Liking ING Direct

Since I opened up my savings account with ING last November, I have been drawn to its minimalistic yet functional user interface. It is so refreshing compared to my other banks.

Bank of America used to have a quick-loading interface until they changed it. Its current interface has more functionalities, but of the kinds that I don't need. It has became slower and not as agile as the previous one. Compared to ING's, the size of the main content column is smaller too. Transaction descriptions are wrapped and often end up truncated. You'd have to click twice to see the full description and the full description display replaces the transaction list display. It's cute, but not functional. I rather have a wider main content column so I don't have to be clicking around just to read the full description, just like in their older interface.

Bank of America's disappointing new interface along with their lack of any savings or CD accounts with decent rate prompted me to consider other banks as my primary bank.

At that time I already have a HSBC checking account for me to withdraw money from while traveling abroad since HSBC has branches in just about every place I have and am planning to go.

So, I setup online access to HSBC and found that its login procedure was clunky. Type in username in one screen. Move to another screen to type in your password and clicking your secret word on a virtual keyboard. Cumbersome and misguided security implementation. While the position of the virtual keyboard keeps changing, the relative distance between the keys on the virtual keyboard is constant. A key-logger simply has to record the relative coordinate of each click to figure out your secret word.

The interface is not fancy, but quite decent. One thing I find is inadequate is the lack of running balance in its transaction listing. Transactions are also not posted until the next day. So, if you make a payment for today, the money will be deducted from your account today and you'll see that the available balance goes down. But you can't see the transaction that causes that until the next day.

HSBC's online account opening is also another thing that is lagging behind other online banks I've dealt with. It took me almost two weeks to finalize opening a savings account. I did it in less than half hour with other banks offering online account opening: BofA, ING, ETrade, Countrywide, Wells Fargo, Wachovia, etc.

Yet, I am still sticking with them because of their international branches and also decent savings and CD rates.

But, nowadays, ING is my primary bank. Its interface is quick-loading and minimalistic. There is no distracting in-bank advertisement on the top, sides, or anywhere else on the screen. I don't need to have a javascript-enabled browser to access it. It does not use silly virtual keyboard for authentication. It has a wide main content column so transaction descriptions are not wrapped and truncated. It has running balance. Posted transactions show up immediately. And it has a feature that no other bank has yet: its transaction listing screen shows scheduled transactions that is going to be applied to the account. You get to see all the pending transfer and bill payments together with posted transactions so you get an overall sense of the activity.

The only thing I hate is the screen for entering payee information. Too many small fields so you can't copy-paste information from the payee website effectively. You'd have to copy-paste information in small chunks. It's so frustrating. By far, BofA's bill payment interface and functionality are still the best I've seen.

The rates in ING are not exactly spectacular but also not something to sneeze at either. Among online banks, its rate offering has lately fell somewhat below the average. That really does not matter for me because I'm using it as my primary bank and the cost of not incurring aggravation on myself due to having to use badly designed user interface more than make up its so-so rates.

First Lesson in 2008: Storing Emergency Fund

Already, 22 days into 2008, I am humbled by my mistake of not diversifying. In my previous article, I recognized that I have not been storing my emergency fund correctly because I didn't diversify the maturity dates of the CDs holding the fund.

I stored it in two CDs, the 40% and 60% as I called them. 40% of the fund in a 6-month CD, 60% in a 1-year CD. That had been working great during the economic high prior to late 2007. But, this will be the first economic downturn my emergency fund experiencing.

So, since I had access to the 40% in liquid form (laying around in savings account) earlier today, I put half of it in a 1-year CD, and the other half in a 6-month CD. So, that's 20% each of total fund.

The 60% CD will mature next week. I shall split it of into 3 equal parts, each is 20% of the total fund. The first part will go to a 1.5-year CD, the second to 2-year, and the third to 3-year CDs.

