I'm surprised these days by how often people tell me they're keeping their savings in a major walk-in bank that's paying just half a percent or less interest.
When I point out that online banks typically have savings rates that are many times higher than those of their brick and mortar counterparts, I'm often rebuffed. The most common reason I'm given is that walk-in banks simply are more convenient, providing such benefits as free local ATMs, in-person access to real human beings and even coin counting.
Certainly there are good reasons to have a local bank. But it's not an either-or choice. As I point out in this Consumer Reports story, it can make a lot of sense to have a walk-in bank or credit union for checking, ATMs and other benefits, as well as one or more online banks for their high rates on savings accounts and certificates of deposit. Indeed, many online banks actually require depositors to maintain an external checking account – most likely at a local institution – for use in transferring money to and from their online accounts.
When it comes to savings rates, online is where the action is. That's because online banks compete primarily on how much they pay. As a result, there has been a sort of rate war among them, as the institutions vie to stay at, or near, the top of the list of best payers on the bank comparison websites such as Bankrate.com, DepositAccounts.com, and MagnifyMoney.com. And to get there, banks currently need to pay an annual percentage yield of around 2.25 percent. That's 40 to more than 200 times the yields you're likely to see at a local big bank.
Even if you have a relatively small amount in savings, those higher rates can translate into a lot more income. For instance, if you deposit $10,000 in an online bank paying a 2.25 percent yield your first-year earnings would be $225, $180 more than if you deposited that amount in an institution paying a .4 percent yield. With a $100,000 deposit, the first-year earnings at 2.25 percent would be $2,250, compared to just $400 at.4 percent. And if you're getting just .01 percent locally, the differences can be staggering. Even if your attention has been on the stock market or other investments, where your earnings can be significantly higher, it makes sense to keep at least some money in savings, where it's available for emergencies and other immediate expenses and not subject to market risk. And as interest rates continue to rise, savings may look even more attractive.
What to Do
If you have more than just a tiny amount in savings, look for the best rate you can find, even if it means moving your money to an online bank you never heard of. You can find the best rates by visiting those bank-comparison websites. Just keep in mind that, by default, both Bankrate and DepositAccounts put banks that advertise with them at the top of the list, even if their rates aren't the highest. To see the best rates at Bankrate, change the selection in the "Sort by" drop-down box from "Default" to "APY." At Deposit Accounts, simply scroll down below the list of "Sponsored" banks, or you can sign up for free membership, which removes the ads.
Before opening an online account, verify the minimum deposit requirements and look at the available features, such as check-writing, ATM access, IRAs, and payable on death accounts, which let you designate one or more beneficiaries in case something happens to you. Also, carefully review the fees, limits on the number of allowed monthly withdrawals and other terms and conditions. In particular, be on guard for money transfer charges, which a few banks charge when you move money out of the account. It's also a good idea to check any customer reviews. Some sites also have bank health ratings that can give you an idea of an institution's financial condition. But you also should verify that the bank is covered by federal or state deposit insurance.
Opening an online account usually is easy. You give the bank your Social Security number and contact details, among other information. You'll also likely need to provide an account and routing number for the local checking account that you'll use to transfer money back and forth. Once you're done, you may need to wait a few days for your online bank to make trial deposits to your local institution.
Once your account is open, check rates often. Some online banks prefer to maintain a reputation as top payers and will respond right away to increases in interest rates generally. Others will pay top rates for a while and then fall behind. If your bank's rates become uncompetitive, don't hesitate to move your money. But check first whether the institution has a policy of keeping any accrued interest that hasn't yet posted to your account. If it does, you may need to wait until any interest is credited. Most banks compound interest daily but pay it only once a month. Also, when checking your bank's current rates, don't look only at the rate posted on it's website. Some banks have adopted a sneaky practice of advertising new, higher rates, while keeping existing customers at the older lower ones, hoping those customers won't notice. So check not only your bank's current advertised rates, but also the rate it actually is paying you. You can find it by looking at your account details (more on this practice in a future blog).
Comments
Post a Comment