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Back to Basics #2: Savings Accounts

Most people have (or know they should have) a savings account. But do you know how the money in your savings account works, and earns interest?

How do banks work, anyways?

Banks work by buying your money from you and selling it to other people. I’m not even kidding. When you put your money into a savings account, your bank pays you interest for doing so, because now they have money to sell to other people, in the form of loans. I won’t lie, I wish I could buy money from people at an extremely low rate, and then sell it to other people at a much, much higher rate! I’d be rich! I’d be the Bank of Stephanie.

So obviously, it’s better to keep your dealings with the bank in the “savings” category, and not the “loans,” category – although that’s not always possible. But if you think about it, if you have a savings account and a loan at the same bank, you’re buying your own money back from the bank at a much higher rate. Ew.

So how much is the bank going to pay you for the privilege of selling your money? Usually, not much. My own savings account earns about 0.2% interest annually, which is about the average. Considering I barely use the account, there’s only about $15.00 that just sits in there, earning 0.2% interest. At the end of the year, that’s only about 3 cents a year that the bank pays me for my $15.00.

Even if I ramped up the amount I kept in the account to $10,000 (which would clearly mean I robbed the bank and then deposited that robbery money right into my savings account, which would be convenient!) that money would only earn $20 over the course of the year.

So why bother with the savings account at all?
For one thing, the money in a savings account is a little tougher to get at than the money in a checking account. Sure, you can get it out with your ATM card, but you can’t get at the money with a debit card or check. This encourages you to save, rather than spend – hence the name of the account.

And the other thing is, although you might not be earning much interest on your money, you are earning some, which means it’s better than stashing the money under your mattress.

But I want more!
Oh, it can be done! 0.2% interest is pretty dismal, especially when you realize that inflation is about 3% a year – meaning that your money in a savings account is actually losing value. Ick! So, can you beat out inflation with a savings account?

Oh, you totally can, thanks to the internets! Online savings accounts offer much, much higher rates. Why? Because they’re online, that means the banks don’t have to pay tellers or security guards or even janitors – they can just hire a few customer service people to man the phones. This frees up a bunch of their money to pay out to you, for using their savings accounts.

And of course, the banks go to great lengths to insure their databases are secure, so there isn’t a whole lot of worry attached with doing your banking online. You establish a “connection” between your new online savings account and a checking account that you already have. This allows you to electronically move money back and forth between the two accounts. You’re limited to 6 electronic transfers a month out of a savings account, but there’s no limit on transfers of money into one.

Ok, cool, hook me up.
Hold on, cowboy. Choose the right online savings account. This may not be the end-all-be-all decision of your lifetime, but it certainly warrants some thought. Here are the three accounts I would recommend:

Emigrant Direct
I opened my first online savings account with them, and I had a little trouble getting the account set up, but that was mostly my fault. They offer 5.05% annual interest on your money, which is so much better than that paltry 0.2% the brick-and-mortar banks want to buy your money for.

E*Trade

I opened my second account with E*Trade while they were having an “Open an Account with $1 and get a $25 bonus!” deal. This account also offers 5.05% interest, and I also had some dealing with their customer service (once again, the problem amounted to me being a dumb-dumb).

ING Direct
ING’s Orange Savings Account trails the pack in interest rates, offering 4.5%. However, those who have an account with them spend lots of time giving glowing recommendations to their customer service. I have a special place in my heart for good customer service, so I will certainly take the interest cut someday. ING offers a $25 bonus if you sign up with a referral link and deposit at least $250.

Which of these accounts you chose is up to you. There are other accounts out there, some offering even higher interest rates. The important thing to do is figure out what matters to you most about a savings account, and pick the bank that best embodies that quality. If it happens to be local banking that matters to you most, then it might even be your brick-and-mortar local bank.

2 responses to “Back to Basics #2: Savings Accounts”

  1. Alain

    Newbie to PTY, but not to ETrade . Be EXTREMELY careful about using any Etrade financial services besides the brokerage. Despite suggestions to the contrary ETrade Bank and ETrade Visa have NO connection with ETrade. Links between accounts [transfers from brokerage to bank to VISA etc] DON”T work as promised resulting in late payments, late fees and bounced checks, in two cases to IRS, something you NEVER want to do. Customer service is the worst I’ve ever encountered with any financial institutions in 35 years, not unfriendly just incompetent – I reluctantly kept the brokerage account but closed both my bank and credit accounts with ETrade

  2. Bary

    I’ve never had any problems with the hundreds of transfers I routinely make between brokerage and bank accounts– these happen virtually instantaneously and you can verify the balances afterwards.