I am hoping to end up with a 3-year ladder with 6 rung, each 0.5 year away from each other. Putting the fund into such ladder makes sense to me. The size on each rung, 20% ($4K), is big enough for many immediate needs and small enough that I can bear the pre-withdrawal penalty.

A longer ladder brings about more rate stability. This bankrate article on CD laddering uses a 5-year ladder with 1-year rung as an example. But with stability, there is also the risk that the fund won't be coping with inflation in an extreme economy.

I think if there is a symbol for living on the edge, and if my generation, gen-X, can speak as one voice, we would have picked that symbol. Our entrance to the world is marked by extreme events. Extreme sports. Extreme weather fluctuation. Extreme economy fluctuation. Extreme job-hopping.

5-year turnaround is too long. Things change much faster nowadays. 3-year is the longest I can talk myself into. There has not been a recession lasting longer than 3 years, and by keeping the turnaround lively enough, I get to stave off the risk of losing its value due to extreme inflation.

Quick, Stash that Emergency Fund

The Fed just made a surprise cut on its short-term interest rate by 0.75%. This will likely bring about inflation as well, and I want my emergency fund to keep up with the inflation, at least.

This also means that Savings and CD interest rates will shortly fall at least by that amount too. How soon? Who knows. But when they do fall, they will certainly fall behind the inflation rate. According to inflationdata.com, the inflation rate in Dec 2007 is 4.08%. Meanwhile, the average 6-month CD rate is 4.66% (4.75% APY) according to bankaholic.org. Fed's cut will likely bring that to under 4%.

60% of my emergency fund is already in CD. 40% was laying around in savings accounts. To keep up with inflation, I need to consolidate them to fixed-rate CD accounts immediately. I don't think there will be enough time to shop around for good deals on CDs and transferring the money there in time before the rate adjusts. I just have to settle for whatever CD rates my current banks offer.

Lucky for me, I've been preparing for this for a while. Back in November, I've setup accounts in ING and E-Trade. I've been banking exclusively with HSBC. My primary account was there. Yet, HSBC had this outdated and slow online account opening mechanism that required you to mail/fax in documents and took weeks (days if you were lucky) to open. With ING and E-Trade, the account opening and funding procedure takes 5 minutes to complete (with ING, it took only 10 seconds!).

I did that and now I have 40% of the emergency funds that was laying around in savings accounts locked away in a 6 months 4.35% APY CD. They were in savings accounts because I had a trip to Las Vegas last December, and preferred to have them in liquid form while I was away. So, when the CD that was holding them matured last November, I simply transferred it to the savings account.

Unfortunately, the other 60% is in a CD that will mature next week. I am pretty certain that by then the rates would have adjusted. I don't know yet where I'm going to put that.

I think I'm going to ladder it. Having my CDs maturing at short intervals from each other exposes me more to bad CD rates. During uncertain economy periods, like we are in now, the bad CD rate may not keep up with the inflation rate.

Mortgage After-Tax APR Comparison

Just want to drop a quick note that I have a spreadsheet that may help you answering that flummoxing question: should I invest or prepay.


Mortgage After-Tax APR Comparison

Invest or Pre-Pay the Mortgage?

Now I come to the point where many others have came upon: to invest or prepay my mortage?

Factoring in interest deduction, my after-tax mortgage interest rate is 3.7%. That's 3.7% guaranteed after-tax investment rate.

I need an investment vehicle that offers a before-interest-tax 5.16% APR to beat that. An equivalent investment vehicle delivering the same kind of rate guarantee is CD. Since CDs are usually advertised in APY with monthly compounding, the equivalent APY is 5.28%. A quick check at bankaholic.com showed only 7 banks offering CDs with higher APY.

The highest is offered by KeyDirect at 5.7% for 120 months (10 years). Unholy cow! But that is the longest CD term I've ever seen and is offered by a bank that I don't want to do business with any longer.

