Thursday, June 28, 2007

Checking account & How to write a check

Similar to a savings account, its an account in which you can write checks. When you open a checking account, you will get a check book. Many banks charge a fee, others give the first check book for free. Instead of using cash to pay for things, you can now write a check. Its convenient and somewhat easy to use. I say somewhat easy because at the beginning, you may make mistakes when you write a check. You have to be more financially responsible with your checking account than your savings account. If you write a bad check (meaning there is insufficient funds in your checking), the bank will charge a fee and the check may either bounce back or the bank will cover it.

Here's one thing you should take from my experience: "ALWAYS BALANCE YOUR CHECKING ACCOUNT." If you put money in, record it and add it to the current balance. If you take money out or wrote a check, record it and make the deductions from the balance. If you get lazy and you don't do this, you are going to throw yourself off and you are going to wonder how much money you have in your checking account. I personally use Microsoft Money software to track my checking account (I also use it for other purposes such as tracking my investments and other money stuff).

In the age of digital technology and internet, the art of writing a check may be lost. Most people pay their bills online than mailing their check and putting a stamp on the envelope. But there will be a time when you need to write a check out and so here, I will teach you how to write a check

Step 1) Very simple, write the date next to the "Date". You might want to use numbers instead of writing it out. You don't have much space to write the whole date out in letters and numbers.

Step 2) Find out who you are writing the check to and write the name on the line next to "Pay to the Order of"

Step 3) After that, write the correct amount in the box next to the "$"

Step 4) On the line under "Pay to the Order of", write out that amount from Step 3 in LETTERS. You can either print it or write in cursive. Most people tend to mess up here. If you are writing a check out for $1433.21, it should read "One Thousand Four Hundred Thirty Three and 21/100" MAKE SURE YOU WRITE THIS OUT CORRECTLY!!! Be careful where you put the word "and". ***If there's lots of space between your writing and the word "Dollars", draw a line in between them.***

Step 5) Sign (DON'T PRINT) your name on the line near the lower left hand corner.

Step 6) This is optional, but on the line next to your signature is the memo line. It may say "For" next to it. You don't have to put anything on there. Some companies ask you to write the account number or policy number on the memo line so that they can credit the right account. (There could be more than one person who has the same name as you).

Step 7) Note the check number, date, the payee and the amount on the check. You should record this in the check ledger, located near the front of the check book. Make the appropriate adjustments on the balance. In my example, if you had $5000 in the checking account and you wrote a $1433.21 check, the new balance would be $3566.79.

Step 8) When you get your monthly bank statement, you want to make sure everything is accurate. (even banks can make errors. Its rare, but it does happen).

Near the end of your check book are deposit tickets. If you want to deposit money into your checking account, you would use these ticket. I personally deposit money into my savings account and then go home and then transfer the money from my savings to my checking account online. You don't have to do it my way, I just find that way easier for me.

About those numbers on the bottom of your check:
1) The numbers on the bottom of your check includes your bank routing number, your checking account number, and the check number.
2) The first 9 digits is your bank routing number.
3) The next 9 digits is your checking account number.
4) The final 3 or 4 digits is your check number, which is also located on the top right hand corner of the check.

Wednesday, June 27, 2007

Savings account

I don't know why I'm posting this. But it seems that there are people who don't have one and probably don't understand what it is.

Simply put, a savings account is a place to save your money and you will earn monthly interest on it. You can open a savings account at any bank. In the United States, almost all the banks are FDIC insured. That means, if something were to happen to your account, your account is insured up to $100,000. So if you had $20,000 in the savings account and someone stole it, you are insured up to $20,000.

Keep in mind, interest rate on your savings account are subject to change. I remember I was getting 5% on my savings account in the 1980s. In the late 1990s to the time I write this, I now get less than 1% on my savings. Then I came across online savings such as EmigrantDirect, HSBC Direct, Citibank e-savings, and so on that gives 4.50% to 5.10% on their savings accounts. These too are also FDIC insured.

So how you open a savings account? Go to a bank and ask to open one up. They will tell you what you need to open one. I would pay special attention to their fees (if any), the minimum balance requirement, and the interest rate they offer.

What can you do with your savings account? You can deposit and withdraw money from it at anytime. Though, you won't be able to pay your bills with cash (and no legit company is going to accept cash as a method of payment). You need a checking account to pay your bills.

