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Can You Trust Online Banks?

September 22, 2008 by Lazy Man 2 Comments

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.

Filed Under: Banking Tagged With: fdic insurance, high yield savings, high yield savings account, ing direct

4 Investing Ideas for Your Economic Stimulus Tax Rebate Check

June 14, 2008 by Lazy Man 9 Comments

Today’s post comes from Miranda Marquit. She writes about personal finances for YieldingWealth and edits debt consolidation information for Destroy Debt.

The “economic stimulus” tax rebates have begun arriving, and now people are wondering how to spend them. Instead of blowing all that cash on something you don’t actually need, why not put part — or even all — of that money to work for you through investing? Here are 4 investing ideas for your “economic stimulus” tax rebate check:

  1. Retirement account – If you aren’t putting the maximum amount into your retirement account, why not use that tax rebate check to bring it up to scratch? Even with a modest rate of return (around 7 percent) over 20 or so years, you can make a big difference in the end result if you put the money in your retirement account.
  2. Index funds – In general, the stock market is struggling a bit. This means that now is an ideal time to get in (you know, the old “buy low, sell high”). You can buy more units for your money. And if you choose index funds, you can enjoy instant diversification. Over time, the stock market gains. You can take advantage of that buy getting in now, even though the returns are modest, averaging between 7 and 11 percent.
  3. Cash – This is not going to get you a great return right now. But cash investments (like a high yield savings account or a CD) can be a good way to build your emergency fund. And they are safe, if you use a bank that is FDIC insured. You can pad your “rainy day” fund with an infusion in the form of your tax rebate check. The money will grow (albeit slowly), and offer you a bit of a safety net. Besides, the Fed has to start raising rates again sometime. When that happens your savings account yield will increase, and you can ladder CDs into something with a better return.
  4. Growth stocks – If you’re the type of person who can stomach a little more risk, this might be a good opportunity for you invest in some growth stocks. These stocks are riskier, and you could end up losing the money, but it you choose carefully, you just might parlay your tax rebate check into some serious stimulus for your investment portfolio. One of the more promising sectors is clean tech.

What you choose to do depends on your risk tolerance and your investing style — as well as your individual needs. But no matter your decision, you can put this “found” money to work.

Filed Under: Investing Tagged With: cash investments, debt consolidation, diversification, Economic Stimulus, emergency fund, fdic, growth stocks, high yield savings, high yield savings account, index funds, Investing, personal finances, rainy day fund, rate of return, rebate check, retirement account, safety net, stock market gains, Tax, tax rebate, tax rebates

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