Ask the Readers: Two Questions About Saving
Published on - February 13th, 2009 (Modified on - July 10th, 2009) (by J.D. Roth) I’ve been swamped lately. As a result, the reader questions have been piling up. There’s a huge backlog. Today I’m going to tackle two related questions at once. Do you have an opinion on the best place to save your money? Chime in below!
Where should I start saving?
First up, ashleyD commented on my recent post about using financial spreadsheets. She’s beginning to get control of her finances, but she doesn’t know where to put her money. She wrote:
I need help. I’ve been reading for a few months, but I haven’t caught on where to put my dollars. We’re currently using the snowball method to pay off our debt. We’ll be debt-free in June 2010, or maybe before. I feel an alarming need to put some money somewhere now. I’ve sold off clothing and I’m making a bit of money on the side with eBay. Where should I open two $100 accounts? We’re 25 and 29.
Congrats to Ashley for starting on this at a young age. It’s fantastic that she’s paying off debt, making extra money on the side, and looking to save. I didn’t take these steps until I was in my mid-thirties, and I wish I had started sooner.
I think it’s a good idea to begin an emergency fund as soon as possible. An emergency fund is like self-insurance: it’s a buffer against unexpected things that might come your way. But where to put the money? Based on my experience, there are two options that make sense.
Option one: Rewards checking
If Ashley knows she has self-discipline and can refrain from touching the money, she might consider a rewards checking account at her local credit union. From what I’ve found, these offer the best rates anywhere, though they do carry requirements in order to obtain the rate. (You have to use your debit card a certain number of time each month; you have to receive electronic statements; etc.)
Here’s a huge list of rewards checking accounts by state.
Option two: Online savings
On the other hand, if Ashley suspects her self-discipline might falter (as mine always did), she’s probably best served by opening a high-yield online savings account. I elected to use ING Direct, though there are many great options.
For me, the advantage of an online savings account is that the money is completely separate from my everyday checking. If I want to access the cash, I have to go through the process of transferring it from ING Direct to my credit union. The very act of doing so prevents me from spending the money recklessly. Another advantage is the ability to set up automatic monthly deposits, which helps me to save on “autopilot”.
What advice can you offer Ashley? If you were just starting to save, where would you put your money? How would you structure your savings? Would you set aside a certain amount every month, even if it was just $10? Or would you wait until you had large contributions to sweep into the account?
Should I chase interest rates?
Meanwhile, Bo has already started to save. He’s wondering if he should chase interest rates in order to make a little more money. He writes:
While I’m an ING Direct disciple like yourself, I’m awfully tempted to jump ship with the recent interest rate drop. ING is now at 2.2% APY, while HSBC Direct is at 2.45% APY and E-Trade is at 2.5% APY. Let’s say you have 50K parked — you’re talking an extra $125 or $150 a year. I know it’s not a lot, but if I was walking down the street and saw $150 laying on the sidewalk, I would definitely stop to pick it up. What say you?
This is a great question. In the past, I’ve come down against rate chasing, but that’s mostly because I think it’s a hassle — and because I didn’t have much saved. Now that I have more in savings, I’ve begun to see the appeal of picking up a little extra money for very little effort.
Still, I’m not sure it’s worth my time. My emergency fund has a balance of $10,394.04, which is earning 2.20%. If I were to move it do a different bank, I’d probably choose FNBO Direct, which is currently offering 2.60% APY — 0.40% over my ING savings. How much difference would that make in a year? $41.58, or $3.46 a month. I’ll be honest: even though FNBO is a heavy advertiser at Get Rich Slowly, I’m not willing to move my money out of ING Direct for $3.46 a month. FNBO gets good reviews, but they’re an unknown to me. I love the ING Direct interface and the multiple accounts.
But if I had $50,000 in the bank instead of $10,000? Would I move from ING Direct to FNBO Direct for $200 a year? As Bo says, I’d stop to pick up $200 from the sidewalk…
What about you? Would you switch banks over half a percent of interest? Over one percent? Would it make a difference if you had a larger or smaller balance? Are there any other tips you can offer Bo as he shops for online banks?
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I use ING for nearly everything and I really love it, but I want to clear up some confusion: they do not have “sub-accounts.” What they do is make it very easy to open several (25 max, I reached it) SEPARATE savings accounts. Each account has a different account number and earns its own interest payment. Transferring money from one ING account to another is instantaneous (unless you do it very late at night/early in the morning, it seems to be from 11:30pm to maybe 5am?), but they are all separate accounts and each has it’s own line on the 1099 the send you.
