WaMu Free Checking is now Chase Free Extra Checking

More changes… WaMu bank accounts are gradually being converted into Chase accounts, and customers will have to log in at Chase.com with new usernames. Mine is switching over May 22nd. The popular WaMu Free Checking account becomes the Chase Free Extra Checking account, and keeps a lot of the useful perks. I received another mailed pamphlet from Chase outlining all the details, but I couldn’t find a link online, so I typed out the highlights below.

Benefits

  • No monthly service fee, no minimum balance requirement.
  • No fee for money orders, cashier’s checks and travelers checks.
  • No Chase fee for non-Chase ATM withdrawals.
  • No fee for Domestic Outgoing for Foreign Outgoing Wire Transfers.
  • You will continue to receive your discounted or free check orders when ordered from us.
  • One insufficient funds/Returned Item Fee will be refunded annually. However, the refund will no longer be automatic, you must call in and specifically request it. Also, it will no longer carry over if unused.

Changes

  • The 0.03 Cash Back debit rewards program is discontinued.
  • We may change your account to a Chase Better Banking Checking account when you do not have at least one customer-initiated transaction over the past six monthly statement cycles (which has a $12 monthly fee if minimum balance is not met).

The WaMu Online Savings account will be converted to a Chase Premier Savings account, with the monthly fee “waived at this time”. I could not find any information on the interest rate, but I have a feeling this account will not return to its former high yields.

Added: According to the letter I received, the account numbers, checks, and ATM/debit cards will remain the same and active.

Bank of America Raises Fees on Checking Accounts

I recently received a pamphlet about the “improvements” that Bank of America is making on several of their checking accounts. But after reading through it, all I see are a bunch of small fee increases.

For example, many people have the MyAccess checking with no minimum balance requirement and no direct deposit requirement. Now, the monthly fee is either $8.95 or you need a direct deposit. And you can now be dinged by the $35 overdraft fee up to 10 times in one day. I guess they aren’t scared of another class action lawsuit. You can see all the pricing changes outlined here.

I guess they need to drum up some more money somehow, and most of the fees are still avoidable. But given that around 27% of their revenue comes from fees, and that there were $36.7 billion of overdraft charges by banks last year, I really think this is another reason banks are pushing their debit cards so much. Not only do they earn transaction fees, it makes it that much more likely that people rack up more overdraft fees. Imagine this: You lose track of your balance once, but make 5 small purchases over two days before realizing. That’ll be $175, please!

Be careful out there… those “free” checking accounts have to be paid for somehow.

Free Personalized Hallmark Card For Mother’s Day

Mother’s Day is May 10th. Get off your lazy bum and send Mom a card! Actually, since you can do this all online and they’ll even ship it for you… go ahead and stay on your lazy bum.

Hallmark is offering a free personalized paper card, and they’ll even ship it for you free USPS First Class. Just register for a free account, choose and customize the card you like, and check out using the promotional code is CARD4MOM. You should see the following:

Via SD. Order by May 1st for guaranteed delivery. Reportedly you can use coupon code APRILCARD for another free card with a separate order. Now, is it weird that the card I picked out looks like an asset allocation pie chart?

Citi Forward Card Review + Rewards Summary

Citi Forward CardI ended up applying for the Citi Forward® Card mentioned several days ago. It ends up being great card for those who want the best rewards on eating out at restaurant and buying anything at Amazon.com. Here’s why…

This card works off the same ThankYou points system as many other Citibank cards. 10,000 points = $100 gift card at stores like Sears, Macy’s, Staples, Old Navy, Gap, etc. 14,000 points = $100 prepaid Visa credit card. 16,000 points = $100 in straight cash (a check sent directly to you). If you can find a store where you can use a $100 gift card = 10,000 points, that basically a penny per point.

What makes this card unique is that you get 100 points for each month you paid on time and don’t exceed your credit limit, as well as a highly touted 0.25% interest rate reduction after 3 months in a row of making a purchase, staying within limit and paying on time (max reduction 2%).

You also get 5 points for every $1 you spend on restaurants, book stores, video rental stores and movie theaters. On everything else, you get the plain vanilla 1 reward point for every $1 spent. There is no annual fee for the card.

