fdic insurance Archives - Lazy Man and Money

Jim writes about personal finance at Blueprint for Financial Prosperity.

I recently had a chat with one of my friends about online banking, how she had just started checking her account online, using bill pay functions, and managing her transactions through a website. She’s a pretty savvy individual, a mechanical engineer by trade, but not especially trusting of the Internet. She had heard all the email phishing stories, about people stealing your identity online, and the idea of an entirely online bank with no physical locations for her to visit was too much of a jump for her.

I opened an ING Direct account when they were first offered because the high yield interest rate was simply too hard to ignore. I jumped in without looking. I didn’t look up ING and knew nothing of their history, but everything worked out for the best. My friend was not going to do this. So this is my attempt to convince her that online banks are perfectly safe and I’ll use the characteristics at what I consider the best online banks as a basis for comparison.

FDIC Insured

A bank is a bank is a bank. Whether it’s entirely online or entirely offline, you get the same protections under FDIC insurance as long as they are FDIC insured. You can look for the logo on the bank’s website and confirm it using the FDIC’s Bank Find tool. FDIC insurance means that your principal under $100,000 is protected just as it would be at a more traditional bank.

Most Run By Established Banks

Let’s look at the banks I have listed on my high yield savings account bank page:

FNBO Direct: First National Bank of Omaha was founded in January 1, 1857. Bank Find says the bank has been insured since Jan 1, 1934 because that’s when the FDIC was created. FNBO pre-dates the FDIC! (here is my review of FNBO Direct)
E*Trade: E*Trade is known more for its brokerage services but the bank has been around since January 1, 1933.
ING Direct: They were established in August 4, 2000 but trace their origins much farther back to ING Group, a Dutch conglomerate. (my review of ING Direct)
HSBC Direct: HSBC is a London-based bank that only recently began to make a push in the United States, so it’s Bank Find listing is only a few years old. HSBC stands for Hongkong and Shanghai Banking Corporation Limited and it was “established in 1865 to finance the growing trade between China and Europe” according to its website. (my review of HSBC Direct)
WaMu: Washington Mutual Bank has been around for quite some time but its recent incarnation/name was formed nearly twenty years ago on December 27, 1988.
Emigrant Direct: Finally, Emigrant Direct is operated by Emigrant Bank, a New York based bank that has existed since September 30, 1850.

Only One Online Bank Failure

To my knowledge and to date, only one online bank (NetBank) has failed and all the assets were FDIC insured (up to the $100,000 limit). For all intents and purposes, the failure of the bank had nothing to do with the fact that it was entirely online and it was eventually taken over by ING Direct, one of the online banks I listed earlier. NetBank account holders were able to log into their accounts within a few days and there was hardly any interruption of services.

Take advantage of the high yields and lower overhead costs of online banks and open one up today. The only online bank promotion I’m aware of is a $25 bonus for using an existing ING Direct customer’s referral (which isn’t that incredible because you can get higher yields at other banks) but the higher rates probably trump whatever you’re getting locally. Just open one, deposit a little money, and see that nothing bad will happen. :)

Jim writes about personal finance at Blueprint for Financial Prosperity and has a savings account at almost all of the major online banks, it beats keeping all those pennies in his mattress. He is also uncomfortable writing about himself or his mattress in the third person.

I’m amazed by the number of people who seem to be against debt. Debt has become has a problem in America, but I think too many people clump the good with the bad. To the people that don’t like debt, would you take a million dollar loan at 1% interest? I would. I’d immediately put it in a few interest baring accounts that are FDIC insured (I say a few because FDIC insurance doesn’t cover a whole million). At today’s rates, which are historically pretty low, you can make a guaranteed 3% on that money. That means the debt naysayers would be missing out on 2% of a million dollars, $20,000 a year. I’m pretty Lazy, but for $20,000 I can manage to set up some bank accounts.

Good Debt

When you can make more money than you are paying, that’s an example of good debt. Some people call it leverage. Here are some other examples of good debt:

Student Loans – The idea here is that you choose to into a little debt now, so that you can make a lot more money through the rest of your life. That extra income, in theory, should be enough to pay back all that debt and then some. Just remember that if you initially got a bad rate you can refinance student loans and save a lot on interest.
Mortgage – This is an area of wide debate – it might even matter where you live. If you had a mortgage in the early 1990’s there’s a good chance that the debt allowed you to own a home that appreciated in value a whole lot. If you bought in some markets in the last couple of years, there’s a good chance you’ve seen no appreciation and if you sold today would have been worse off than if you rented. In many cases, a mortgage is tax deductable and that’s very nice benefit as well.
Work Necessities – Many people don’t consider a car loan good debt. However, if you need a car to get to your work, I argue that it’s good debt. For it to quality as good debt, you’d have to treat it as purely transportation between two points, not a status symbol. When an expense is necessary to protect your income stream, it may very fit into the good debt category

Bad Debt

Bad debt is debt that doesn’t have an obvious way helping your finances. There’s a lot of debt that falls into the category of bad debt, which is often where bad debt gets its name. Do you use a credit card to buy CDs and don’t pay it off every month? That’s a prime example of bad debt. Many companies will charge you interest of 20% or more. It’s not long until you are paying twice as much for that CD as you should. This does not benefit your finances?

If you go into debt to afford a vacation, that’s bad debt as well. You might feel more refreshed and ready to earn more money, but you need to get your finances in the positives first.

Three Debt Questions to Ask Yourself

I like to ask myself the following questions before considering taking on any kind of debt:
1. Am I going to pay interest on this purchase? With my credit card purchases, I pay them back, so the answer is usually no.
2. Does this purchase preserve or grow my current earning potential? If yes, then it has potential to be good debt. I say potential because it’s not worth going a million in debt to earn a couple of extra thousand dollars a year. It’s also not worth protecting a $20,000 a year job.
3. Am I buying this because I feel “I deserve it?” This is often a danger sign.

It’s not always easy and straight-forward, but understanding the difference can be important.