I have a savings account for each credit card and when I make a purchases on them, I transfer that amount from my ING checking account into the appropriate savings account, so my Checking balance is (nearly) always “money I haven’t already spent” (minus other savings accounts, like car payments, insurance, maintenance, other monthly bills like cellphone and internet, etc.). Then, when I want to pay a credit card, I just have them debit the appropriate ING account.
I also track everything on a PDA, and on there, I have real subaccounts for food, gas, and entertainment. Because my wife buys food several times a week, and ING only allows 6 withdrawals from a savings account each month, having a Food account would not work, as it would have way more than 6 withdrawals a month, so food comes out of Checking in ING, but out of Food on my PDA. This system has worked VERY well for me and I wish I had started doing things this way years ago!
Also, no one ever mentions Union Federal Savings Bank (www.unionfsb.com). The website isn’t nearly as nice as ING’s (they recently redid the ACH part, but I rarely use it) but they are giving 3.05% and it’s been at that rate for several weeks now. I believe the minimum to open the account and earn that rate is $1, but it may be less.
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I have a savings account for each credit card and when I make a purchases on them, I transfer that amount from my ING checking account into the appropriate savings account, so my Checking balance is (nearly) always “money I haven’t already spent” (minus other savings accounts, like car payments, insurance, maintenance, other monthly bills like cellphone and internet, etc.). Then, when I want to pay a credit card, I just have them debit the appropriate ING account.
I also track everything on a PDA, and on there, I have real subaccounts for food, gas, and entertainment. Because my wife buys food several times a week, and ING only allows 6 withdrawals from a savings account each month, having a Food account would not work, as it would have way more than 6 withdrawals a month, so food comes out of Checking in ING, but out of Food on my PDA. This system has worked VERY well for me and I wish I had started doing things this way years ago!
Also, no one ever mentions Union Federal Savings Bank (www.unionfsb.com). The website isn’t nearly as nice as ING’s (they recently redid the ACH part, but I rarely use it) but they are giving 3.05% and it’s been at that rate for several weeks now. I believe the minimum to open the account and earn that rate is $1, but it may be less. I use ING for nearly everything and I really love it, but I want to clear up some confusion: they do not have “sub-accounts.” What they do is make it very easy to open several (25 max, I reached it) SEPARATE savings accounts. Each account has a different account number and earns its own interest payment. Transferring money from one ING account to another is instantaneous (unless you do it very late at night/early in the morning, it seems to be from 11:30pm to maybe 5am?), but they are all separate accounts and each has it’s own line on the 1099 the send you.
I have a savings account for each credit card and when I make a purchases on them, I transfer that amount from my ING checking account into the appropriate savings account, so my Checking balance is (nearly) always “money I haven’t already spent” (minus other savings accounts, like car payments, insurance, maintenance, other monthly bills like cellphone and internet, etc.). Then, when I want to pay a credit card, I just have them debit the appropriate ING account.
I also track everything on a PDA, and on there, I have real subaccounts for food, gas, and entertainment. Because my wife buys food several times a week, and ING only allows 6 withdrawals from a savings account each month, having a Food account would not work, as it would have way more than 6 withdrawals a month, so food comes out of Checking in ING, but out of Food on my PDA. This system has worked VERY well for me and I wish I had started doing things this way years ago!
Also, no one ever mentions Union Federal Savings Bank (www.unionfsb.com). The website isn’t nearly as nice as ING’s (they recently redid the ACH part, but I rarely use it) but they are giving 3.05% and it’s been at that rate for several weeks now. I believe the minimum to open the account and earn that rate is $1, but it may be less.
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i’m very much a fan of KISS. i seriously don’t have time to go chasing!
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@Jamisonb
“I am 32 my wife is 31 and we have a 2 year old. We have over $10,000 in savings (Emergency fund) and fund our Roth IRA. We have zero debt other than about $38,000 left on our house (we triple our payments and have done so for about 2 years.)
We may be moving this summer and when we sell the house we may live with my folks for 6 months to a year. I will likely have $100,000 cash on my hands. Is there a better place to store that cash other than a plain-jane savings account or are there more attractive options?”