5x Rewards at Restaurants
Again, at 1 penny per point with gift cards, getting 5x points is like getting 5% back when eating out. At that rate, eating out $170 a month will get me a $100 gift card every year. Even if you convert to straight cash, that’s still 3.125% cash back at restaurants (5/1.6). Or 3.57% back if you are okay with prepaid Visa card, which I am since they are usable anywhere that takes credit cards.

5x Rewards on Books = 5% back at Amazon
Here’s an interesting question. Who’s the most popular bookstore? Amazon.com. With the Citi mtvU card for college students, the 5% back on books worked on all purchases at Amazon, even if it wasn’t 100% books, since they really have no way of telling. Update: I have verified 5x points at Amazon.com.

Reminder: U.S. Savings Bonds Purchase Deadline

Just thought I’d mention that I used TreasuryDirect today to purchase another $5,000 of Series I savings bonds. If you buy them by the end of April, you can lock in an investment that will get you about 3.08% APR over 11 months. The deadline is fast approaching, and I didn’t want to cut it that close. More details here.

Since the interest on savings bonds is exempt from state and local taxes, based on my tax situation that will bring my tax-equivalent yield to over 3.5%. Not too shabby. I might buy some more, as I think it’s a nice place to store emergency funds – which I see as a permanent cash allocation which I hope not to use – as long as you can wait out the initial lack of liquidity over the first 12 months.

Should I Buy Gold Now To Hedge Against Future Inflation?

Due to the current market conditions, many investors are wondering if investments in gold should be added to their portfolios to hedge against future inflation risks. In the video below (direct link), author Larry Swedroe discusses why he thinks gold is not an appropriate hedge against inflation, as well as some alternative investments.

The debate about gold will probably continue on for eternity, but I tend to lean towards his analysis because gold is too volatile for my tastes. I do like the idea of keeping some physical gold bullion as a hedge against economic collapse, but not as ETFs taking up a huge chunk of my portfolio. I would rather have something that would fit into traditional asset allocations plans, providing both stability and a good (but not perfect) hedge against inflation. So let’s explore the recommended alternatives:

In tax-advantaged accounts like IRAs, Swedroe instead recommends Treasury Inflation-Protected Securities (TIPS) which adjust with the Consumer Price Index (CPI). For this, I have bought shares of the Vanguard Inflation-Protected Securities Fund (VIPSX). I could buy individual funds directly from the government at no cost, but for now I like the simplicity. I even increased my allocation recently.

In taxable accounts, he recommends highly-rated municipal bonds with a relatively short average maturity of 3-5 years. For this, I am looking to buy shares of the Vanguard Limited-Term Tax-Exempt Fund (VMLTX). It is currently about 83% AA/AAA rated municipal bonds, and keeps a maturity of between 2 and 6 years (currently 2.8). The yield is currently a tax-exempt 2.12%, and it has a low expense ratio of 0.20%. If inflation does rise, the yield should rise to keep up.

I’m actually surprised he didn’t bring up commodities funds here as well, which I’ve seen him recommend as insurance against unexpected severe inflation.

My Cash Transfer Hub: E-Trade Complete Savings Account

If you have your cash spread out across several bank accounts, whether it’s to help with chasing higher interest rates, paranoia, or saving for different goals, it can become quite a hassle to transfer money between accounts. I get asked all the time about how I juggle them all.

Part of my solution is to utilize the E-Trade Complete Savings account to connect them all together. This is basically E-Trade’s version of the online savings account which I’ve had for years. From my experience, the interest rate goes up and down (it is currently a so-so 1.20% APY), but it works very well for me as my bank “transfer hub”.

What are some important things to look for in such an account?

Basics and Cost
To start off, you’ll want a bank that offers a very low minimum balance and no monthly fees. A decent interest rate would be good, but a top interest rate isn’t critical since this isn’t where you’ll be keeping the bulk of your funds. You might want to keep a little bit of cash here in case you need to transfer some out quickly, and also to keep your bank from closing out an empty account.

