Ok so maybe that headline is a little misleading.
I can’t say for sure that all the cool kids are doing it, but since my mother has told me many times that I’m cool, I know at least one person who has! 😉
That’s right folks, I stuck true to my word from last month’s Net Worth update and have finally switched to an online savings account! (Public accountability for the win!).
This is a move that I’ve been wanting to make for ages, but had been putting it off for no good reason.
As you’ll see, the effort to switch will be justly rewarded!
Here’s a little bit more on why I needed to make the switch (and why you may too).
Bank Account History
This isn’t actually the first time I’ve switched banks.
Up through college I had an account through a local credit union in my hometown. Then I switched to another local bank up in the Northeast when I started working up there.
Each time I switched it was so I had a place to withdraw and deposit cash. It’s not something I would do often, but knowing I could at a moments notice was important to me.
Finally, right before I moved out west, I needed to switch banks again. I wasn’t really sure which bank to switch to so I ended up choosing the one that everyone knows is everywhere: Bank of America (yep, I know).
Despite their bad reputation, everything honestly worked out fine for me with them, except for one thing.
I wasn’t getting any money back from them.
I was with them for just under 3 years. Here’s the cash balances I had at the end of each month:
That’s right, at one point I had over $30,000 in cash (more on that mistake when I wrote about overdoing my emergency fund) and only twice did I have less than $10,000.
That’s a pretty large sum to me. Bank of America surely would be rewarding me with some nice monthly interest payments, right?… right!?
Anyone want to take a guess at how much money I made in interest over those 3 years?
With their stellar interest rate of 0.03% on their savings accounts (and even less on the checking accounts) I earned virtually nothing for all that money I had sitting there.
Armed with the knowledge of this, plus this shameful announcement from a few months back, I knew it was time to make the switch.
Online Savings Accounts to the Rescue!
With the rise of these online savings accounts, there is no need to stick with the low interest rates that traditional banks offer.
You can do so much better for your money!
Doing a quick google search for best online savings accounts will show you that there are several online savings accounts you could open up that have interest rates above 1.5% (as of May 2018).
These online banks often do not have brick and mortar shops, meaning they don’t have a lot of additional expenses to incur and can thus offer these higher rates.
Marcus, Synchrony, Ally, Discover, American Express and others are among the online savings accounts that are FDIC insured and have above a 1.5% interest rate.
Read up on the account features and make sure you are comfortable with what you are getting.
A few questions you may ask yourself are:
Does it have an online checking account as well? Is there a minimum balance? Any monthly fees? Is there ATM access? How will you deposit money?
These are all important to know prior to opening an account, as well as getting answers to any other questions you have.
Make the Choice
I ended up choosing Ally bank, mostly because they had good reviews from people who I know that use them.
It just so happened that the day I signed up they raised their interest rate from 1.5% to 1.6%! Score!!
One thing Ally did not have was an option to deposit any cash, the only way was through checks or money transfers.
As this was important to me, since I do deposit cash a couple times a year, I ended up switching checking accounts to Capital One instead of going all through Ally.
Capital One was perfect as it has a wide ATM network in case I ever need cash in a pinch, and you can also deposit cash into your accounts through ATMs as well.
It’s an extra step as I need to set up external transfers from Capital One to Ally to transfer all that money to my savings accounts, but it’s easy enough for me and not a big deal.
These external transfers are free (make sure your bank does not charge a fee) at Capital One, though it does take 2-3 days for the money to show up.
If you need to switch checking accounts too there are tons of options ranging from online to brick and mortar. Just make sure to be extra careful about seeing what waives the monthly fee if they have one, whether that be through direct deposit or a minimum balance.
When I made the change, I first opened up my new accounts and ensured my employer’s direct deposit to my new checking account worked. Then I made external transfers ensuring that was working properly.
Finally, I went to my old bank and closed my accounts.
Pro tip: Don’t close your accounts on Saturday late morning right before they close! Otherwise you may be stuck all weekend with an $11,000 check and have a very uneasy feeling that something bad was going to happen to it (luckily it all worked out!)
So Whats’s The Difference?
You may be sitting here thinking, so what’s the big deal? The difference between 0.03% and 1.6% is pretty negligible.
Why should I go through the hassle of switching up all your accounts for such a small percentage?
Here’s why. Let’s use my situation as an example.
Over the 3 years at my 0.03% interest rate, I made $17.84 in interest payments, basically $6 per year. This was with balances ranging from $10,000 to $30,000 each month.
Now, at present let’s say I have $10,000 in these savings accounts (it’s actually slightly more) earning 1.6%.
In one year I will earn $160 (10,000 x 0.016) per year. That’s $154 more per year! All for doing exactly the same thing!
My money is just sitting there just like it always has. Only this time I’m getting paid a lot more. I like that!
Just for fun I took a look at how much I could have made at a 1.6% interest rate based on my month end balances over the past 3 years.
The result was not fun to look at. I could have made over $850 over that same time period at that higher interest rate. Man that hurts to admit.
Even if you have lower balance totals in cash, $1,000 will give you $16/year, $500 will give you $8/year, it all adds up!
The sooner you can optimize your financial life the better off you will be, regardless whether you are pursuing early retirement or financial independence.
Sometimes peer pressure can be a good thing, what’s stopping you from making the switch to online savings accounts?
What interest rate does your current savings account offer? Have you have heard of these online savings accounts? What are some reasons you would not be willing to switch?
(Side note – people on the FIRE journey – we’re all totally cool right!?)