Traditional walk-in banks offer very little incentive to save. For instance I have used a Wells Fargo Savings account for the last five years. During that time I have earned less then 1% interest on my savings each year. Basically this means that by keeping my money in my Wells Fargo Savings Account, I am losing money to inflation. As interest rates have risen over the past year, such a low return on savings just doesn’t make sense, and certainly does not get me excited to save.
Luckily there are alternatives. Internet banks offer high interest savings accounts that are linked to your checking account. For instance the ING Orange account currently offers a 4.35% annual return on savings. Emigrant Direct offers an even higher 5.0% interest rate saving account. And most importantly these internet banks are FDIC insured just like the large walk-in banks: Bank of America and Wells Fargo.
Your internet bank accounts are linked to your existing checking account. You can transfer funds back and forth just like you do with your normal bank accounts. The main difference is that it takes several days for a transaction to post, typically three days for the ING Orange account. Under most circumstances this gives you plenty of time to access your money.
Now why does it make a difference? Well lets say that you were able to save $100 a month for 10 years. Over that time a savings account that returned only 1% interest would grow to $12,620, basically earning you $620 interest over that 10 year period. A bank account that offers 4.5% interest would grow to $15,150. This is $2,500 more than the other account. It gets even worse. Let’s say that you start out with $5000 in savings and you add to it $100 a month for 10 years. The account earning 1% interest would grow to $18,000. Your internet bank account earning 4.5%, would grow to $23,000, a difference of $5000 in ten years.
The news is full of reports about the lack of personal savings in America, some even call it a crisis. The big banks have jumped on this opportunity and are offering all sorts of programs to encourage savings. For example Bank of America offers a program called Keep The Change, which round up the cost of every purchase and puts the extra money into your savings account. While these programs may help provide a frame work for savings, they may not actually be saving you any money at all. This is especially true if the interest rate your bank offers you is not beating the cost of inflation.
If you are comfortable with the internet and making on-line purchases, then internet banking is a great way for you to grow your savings and create a nest egg for your future.