How much should you have in there? I wouldn't keep too much in there since they don't have a great return on them. They are good for short-term uses such as going on vacation or buying a home or for emergencies. Though, I would recommend using money market funds as your emergency fund. They tend to perform slightly better than what you get in your savings account.

If you are going to save for long term such as retirement, you need to invest. This is how people become wealthy when they retire. They invest early and stick with it for the long term. I suggest investing into mutual funds. Some say you should invest in no load funds. I say, it doesn't matter if the fund is a no-load or load fund. Both will get the job done.

Saturday, June 02, 2007

Debt Payment: Simple interest vs Schedule Interest

What is the difference between simple interest versus schedule interest?

Schedule interest is where payments are credited to interest and principal on the due date, whether you pay it a little early or little late. Most lenders use schedule interest method. Your amortization schedule is already fixed since the first day you sign the loan contract.

Simple interest is where the interest portion of the payment depends on the actual number of days that have elapsed since the last payment. If you pay it early, more of your payment is applied toward the principal. If its late, more goes toward interest. If its on time, there is no difference between schedule interest and simple interest. However, if you were offered a bi-weekly payment (meaning your monthly payment is split in half and you pay this amount every 14 days), the savings on a simple interest method is huge!

Take a look at this example:
$100,000 loan with a 10% interest.
Monthly payment is $877.57

With schedule interest calculation (which is used in mortgages), this is how the loan work:
Month 1: $100k x 10% = $10,000 interest
$10k divided by 12 months = $833.33 is 1st month interest
$877.57 - $833.33 = $44.24 goes toward the principal

Month 2: $99,955.76 x 10% = $9,995.576
$9995.576 / 12 = $832.96 is 2nd month interest
$877.57 - $832.96 = $44.61 goes toward the principal

As you can see, it takes a very long time to build equity in your home.

With simple interest calculation (which is used in student loans) and you pay every 14 days, this is how the loan work:
Month 1 (day 1 - 14): $100k x 10% = $10,000 interest
$877.57 divided by 2 = $438.79 bi-weekly payment
$10k divided by 365 days = $27.40
$27.40 x 14 days = $383.60 (first 14 day interest)
$438.79 - $383.60 = $55.19 is applied toward principal

Month 1 (day 15-28): $99,944.81 x 10% = $9994.481
$9994.481 / 365 = $27.38
$27.38 x 14 = $383.32 (second 14 day interest)
$438.79 - $383.32 = $55.47 is applied toward principal

Month 1 summary: Your total payment from day 1-28 is $877.58. $766.92 is interest payment and $110.66 is applied toward principal.

Month 1 - 2 (day 29 - 42): $99889.34 x 10% = $9988.934
$9988.934 / 365 = $27.37
$27.37 x 14 = $383.18 (third 14 day interest)
$438.79 - $383.18 = $55.61 is applied toward principal

Month 2 (day 43-56): $99,833.73 x 10% = $9983.373
$9983.373 / 365 = $27.35
$27.35 x 14 = $382.90 (forth 14 day interest)
$438.79 - $382.90 = $55.89 is applied toward principal

Month 2 summary: $766.08 is interest payment and $111.50 is applied toward principal.

Eventually, the bi-weekly payment plan with simple interest will pay this 30 year loan off sooner by a few years than a traditional mortgage that uses schedule interest.

So far, I have found only one company that use simple interest in debt payments and that is Citicorp Trust Bank, who only deals with Primerica Financial Services' clients. If you are serious about paying your mortgage off faster, I recommend checking out Primerica. When it comes to repaying your debt, there are three questions you should ask yourself before considering to refinance or consolidate:
1) What is my total cost?
2) When will this debt be paid off?
3) What is my interest rate?

The financial industry knows that interest rates is what gets people attention and its a great way to attract new business. What most people forget is that interest rate really doesn't do anything for you. All interest rate does is set the fix payment for the life of the loan. Higher interest rate means higher monthly payment. Lower interest rate means lower monthly payment. Interest rate does not help you pay off the loan faster. Its the rate at which you pay, meaning how fast you pay, that determines your total cost and how soon you will be out of debt. If one bank offers a 6% interest on your mortgage and your current mortgage has 8%, you better ask yourself the first two questions before getting all excited. If you look at all the other people who fall into the interest rate advertisement, all it did is put these people back into longer debt and costing them more in total interest.