The next one is CountryWide's 5.45% but only for 3 months. Sounds good except that it needs a $10K initial deposit. But building up to $10K takes time and all the while the collected money will be sitting in lower-than-5.16%-APR accounts. The other CD offers do not seem good as well. So, it seems my mortgage gives me the highest guaranteed investment rate for now.






Let's go a riskier route: stock market (includes mutual funds). The tax rate for capital gain is 15%, so, the minimum APR to beat the mortgage's rate is 4.35%. If I invest in various low-expense-ratio index funds or ETFs like VFINX, VTI, SPY, my risk of not making more than 4.35% APR over the next 3-5 years (expecting a baby, see below) is very low. Investing it in stock market gives you the best bang for your time.

Yet, 36% of my income is already in stock market in the forms of 401k and IRA. For me putting extra money in the same basket just increases the risk needlessly. Furthermore, if we own the house, we will be less affected by a recession. That is the virtue of not putting all your eggs in one basket.

Readers who are still with me at this point would probably think, 'this guy is going to prepay'. I would have, but my better half, well, being better, she gives me a better argument.

'We are still young', she argued, 'what is youth without risk?'. We have no children yet. We can basically take as much risk as we want now. We can even be fools and go back to the 30K debt hole we came from without affecting any innocents.

I bought it. For better or worse, I liked the argument. Perhaps I'm just greedy instead of being young. For now, I am reducing the amount of pre-payment from $1500 to $1000/month. Over time, I'll move more and more to the stock market.

When our risk-equation changes, like when we have a baby, I will have to revisit this topic again.

UPDATE 2007-Dec-14: I have a spreadsheet that may help you answering that flummoxing question: should I invest or prepay.

Mortgage After-Tax APR Comparison Goggle spreadsheet.

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Formulas:
Effective APR = APR * (1-TaxRate)
APR = Effective APR / (1-TaxRate)
APY = (1 + APR/q)^q - 1, where q is number of compounding per year.

Income Distribution

I stumbled upon a gem comment today at getrichslowly.org.

# Baba Ghanoush Says:
June 1st, 2007 at 10:55 am

In our house, the discretionary savings gets allocated in this order:

1) 100% to emergency fund (until at least 3 months expenses)
2) 100% to pay off high-interest debt
3) 401K to point of company match
4) monthly contribution to a “big ticket fund”, which is savings for occasional large expenses, like semi-annual insurance, vacations, etc.
5) Roth IRA to contribution limit
6) 401K to contribution limit
7) remainder: 50% mortgage prepay and 50% taxable index fund

I have #1 and don't have #2. I am already doing #3. The line between #1 and #4 is fuzzy. I guess any liquid asset I have over 3 months expense is automatically part of #4. I'm already doing #5.

I have not been doing #6, instead I have been putting down money for mortgage prepayment. I am still forming a plan of what to do with the leftover after #5. That post at getrichslowly.org has a lot of insightful comments that I have not gone through completely yet.

While my goal is to increase my net worth by $100K in 1.5 years, I have to balance it with long-term interest too.

Poor Elderly Couple

While I was queuing up for casher in grocery store earlier today, I overheard the elderly couple in front of me arguing. They were arguing in Chinese about not being able to pay for the stuffs on their cart. They were talking in normal voice probably because they were confident that no one around could understand them. But, I understood Chinese well enough to snoop on them.

Basically, they were worried that they didn't have enough money to buy the stuffs in the cart. The total for their stuffs came to $23. The man slid his card (I couldn't tell if it was a credit or debit card) and the transaction was declined. He tried again and got declined again. They were forced to let go of some stuffs before the transaction was finally approved.

I didn't know where they got their money from, but seeing that they are from Asia, their children probably support them. It is customary in Asia for children to support their elderly parent.

I am from Asia likewise, and I will support my parents when they are ready to retire. I will do it without any hesitation not because I have to, but because I respect them and thankful for them slaving their prime years towards my well-being.

But, now I think I am the first generation along my family lineage to have the chance to not be a financial burden for my children, and I want to take that chance.