Transfer System
Just about all banks allow ACH (automated clearing house) transactions, but you have one party initiate such transactions, and many “old-school” banks don’t do this. Accordingly, you’ll want your hub account to have the ability to “push” or “pull” funds in and out of multiple external bank accounts, with no transfer fee. Some banks only let you link one or two accounts, while others charge you to initiate transfers. For example, Bank of America allows you to move money to BofA for free, but charges if you move money from BofA using their system.

The E-Trade Complete Savings account has no minimum balance and no monthly fees, you can link an unlimited number of accounts, and there are no transfer fees.

Transfer Speed and Interest Crediting Policy
Of course, you’ll want fast transfer times. Some banks take 3 business days to move money in either direction, with your money in limbo and not earning interest anywhere. However, E-Trade is much faster, with transfer times of only 1 business day (which is how long it should take…). Also, if you schedule a funds transfer from an external account to E-Trade before the end of the business day at 4pm EST, they will actually credit your account the same day, even before they withdraw the money (although to prevent fraud you can only withdraw after 3 business days). However, you will start to earn interest starting that day, even before the money actually get debited from your source account!

Here is a sample screenshot:

In fact, if you initiate a transfer on Friday, you can earn interest at both accounts over the weekend. Here is a sample timeline:

  • Friday: You schedule a transfer of $1,000 from Bank A to E-Trade. You start earning interest at E-Trade on Friday. Nothing has happened at Bank A.
  • Monday: $1,000 is withdrawn from Bank A.
  • Thursday: $1,000 is now available to withdraw from E-Trade. You schedule a transfer to Bank B. $1,000 is debited from your account at E-Trade.
  • Friday: $1,000 arrives at Bank B.

Yes, it will take you a week to move the money, but you’ll be earning interest the entire time due to the double-interest over the weekend. Compare this to other accounts where the money is in limbo for 3-5 total days (3 business day + weekends/holidays) and you’re earning zero interest during that time.

For these reasons, I think the E-Trade Complete Savings account is very useful for the ability to connect any two bank accounts and move money relatively quickly with minimal interest loss. If you already trade stocks with them, it’s basically a no-brainer given the horrible yields on money market funds right now.

I have also heard good things about the transfer speed at GMAC Bank, but I don’t know if it’s quite this good as I don’t have any personal experience with them. I’m also concerned about how GMAC Bank will be around… if they get bought or sold to another bank, the website may disappear as well. I’m already going to miss my WaMu interface when I get forced over to Chase next month.

Amortization Schedules and Principal Prepayment, Part 2: Verification

Yesterday in Part 1, we talked about the basics of amortization and mortgage prepayment. In this post, I just wanted to share some other interesting results I got when tinkering around with the amortization schedule.

Are you always paying the same amount of interest?

As I noted before, amortization is a way to make equal payments but still preserve the right ratio of principal paydown and interest. You can check this using the same schedule of payments as before, except now I’m just looking at it broken down by 12 years instead of 360 months. ($200k mortgage, 30-year fixed at 5%).

If you have a loan of $200k at 5% interest, simple arithmetic will lead you to guess you’ll pay around $10,000 of interest the first year. As you see above, during the first year you actually pay $9,933 towards interest, as your loan balance went from $200,000 down to $197,049 over time. If you simply divide the $9,933 by the average of $200,000 and $197,049, again you’ll get 5%.

This just provides a rough estimate, but you can see that you’re always paying 5%, even as the principal shrinks. Only at the very end does it vary slightly, not sure why exactly, but I’m guessing due to smaller numbers. The lender isn’t ripping you off by having you pay a ton of interest in the first year. You just have a lot of interest to pay! Kind of neat, actually.

Is your investment return from paying extra towards principal really the mortgage’s interest rate?

When you pay down your mortgage at 5% interest, it is often assumed that this is the same as investing that cash elsewhere and earning 5% per year. (Ignoring tax issues.) But is it?

