive interest rates as they don’t need to offer them to attract customers. Most of these big retail banks rely on convenience and physical location presence to attract clientele. On the other hand, online banking sites, blessed with lower operational and maintenance costs, are highly motivated and more willing to offer competitive interest rates for account holders.

Most of my recently opened high yield savings accounts are with generally well known online banking institution favorites like HSBC Direct, Countrywide’s Savings, WT Direct, E-trade Savings Bank, and Capital One Direct Savings. Oldies but goodies like ING Direct Savings (get an ING Direct Sign Up Bonus), and Emigrant Direct still remain alive and well as members of my complete savings account tracking roster. While the actual order in the interest rate sliding scale changes periodically, the mentioned banks tend to offer consistently high rates. After opening accounts, it’s simply a matter of tracking APY changes and shifting funds around accordingly.

It’s important as a rate chaser to have target bank accounts ready for quick transfers as interest rates change. Back in the old caveman days before the advent of the Internet, opening new savings accounts was cumbersome and limited to local brick and mortar branches, and phone banking was a pain. With the emergence of the Internet and the development of fully functional online banking websites, online funds can now be shifted around instantly with a few strategic key strokes. To manage your online accounts and prep them for transfers, all you have to do is register for online account access and set up linked ACH electronic access. To set up ACH transfer permissions, you’ll be required to submit information about the bank account that you want to link up – including the bank account number and the banking institution’s ABA routing number (you can ask your bank for this information). Frequently the online system will initiate two small denominational test deposits into your linked bank account, the amounts which you’ll have to verify to confirm that you are the actual owner.

2) Be Watchful Of New Bank Account Credit Report Check Penalties, and Electronic Bank Transfer Limits

If you’re like me, you try to maximize your money whenever possible. In my case, so long as the resulting effects don’t put myself in a potentially worse off financial position and the necessary actions to get me there aren’t too prohibitive, I try to go for the gold whenever possible. For those looking to open multiple bank accounts, one thing to keep in mind is the health of your credit score and credit report history. When a new savings or money market account is opened, some banks initiate a hard credit check. The resulting hard credit pull, as it is sometimes called, may result in a small credit score hit in the nature of a request by one seeking credit. Not all banks initiate a hard credit pull that will ding your precious FICO score for new savings account applications, but some do. Examples of online bank account applications that result in harmless soft credit pulls include – Capital One Direct Savings, Countrywide, Emigrant Direct, E-Trade Savings, FNBO, HSBC Savings, ING Direct savings, and Washington Mutual.

Another thing rate chasers have to watch out for as well is the federal savings account limit of 6 ACH transfers a month. However, unless you are shifting your savings around every few days, the 6 ACH transfer limit per account should not be too much of a limitation or restrictive hassle. Be mindful that the transfer limitation also applies to money market deposit accounts as well. For most comparative factors, savings and money market accounts have little differences except money markets usually provide slightly higher interest rates and sometimes offer check writing privileges. However, money markets usually have higher tiered minimum balance requirements, although that is not always the case.

3) Manage Your Portfolio Of Multiple Savings Accounts By Using An Account Aggregation Service

To keep an eagle eye on your bank balances and army of savings accounts, I recommend using an account aggregation service like Yodlee, or Mint.com. Yodlee in particular offers its banking account consolidation service through other financial providers as well, such as Bank of America. In my case, I utilize Yodlee through Fidelity’s Full View access, which allows me to link up all of my high yield savings accounts and money markets to Fidelity Investments, storing my account passwords securely so that I can easily view my regularly updated account balances from one location. To make actual transfers however, you’ll have to log into the desired bank account directly.

4) Periodically and Regularly Shift Your Bank Balances Around As Major Interest Rate Changes Are Issued By the Federal Reserve

One thing to note is that I’m not a rabid or fanatic rate chaser. While some hardcore rate chasers shift their money around as soon as interest rate offerings change the slightest, I prefer to my make shift once or twice a month at the very most – call me a mild rate chaser if you wish. Usually I only shift my balances around in pursuit of higher APY rates every two or three months on average. Thus I don’t go hog wild over every slightest budge in APY, although there are lots of super online rate chasers who do though. Just look at those crazies who post on Fatwallet forums – they go nuts over a single .01% change.

Frequently, I fashion my fund transfers from one savings account to another around major interest rate moves by the Federal Reserve when I know major changes are coming my way. Upcoming federal reserve meeting dates on the calendar greatly interest me because decisions by the Federal Reserve frequently have a correlative effect across the board on the interest rate offerings by major banks. Rate cuts by the Fed usually signal subsequent APY interest rate drops by banks in a matter of days. Similarly, raises in the Fed Funds rate usually signal potential banking interest rate increases. Thus I usually try to make my electronic fund transfers as major rate changes are made across the board in response to Fed interest rate moves. Usually there is a lag time of about 1-2 weeks before banks at large fully and collectively respond to Fed announcements. Keep that in mind as well, lest you shift or chase that higher APY interest offering prematurely.