Goodbye, money!

I'm pretty sure that money is one of those topics that you're not supposed to talk about. Like religion and romance, it's one of the things most adults spend a great deal of time thinking about, but are extremely unlikely to bring up in casual conversation. It isn't bad, but it's somehow impolite. So, I should warn you that the rest of this post will be all about money. I see two likely outcomes: it will make you uncomfortable, or it will make you bored. In either case, you probably don't want to read it.

It's kind of funny that I'm writing a whole post on finance, actually. I find that as I grow older, my basic nerd orientation is spreading to more and more topics. When I was growing up, I was nerdy about more conventional geek topics - fantasy novels, astronomy, computers, and the like. These days, though, I'm taking that same obsessive, anal approach, and applying it to things like cooking (hello, Cook's Illustrated!), nutrition, index mutual funds, and local planning commissions. Also, Battlestar Galactica. Hey, you can't change overnight.

I've said it before, and I'll say it again: in general, the more impersonal and inhuman a system is, the more I like it. It sounds harsh to say, but it's true. I'd rather buy something online through Amazon than at a store; I'd rather search for an answer on a company's Web site than pick up a phone to call them; I'd rather check in for my flight online than talk with a gate agent.

With that background, you can probably understand why I'm so drawn to the prospect of online banking. Now, unlike other industries, I haven't specifically had bad experiences with banks; the tellers and other people I meet with tend to be professional and pleasant. Still, it's another part of my life I'd like to automate as much as I can. I've been doing direct deposit through DuPage Credit Union for almost a decade, and am unlikely to stop any time soon.

My one gripe with DPCU, and banks in general, is the low interest rate. At one point, the savings account rate was something like 0.25%. After I graduated from college and paid off my highest-interest debt, I started looking around to see where I could more profitably park my money.

I ended up settling with ING Direct. They had a national advertising campaign, but in spite of that, they also run a really clean web site with quite high interest rates that generally hover above 4% APR, which is actually above inflation and provides some incentive to save. I liked the slickness of the system, which they probably didn't invent but did make famous: you link an online savings account to an offline checking account, and with a few clicks you can shuffle money back and forth. It's also fully FDIC insured, which takes a lot of the queasiness out of the idea of "online banking." My DPCU savings account went dormant, and my checking account became more of a sweep account: I would stash enough funds in there to cover the bills, and periodically move the excess over to the online portion.

This all worked well, and eventually I reached the fortunate place where I had enough cash "on hand" (in practice it takes a few days for money to move between accounts, but this isn't a problem so long as you are aware of it) to cover the recommended 3 months of living expenses. Diligently following the advice of personal finance authorities, I started to look around to see where I could park additional funds.

The standard tradeoff you have to look at in finance is between risk and reward. Over the long haul, few investments pay better rates than the stock market, but you always need to be prepared to lose a lot of money in any particular year. I won't need to tap my retirement funds for decades, so all that money is comfortably put away in mutual funds with Vanguard. My short-term funds are very happy in an online savings account. But what about the mid-term money that I may want to spend in the next few years?

Part of the problem for me is defining just what my goals are. Back when I was living in Kansas City, it seemed pretty clear: save up enough for a 20% down payment on a condo, and switch out of the renting lifestyle. In Kansas City, you could buy a one-bedroom condo for about $80 grand, and a luxury two-bedroom for around $150 grand. Since moving to the Bay Area, I've had to seriously rethink that. The absolute bare minimum you could possibly spend on a one-bedroom is $200 grand, and that is NOT in a place where you would want to live. Realistically, I would need to buy something in the neighborhood of $400 big ones just to feel like I wasn't stepping backwards from my current apartment.

I'm earning more now than I was in KC, but as you can probably guess, it isn't four times as much. So, that has forced some re-evaluations. Is it realistic for me to shoot for home ownership? If not, what should I be trying for instead? Because of this uncertainty, I've been less sure of how to best invest. I ended up, for better or worse, coming up with a hybrid strategy. Since it didn't seem likely that I would be purchasing a new house for five years, it made sense to invest at least some of my money in a mutual fund. I didn't want to dump everything in at once, though... I'm a believer in dollar-cost averaging, and with my paranoid orientation, I felt sure that if I plunked down a big check on one day, the next day would inevitably see a market crash. A better strategy, I thought, would be to gradually build up the fund through regular investment, similar to what I do for my retirement, and keep the rest in a more secure location until it is ready to move.