Again, a quick check on the spreadsheet confirms this. Let’s say I am just starting Year 2. If I prepay the entire equity portion of $3,102, this will advance me to Year 3 of the schedule, and I will be shaving off one year from my mortgage. In other words, my $3,102 will be worth an entire year’s worth of payments, or $12,884, in 29 years. This works out to be the same as a 5.03% annualized return. Close enough for me. Again, if you prepay near the very end of the term, the percentage starts to drop off a bit. But remember, if you’re prepaying, you’ll probably be finished with your mortgage well before reaching that point.

I’ve plotted both the effective interest rate paid and the paydown investment return (gain) below:

You can play with the spreadsheet yourself at Google Docs or in Microsoft Excel format.

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Amortization Schedules and Principal Prepayment, Part 1: Shortening a 30-Year Mortgage Into 15

I’ve been tinkering around with my mortgage. Have you ever wondered how the monthly payment was determined? It’s called amortization. An amortization schedule is a way to make equal payments over a period of time, but have the payments split between principal and interest so that the interest paid over time decreases over time along with the loan amount remaining. It is a balancing act to be fair to both borrower and lender, and you can find a mathematical derivation here.

The most direct way to see where you are on your amortization schedule is to ask your lender to send you a copy. Alternatively, you can generate one yourself by using a mortgage calculator with this feature. Here is the amortization schedule for a $200,000 loan with a fixed interest rate of 5% over 30 years.

(May not be visible in RSS format. Here is the direct link.)

As you can see, in the beginning most of your payment goes towards interest, and only a little reduces your principal, or outstanding loan amount. As time goes on, your payment stays the same, but the chunk going towards interest decreases as the principal shrinks.

Mortgage Principal Prepayment
If you want to pay off the loan in less than 30 years, you’ll have to pay more than required. This is known as principal pre-payment. The effect of making such additional payments can be visualized by imagining that it moves you “ahead” in the amortizaton schedule.

Here’s an example using the schedule shown above. Let’s say you’re just getting ready to make your first payment of $1,074. At this rate, you still have 359 out of 360 monthly payments left to go! How much money would it take to shave off one extra payment off the end? To find that, you just have to look at the principal portion of Month #2, which I highlighted orange: $241.

If you pay $241 additional with your first payment now, you’ll won’t have to pay the $1,074 due on Month #360. Why is this? Working backwards, you can confirm that this is pretty much a 5% compounded return on $241 for 30 years, as expected. In addition, you’ll be shifted forward to Month #3 on the schedule. So next month your (still required) payment of $1,074 will have a bit more applied towards principal, and a bit less towards interest.

Making a 30-year Mortgage into a 15-year Mortgage
This actually creates an interesting way to shorten your mortgage. What if you kept paying the next month’s principal payment on top of your required $1,074 each month. You’d add on $241, then $243, then $245, and so on. Every month you’d shave off one month off the end, leaving you with a 15-year mortgage! You can also imagine this as skipping every other payment by just paying the principal and saving the interest.

This can work out nicely because the extra required will start out reasonably low at $241, and increase gradually with time along with your income and/or cashflow.

An alternative is to add $510 to every payment each month to shorten the term to 15 years. Although if you’re sure you want to do that, you might want to just get a 15-year fixed mortgage at a lower interest rate.

Read on in Part 2: Return on Investment Verification.

Bogle & Enough: Not Everything That Counts Can Be Counted

John Bogle is the founder of the Vanguard Mutual Fund Group, and the creator of the first index fund. Reading his latest book Enough: True Measures of Money, Business, and Life was like listening to one of his many speaking engagements, a distillation of a lifetime of wisdom from a man who changed the way that billions of dollars are invested today.

As Heller famously responded when told by Kurt Vonnegut that a hedge fund manager had made more money in a single day than his classic novel Catch-22 made in its entire history, “Yes, but I have something he will never have… enough.

Very simply, this book outlines the problem with making how much money we have the way to measure “success”. Such a philosophy affects how individuals invest, how business is conducted, and how lives are led. Bogle warns that this is taking our country down a dangerous road, which may leave our future less bright than the past. As Albert Einstein said: “Not everything that counts can be counted.”

His words about the need for character, accountability, and stewardship definitely ring true. However, I just can’t see the people of Wall Street turning down all this easy money without some “convincing” from the rest of us. Sure, they may feel a tinge of guilt now and then. But as Bogle paraphrases Upton Sinclair: “It’s amazing how difficult it is for a man to understand something if he’s paid a small fortune not to.”

