Yes, an Online Savings Account is a Good Idea.
Welcome! If you're new here, you may want to check out my about page to find out why I started this blog, and if you like what you see, please consider subscribing to my RSS feed. Thanks for visiting!
When friends ask where they should keep their money, my first response is always to ask where they keep their savings, and if its at a local bank, to suggest that they open an online high-yield savings account. These high-yield savings accounts — like ING Direct, Emigrant Direct, HSBC, and more — have been around for a while, and offer extremely high interest rates. Yet I always seem to have trouble convincing some of my friends that it almost certainly is worth it for them, and I’m not quite sure why.
1. The interest is nothing to scoff at.
One of the most common reactions I get to the idea of opening an online savings account is that it can’t possibly make that much of a difference.
Some basic numbers, current as of this posting. A regular savings account at Bank of America has an APY of something like 0.20%, meaning if you leave $1000 in a savings account, you’d earn $2.00 in interest over the course of one year — not much. Open a bank account at ING Direct, which has an APY of 3.00% right now, and with that $1,000 you would earn $30.00 in interest over the course of a year.
In my opinion, the difference in interest (an extra $28 in this example for every $1,000) seems like its worth it — but maybe that’s just me.
2. Easy: Easy to Set Up, Easy to Maintain
For some reason, another common reaction is that it is too much trouble to set up an online account.
Setting up an online savings account could not be easier. The online application at most banks like Emigrant Direct or ING Direct takes only a few minutes; you’ll supply your contact and identity information, necessary to open any bank account in the United States, and you’ll have to provide an existing checking/savings which will be linked to your new savings account to transfer money. If anything, the only lengthy part of the application process is the waiting – it can take a few days for the bank to mail you a form to sign and to verify that you entered your linked bank account information correctly.
Similarly, these online savings accounts are easy to maintain. With that Bank of America Savings Account, for example, you are charged a monthly fee if your account balance falls below $300. Most of these online savings accounts, however, have no minimum balance. You don’t have to worry about making sure you keep enough money in your savings account; you can keep whatever balance you want.
3. It’s Liquid
Whereas perhaps more lucrative investments might require you to lock-in your money for a fixed amount of time, these online savings accounts provide a nice return while keep your assets (mostly) liquid. Need to get money out of your online savings account and in to your local checking/savings account? With most of these banks, you can complete a free transfer within two or three business days. While it is true that (in most cases) you can’t have “instant access” to your money, with two or three days notice you won’t have any problem getting to it.
4. It’s Safe
This one’s simple, but worth noting given the current banking crisis: the major online banks, including ING Direct, HSBC, and Emigrant Direct, are all FDIC insured – meaning that if you keep your account balance under the FDIC insurance limits, which in most cases for single accounts is $100,000, then you’re completely covered in the unlikely event a bank collapses. It’s rare, but it can happen to any bank, internet-based or not; for example, when Netbank ran into trouble and the FDIC had to step in, consumers barely noticed any difference and were eventually seamlessly moved to ING Direct. Most of these banks also use the same website security standards that major brick-and-mortar banks do.
5. It puts a modest hurdle between you and your savings
Over the past few years, I have found that one of the best benefits of an online savings account is the psychological barrier created between me and my online savings account. If I want access to my savings account money, I need to take the active step of initiating the transfer, and then wait a few days. Its almost like a “mandatory waiting period” for buying a gun; in this case, its a minor hurdle, but its enough to make me carefully consider any attempts to remove money from my savings account. And when it comes to saving money, more reflection can never be a bad thing.
6. It’s a good starting point
Finally, it seems to me that opening an online savings account is a good starting point to more effectively managing your money. Its true, as a friend pointed out recently, that a savings account is surely not the best place to store your money in the long-run. But, as I have mentioned, these savings accounts are free, easy-to-open, easy-to-maintain, and safe. With other sorts of investments, you often have to commit a large amount of money, lock in a certain amount of money for a while, or both — and for someone with limited cash, that can be a problem. That’s why these savings accounts provide such a good starting point.
So there you have it; my response to those who think its too much trouble to open an online savings account.
-
Subscribe to Student Scrooge
-
Badges
This is great advice. Thanks for encouraging other students to be good savers!