And what should that more secure location be? I'd been really happy with ING Direct, so I turned to them first. The traditional progression of investment options goes something like Savings Account, Money Market, Certificate of Deposit (CD), then Mutual Fund. Each step offers higher average returns in exchange for higher risk or less flexibility. In my case, CDs seemed like a perfect choice. I could earn an extra percent or so of return in exchange for locking up my money for a year. I staggered my investments to build a "ladder" - instead of having a lump sum that came up every year, I made multiple smaller investments with different maturity dates. That way, if I ever needed to start tapping it, I'd be able to do so right away instead of needing to wait a year or taking an early withdrawal penalty.

That's the system I followed for a while, but I eventually decided to leave ING altogether. This isn't in reaction to anything they've done; their site and service have remained as tight as ever, and they even have made some improvements along the way - in particular, they were the first financial site I know of to use a two-stage login with a secret image or phrase, and that is rapidly becoming the standard. No; I left for pure greed: I found a notably better rate elsewhere. Online banking is the ultimate fungible commodity: my money doesn't care what bank it's in, just what rate it gets, and as long as the site isn't too onerous, I'm happy to walk it elsewhere.

After reading about the next wave of online banks, I decided to move on to Grand Yield Direct from the Apple Bank. They actually have a kind of interesting story: unlike ING, Capital One, and the other big players in online savings, the Apple Bank is just a small regional New York State-based bank that decided to open a high-yield online savings account. And, really, why not? It's a perfect way for them to expand without investing in new branch offices. From my perspective, the fact that they don't need to advertise means that they can afford to give a higher rate. They have a minimum to open an account, but once you're in you don't need to maintain that minimum, and so they combine a great flexibility with a great rate. And, of course, they're still FDIC insured.

I've been with them for a bit over a year now, and have been pretty happy. It isn't as slick an operation as ING - in fact, I think they got their website software from the same people who did DuPage Credit Union's - but it is pefectly functional, and does what I need. An extra 0.8% APY may not sound like much, but it does add up, and it's all free money. It worked so well, in fact, that I started backing away from The Plan. I liked the idea of my three-tiered approach (Savings + CD + Mutual), but it no longer made sense, since my savings account actually gets a higher rate than my ING CDs. So, for the past year, I've been siphoning off my CDs as they mature and rolling them into the savings account.

Incidentally - we're now in an unusual situation known as an Inverted Yield Curve. Typically, when buying things like bonds, treasury notes, or CDs, you get a higher rate when you invest for a longer time. This seems rational - if I'm willing to give up control of my money for ten years, I'll want more compensation than if I just let you use it for six months. However, recently, the opposite has been true: you actually earn more money making shorter-term investments than longer-term. The consensus seems to be that this is The Market's indication that interest rates are going to fall in the near future. So today, you may be able to earn 5% on a six-month versus 4% on a ten-year, but a year from now, you may only be earning 3% on that six-month while still getting 4% on the ten-year.

All that to say, while this savings-account-centric approach is a big winner for me today, it's something I may end up regretting. Still, in the worst case, my interest rate drops... I don't have any risk of losing principal.

Anyways! What prompts this post in the first place is that, as of today, I am no longer an ING Direct customer. My last CD matured, and I moved it to DPCU, along with the solitary penny that remained in my savings account. As with every other transaction, ING's website had a great interface for this: when I withdrew that last penny, they said that it looked like I wanted to close my account, and asked if this was so. I clicked "Yes", then selected from a drop-down list explaining why I was leaving. I got a confirmation email, and just like that - poof! - our relationship was terminated. Nice and clean, and I didn't have to talk with a single human being. Needless to say, this made me extremely happy.