In my opinion, it all ends up falling on us common folk as a whole to vote with our own dollars by not allowing overpaid CEOs as shareholders and consumers, not investing in high-cost complex investments, and not valuing “stuff” so much. We need to change things from the bottom up, not just with top-down rules and regulations.

Finally, my favorite part of this book is how Bogle acknowledges that his success was largely due to a mixture of luck and the assistance of many other people who believed in him. Too many successful people look back and think they did it all themselves. Sure, they may have worked very hard, but every one of us had help. A loving and supporting parent. A teacher who went the extra mile. A mentor who shared their own experience. Knowing that you didn’t do it alone, makes it easier to stop thinking of only yourself, which helps you find the balance of “enough” that includes thinking of others. At least that’s how I see it.

Recap
This is not a book about what kind of stock to buy. If you want Bogle’s view on that, read the more in-depth Common Sense on Mutual Funds or the concise Little Book of Common Sense Investing. I actually like the short one better.

Nor is this a book about frugality or living below your means. Instead, this tends to be more of a “Big Picture” book, about our definition of what “success” is. What should our goals be? What do we value? If you’re looking for some guidance in this area, or feel like there is something missing to this pursuit of money, then this is the book for you.

Quick Review of ESPlannerBasic, Free Version of ESPlanner Retirement Planning Calculator

Background
There are an increasing number of sleek but simplistic retirement calculators out there, and most of them are basically the same. You put in your savings rate and overall asset allocation, and it crunches some numbers based on historical market returns to see if you can replace 80-100% of your current income in retirement.

Then there’s ESPlanner, which represents “Economic Security Planner”. It is based on consumption smoothing, an economic theory where the primary goal of financial planning is instead to avoid abrupt changes in one’s standard of living. Here is one graphical explanation:

This method has gotten some extra publicity because it often tells you that you need to save less money as compared to other calculators. However, since the software cost $149, I never really got to try it out. But now, they have released ESPlannerBasic, which is a slightly stripped-down but free version that everyone can tinker with. For example, it assumes that everyone will live to 100 in its computations.

You input various financial information like income and assets, and the calculator will give you a “spending and saving plan” for each of the rest of your life. I think the most important column is savings:

Saving is the recommended increase (reduction) each year in your regular financial assets. This saving is over and above your specified contributions to retirement accounts.

Sample Run of ESPlannerBasic
Let’s take a look at some of our results, using very rough numbers and a retirement goal at age 50. (Sound familiar?) Our “standard of living” has us spending $60,000 per year as a couple forever. During the next few years, we are supposed to save about $75k per year. (I specified zero future retirement contributions for simplicity, it’s all included in the $75k.)

Then at my chosen retirement age of 50, things change fast, with us starting to take large withdrawals from savings:

That’s be scary! Then, at age 65, the calculator assumes that Social Security will kick in, which almost has us at a zero savings rate.

Criticisms and Compliments
My thoughts on this calculator are pretty much in line with my thoughts on consumption smoothing in general.

For starters, I don’t like the idea of a calculator telling me what I should be spending in retirement. I like the idea of constructing this on my own, based on conscious decision making. However, the fact that the calculator chose $60,000 per year is creepy. Beforehand, I had already estimated my non-housing expenses in retirement at $24,000 per year. My housing costs are current about $36,000 per year. Add them up, and you get.. $60,000! Of course, at that rate the mortgage should be paid off after 29 years. Still, just an interesting coincidence?

In addition, the calculator gives very specific results based on what are essentially wild guesses. I have no idea if my income will stay the same, increase, or decrease. I have no idea if Social Security will change the full retirement age to 75, or if benefits will be means-tested. I have no idea what tax rates will be 30 or 40 years from now. So I’d take the results with a big grain of salt.

However, since the calculator is free, I can play with many different scenarios and see how different inputs change the given results, and this may help in my retirement planning. What are the most sensitive factors? I hope to try exploring this next.

Via Bogleheads and WSJ Wallet.