Personal Finance

Why I Believe In Online Banks

Congratulations, you have a savings account. Maybe you even have a little bit of money in it. If you’re really lucky, you’ve gotten yourself a decent emergency fund. Unfortunately, if this money is in your regular bank, those shady suckers probably aren’t paying you the interest you deserve. I had my savings in my Bank of America account for years, earning a very sad 0.05% interest rate. I felt used. They were making money off of me like I was a cheap circus monkey. Luckily, online banks have given us all the opportunity to earn slightly higher returns due to the fact that they don’t have the overhead of traditional brick-and-mortar banks.

My Savings Account: ING DIRECT Electric Orange

All you need to do is link your current bank to your new online bank and transfer money whenever your checking account accumulates a little padding. If you need the money, just put in a request and it is transferred in 6 business days.

I chose ING’s checking because of the high 0.9% interest rate (compared to their 0.8% savings rate), the fact that there are no fees, and I can withdraw the money at any time without penalty. There are even better rates available right now through credit unions – for example BCU is offering a rate of 2% on their checking account, but you must live in a particular geographical area and work for one of the companies offering the institution as a benefit. UFB direct offers 1.15% but requires a $5k minimum balance. Just be sure to check the fees and requirements before you open the account. Below is a comparison chart from https://www.google.com/advisor/uschecking:

My CD: ALLY

Let me start by saying that I am fully aware that there are many better ways to invest your money other than into CD’s – you should absolutely contribute first to your 401k or IRA (see my post: Breaking Down IRA’s). I am fortunate enough to have some additional savings that I want for future purchases like a home or wedding, and therefore I know I won’t need it for at least another four years – so a CD is the safest option for it.

A certificate of deposit is a virtually risk-free financial product that is generally offered in one to five year terms by banks. The money cannot be accessed without penalty until the end of the term, but the interest rates are generally much higher than a regular savings account and therefore make sense if you don’t foresee yourself needing the money in the near future and are not fond of risk like me.

I chose a 4 year CD from ALLY bank because:

– Very competitive rate of 1.6% (compared to 0.85% CD rate offered by Bank of America)

– Allows me to increase my rate twice if the bank rates go up. They’re so low now that they’re bound to – so this helps protect against the risk of inflation (see what this means below)

– Ally has an unheard of early withdraw penalty of only two months interest (most banks charge 6 months worth)

I very well may need this money before the 4 years is up, or may find a better place to park the money (the guy who opened my IRA is already urging me to put this money into more diversified investments), BUT because the early withdraw penalty is so low, I can simply break the CD, pay the penalty, and yet still come out about 10% ahead versus going with the three or two year CD because of the higher interest rate.

Obviously if you have a financial advisor in your life, you should try and earn more interest on your money, but if you’re like me and have no debt and need to keep money risk-free in an emergency fund – this may be the right option for you.

Check out google’s advisor https://www.google.com/advisor/uscd to compare today’s rates and see if there is a CD that’s right for you.

Sound like you know what you’re talking about: INFLATION RISK: The value of a dollar does not stay constant when there is inflation. The value of a dollar is observed in terms of purchasing power (what money can actually buy). When inflation goes up, there is a decline in the purchasing power of money (which means you get less for the same amount of money). Therefore, your investment is not earning enough to keep up with the increased cost of living. Interest rates generally rise with inflation.

…Hopefully that didn’t just confuse you more.

 

5 Comments

  1. Pingback: 5 Stupid Money Mistakes We Make In Our 20's - The Frugal Model

  2. You really have awesome tips!!!

  3. Pingback: Building Wealth: THIS is Where You Should be Putting Your Money

  4. Do you still have your money in the CD? I have my own hesitation of going for a 4 year CD even though I know the penalty is 2 months interest only and I already know I would withdraw early. I’m also interested in knowing if you decided to put your money in more diversified investments such as stocks, ETF’s, etc.

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