Ask Dr. Don By Don Taylor, Ph.D., CFA • Bankrate.com

The security of Internet banks

Dear Dr. Don,
I was recently promoted to a commission-paid position from a salaried one. I currently have $10,000 sitting in a checking account. I only need $4,000 max a month to cover bills and other expenses. However, my commission pay fluctuates wildly on a monthly basis. I am saving for the purchase of a home.

I've considered money market accounts. However, the better rate choices are with Internet banks (i.e., ING DIRECT). I'm kind of leery about depositing $2,000 to $5,000 a month into an Internet bank account. How secure is my money with an Internet bank? Can you offer suggestions for a better savings idea?
Kelsie Cache

Dear Kelsie,
Congratulations on the promotion. As you've already noticed, you'll see a lot more variability in your monthly income, so you need to have a cash reserve (emergency fund) that can handle the swings in income. Financial planners commonly recommend an emergency fund of three to six months' worth of expenses.

You're sitting at 2.5 months, so you still need to increase that balance before moving on to your next goal of accumulating enough money for the down payment on a home. No matter how tempting, don't drain your cash reserves to come up with the down payment.

What keeps the bank down the street from stealing your money? It's not the fact that it's down the street. The audit trail that documents the transactions in your account, combined with banking laws and regulations, protect you from larceny or fraud better than the proximity of a branch ever will.

I've been doing this column for more than four years and I've only seen a handful of complaints about customer service from an Internet bank. If they have a good Safe & Sound or Capitalization, Asset quality, Earnings and Liquidity rating from Bankrate and are FDIC insured, you shouldn't have any problems in managing your accounts.

When you're saving for a short-term financial goal such as the down payment on a house, you should be more concerned about the safety of principal than chasing return on the investment. That means that stocks are the wrong idea for this money. If you're putting money aside on a regular basis, use Bankrate's best rates feature to shop banks for certificate of deposit rates. Invest in CDs that will mature on or before the date when you aim to buy that home.

Savings bonds can be attractive too. See the Treasury Direct Web site for current rates on Series I (inflation-indexed) and Series EE bonds. There is a minimum one-year holding period on savings bonds, and the Series I bond has a three-month interest penalty if you redeem the bond within five years.

-- Posted: Nov. 12, 2003