Tue 12 Sep 2006
A friend of mine recently went on an overseas trip and asked me for some advice on the best method of being “safe” with his money. I told him about my use of holding accounts and how they can work to keep you “safe” with your money. I thought I’d pass the info along to everyone; I think this strategy is fairly useful and important even if you’re not traveling overseas and I’ll recount an experience of a co-worker to explain why it’s a great idea to employ.
What you need:
The first thing you need to do is open up a few accounts. Ideally, open two checking accounts at two SEPARATE banks along with a savings account at a high yield account like INGDirect.com, HSBCDirect.com or EmigrantDirect.com
*Please note that you should pick banks that don’t require direct deposit or charge fees for little or no activity.
For the purposes of illustration, we’ll say we’ve created the following:
- A no frills checking account at Washington Mutual
- A no frills checking account at Bank of America
- A high yield savings account at Emigrant Direct.
Pick a checking account (the one with the lowest ATM fees & highest ATM access) to become your “holding account”. For illustrative purposes, we’ll say Bank of America is our holding account. On this account ONLY, request an ATM card (I don’t recommend you get one with a Visa/MasterCard logo). You won’t need checks so don’t order any.
The other account (Washington Mutual) will become your standard checking account. This is where you deposit your paycheck or large chunks of money.
The Emigrant account is a secondary holding account where you will push money from Washington Mutual —> to Emigrant. Likewise, you will link your primary holding account (Bank of America) to Emigrant to push/pull money.
Now that you have an official “holding account” you should deposit some money into it. If you’re going on vacation, estimate how much cash you’ll need and put that amount in this account. If you want to get fancy you can use the automated scheduled transfer feature to push/pull a certain amount every week just remember that transfers take 3 or more days.
If you’re not going on vacation, you should deposit enough cash that will last you 10 days of normal cash usage.
We’ll assume that you have $3200 in your standard checking (Washington Mutual) and you’re going on vacation for 3 weeks. You’ve estimated you’ll need $3000 on your trip.
How it works:
From Washington Mutual “standard account”, transfer $3000 to Emigrant direct account. From Emigrant Direct, transfer $1000 to Bank of America “holding account.” Before you leave, safely store all other ATM cards and take your BOA card (along with any other credit cards you need). You now have $1000 accessible via ATM. This will be your total exposure on your vacation trip. If your Bank of America card gets stolen (along with pin) then the absolute most you could lose is $1000 (assuming no bank reimbursement) rather than the full $3000. You’ll still have $2000 in Emigrant as emergency funds.
After you’ve completed your first week of vacation and burned through the initial $1000 then it’s time to transfer another $1000 into that account. Repeat until you’ve completed your vacation and utilized the funds you’ve needed. IT IS VITALLY IMPORTANT THAT WHEN YOU BANK FROM OVERSEAS YOU DO SO FROM A SECURE COMPUTER. Key loggers could potentially record your password and keystrokes. If you don’t think your computer is safe then have a friend or relative do the transfer for you from a safe computer. Although bank security is getting better it is still vulnerable in my opinion. I recommend you take a bootable CD copy of Knoppix to thwart some issues using unsecured computers. Ideally customize the CD to include bookmarked banks.
Why go through the trouble?
A co-worker recently had her Identity stolen. She had her checking, savings and credit card all with the same bank. Upon reporting her ID stolen to the bank, they froze ALL of her accounts for 30 days. She couldn’t charge anything, write a check, or get cash out of an ATM. Worse yet she had just had her direct deposit a couple of days before she reported her ID stolen. Those funds were frozen too.
This system works well when not going on vacation. I like to have my paycheck broken up into multiple banks and routed to other secondary banks with high yield savings. On any given day, I have access to cash funds from multiple accounts and multiple ATM cards and my “freeze” exposure is limited to the funds in those particular accounts.
This system works well to send money to friends or relatives overseas. It is much cheaper than Western Union and the funds are available instanteously. Losses are always limited to the amount in the account.
Lastly, I don’t think people think too often at the level of exposure when having all their “eggs in one basket.” If you have a checking and savings account at the same bank, you risk losing money from both accounts with a rouge ATM thief. By having seperate accounts, you effectively doubled or tripled the level of security by having the banks do some of the work for you.