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Common Questions We All Have About Banking

1. What's The Fed? How Does The Fed Rate Affect All Other Rates?

The United States Federal Reserve, commonly referred to as "the Fed", was created by the United States Congress formally to help provide the U.S. Economy with a stable and flexible financial system.

In its' purest sense the Fed was created to ensure a good Economy while keeping inflation to a minimum. While the Fed sets rates, it only dictates short term rates (Overnight banking rates and Treasury bills and bonds). Short term rates affect long term rates in just a short period of time. The Fed changes rates in response to inflation. An increase in inflation just indicates that your money buys less for the same product or service. When McDonalds raises the price on Super Size Fries by a quarter, that's inflation knocking!

When interest rates are increased or decreased it dictates how much interest people will have in purchasing goods or services. If a rate is decreased, things become more affordable and the number of goods or services sold increases. In affect more money changes hands. Common sense would tell you this is a good thing, wouldn't it. I can afford more; therefore I can get more toys. If you think about it further, if everybody had money to buy things, we would slowly run out of goods and services. The law of supply and demand kicks in, the provider of goods or services would in turn be able to charge more. Eventually, if this got out of hand, McDonalds would scrap the Dollar menu for the Two-Dollar menu, then it would be the Three Dollar menu, and four, so on.

When interest rates rise, fewer goods and services are trade. Less people are willing to pay a lot of money for an item and less items are sold. Interest rate rises in affect curb inflation.

So what does this tell us as far as our savings accounts online? If you are enjoying good rates, thank you inflation. If you are not, come on Two-Dollar Menu! In English, if the Fed starts to drop rates consistently, start looking for longer term CDs to secure you good rates.

2. What is the difference between stating the rate as APY vs. APR?

When ever you see a rate listed for any financial product one of these three letters will follow. Did you ever take the time to consider what it means?

 

APY is an acronym that stands for Annual Percentage Yield. In English, if you leave your money with that instrument for one complete calendar year this is exact percentage of interest you will accumulate. Again note the one calendar year.

They take into consideration the compounding affect of your interest. Have you ever noticed that the amount of actual paid interest you receive on your account increases just a little every month? Your monthly interest increases even though you have not added any money to the account. What is happening? They are giving you interest on the past interest you have received. For example, you put $100 into an account that receives 5% interest APY. The interest is compounded monthly. You will notice that ever month, you approximately receive 4.888948540378024% in interest. If that is compounded every month, by the end of the year you will actually receive 5% interest.

APR is an acronym that stands for Annual Percentage Rate. This does not take the compounding affect of interest into account. It is offering you a flat rate.

When you are looking to borrow money, you would like to see a rate in APY. But, you never do. When you are looking to give banks money, you would like to a rate in APR, but you never do. This is because it is not an attractive way to package rates. Using the previous example, if you were borrowing money would you rather see a rate of 5.0% APY or 4.89% APR? If you were trying to grow your money, which rate would you prefer? This is where banks take complete advantage of the APY/APR marketing scheme.

3. How Does Customer Support Work With Online Banks?

Most banks offer you email, live chat, and phone support for customers. Honestly, this is something you should worry about. These people have your money, you should get answers to anything you want to know quickly.

If you are in a hurry, email support is the biggest joke in the world as far as online banking goes. I have tried using email support many times in the past. It usually takes 48 hour to receive a response and it's obvious that English is not the primary language of the people responding to the emails. Which in turn means that it takes 2-3 emails for them to understand exact what you are asking of them. A week to get an answer to a simple question. I wouldn't even bother using email support. I do have to say I did have a pleasant email support experience with ING direct.

Live chat is nice for a quick question. In many cases, you receive a response much quicker than on the phone. If you need to discuss confidential information like your account number, logins, and/or passwords; I would hit the phone. While some banks offer secure chats, they require you to install software on your computer in most cases. If I have to download and install something it takes just as long to wait on the phone. Plus, I will not have another program hogging computer resources from my computer.

The phone is the main stay for support. I find 2 main ways to evaluate the level of support you get over the phone. I cover it in two questions:

1. Wait time to Answer Time- How long does it take for them to give you a solid answer to your question after you picked up and dialed the phone? In most cases anything under 10 minutes is pretty good. Under 5 minutes is fantastic!

2. When you finally get someone on the phone are there constant pauses? This means they are being trained or are not knowledgeable enough to answer the question themselves. When I call someone, I want that person to be a know it all. It makes me feel good about it.

4. How Does FDIC Insurance Work With Online and Regular Banking?

FDIC Insurance is treated no differently whether the account is online or offline. "The FDIC protects you against the loss of your insured deposits in the unlikely event that an FDIC-Insured Institution fails. If you or your family's deposit accounts at one FDIC-Insured Institution total $100,000 or less, your deposits are fully insured. If you or your family has more than $100,000 at one insured institution, you can still be fully insured if your accounts meet certain requirements. You can use EDIE to determine your insurance coverage beyond the basic $100,000 amount."

Here is an easier way to explain it:

If you are single, for every bank that you have an account with the FDIC will insure up to $100,000. This means if you use Bank A, when you add up the balances of your savings, checking, and CDs any amount over $100,000 is not covered. If bank declares bankruptcy and over all of your accounts you have $110,000. You are out $10,000.

If you're married or have a joint partner, you can get some killer coverage. You can actually get up to $400,000 of coverage between you. Here's how:

Account 1- Take out an account or several accounts in your name. That will get you up to $100,000 of coverage.

Account 2 - Have your husband, wife, or partner create an account or several accounts in their name. This will get you another $100,000 of coverage.

Account 3 - Create joint accounts with your husband, wife, or partner. Because they are in both of your names you get up to $200,000 of coverage.

Let see, That's:

Account 1- $100,000

Account 2- $100,000

Account 3- $200,000

A total of $400,000 of coverage.

5. What is an Account Minimum?

As part of their marketing packages all savings accounts online list a minimum required amount of funds you need to open an account with. In the off-line world this was a big thing. I remember my first off-line savings account right after college had a minimum of $300. In the past, accounts required too much paper work to be worth the bank's time. Banks would want insure they had a decent amount of money in your account to be worth their paperwork effort.

Today, you will find that most online accounts require only one dollar to open. Electronic funds are easier to manage and require minimal paperwork, so they encourage you to open accounts.

Just be aware that some banks have a monthly minimum you must maintain or you may incur a penalty of some kind. This usually only applies to high rate accounts. They require this high minimum and as a reward you receive a slightly higher rate than other accounts available at the time. I often see this on accounts that are tagged as Online Money Market Accounts.

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