I don’t think there is one right options, but here are my 2 cents:
1. I wouldn’t put it all in one place (diversify)
2. CD ladder maybe?
3. Retirement savings on track?
4. College savings for the 2-yr old
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I recently jumped ship from Wamu Online Savings after Chase acquired them and the interest rate dropped from 3.5% to 1.5%. I opened an account with the highest I found, which is at 3.05% right now (DSD).
I would only switch based on rates if it was significant.
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@Jamisonb
I currently have a similar situation, i.e. sitting on that kind of money while waiting to purchase my next home. If you know that you won’t be needing that money for 6 months, I would rec. a jumbo CD. I found a great rate about 5 months ago with Corus Bank and was able to earn $2k + in interest. However, short-term cd rates aren’t as good now as they were 5 months ago.
Definitely check out the rates on Bank Rate for jumbo cds and compare those to JUMBO High Yield Savings Accounts/MMAs. Right now, it looks like Dollar Direct is offering the best deal for the latter at 3.05 APY, but rates seems to change daily. Hope this helps, and it’s WONDERFUL that you’ve been able to pay down debt!!
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A savings account is the way to go, in my opinion, because you get a bit of interest, and you can access your money quickly if needed in an emergency, but not TOO quickly like with a checking account. That extra step of thinking about it, to make sure it is a true emergency, I think is important.
As for chasing interest rates, I say not unless it makes a lot of sense for you because you have a really large balance. And if you have a really large balance I do not think you should change unless we’re talking about a percentage point difference because the time value of money won’t make it worth your while in the long run. You could better spend your time unless we are talking about a significant amount of difference.
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I’ll second SmartyPig– I just got out of debt and I’m moving my emergency funds to SP. Like ING, they let you set up sub accounts or “goals” that once met can just sit there accumulating interest until you need it. I’m going to set up a series of $100 funds.
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I am in the process of moving my emergency/cash stash out of Capital One MM after they droppd the rate to 2.0%. I got a rate of 3.25% APY with First Union Trade Bank in their High & Mighty Savings account. I had not heard of this bank before but found them through the MoneyAisle auction. At first I was a bit nervouse about going with an unknown, but they are FDIC insured so I think the risk is small.
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Regarding the first question about savings: I think it is a great idea to “pay yourself first”. Sweep 10% of the top into an ING account–just make it one of your regular “bills”, do it FIRST, then take care of your other obligations. ING is so easy–even if your 10% is a very small amount, you can move as little as $1–it really does add up.
If 10% is to hard, make it 5% or 2%, but be committed to the discipline.
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Dollar Savings Direct has a minimum deposit of $1k to open an account. I’d rather get the same rate without tying so much cash to open it.
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I don’t consider my self a rate chaser, but when paypal tanked from a high last year of 5.2%something I moved money into my ING and Capital One accounts. I had money spread out over all three and was making a decent amount of interest. Once rates started falling I locked in a CD ladder at ING and moved the rest over to Capital one because the rate for accounts with over 10k was 2.75% at the time. I always did wonder, if you chase rates for .5% you could make a few extra dollars, but did you account for the fact that during the 3-5 days it takes to move money it doesnt earn anything?
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i’m also a fan on ING and if ashleyD can come up with $250 to start an ING account, I’m happy to offer one of my referrals so she gets an extra $25 and I get an extra $10 in our accounts. If your interested ashley, feel free to email me at stef1213 at hotmail dot com. I find ING super easy to use, and I like all of their security (although lately it doesn’t recognize my computer even though I use the same one to log in). I have 1 one year CD with them as well, which i opened last November, just before rates really started to fall, so I have some of my money at a 4.25% rate. I have no credit card debt anymore (yay!) and I consider my ING acct. an emergency fund of sorts. When I hot a certain goal I plan on starting subaccounts so that some is emergency and some is more long-term savings and some is earmarked for other specific plans.
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We use Vanguard money market for our savings. It has a decent rate, is accessible electronically and has check writing – which is perfect in case we need quick access to the money. We have our IRAs there too, so I have a recurring monthly investment set up from it. Plus, I like the interface and it’s a solid company.
I previously used Netbank for awhile, but got out before they crashed.
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This has absolutely nothing to do with this post – BUT I just wanted to say thanks for having such a great blog! It has really helped me to get my personal finances in order over the past 6 months or so.
I just made my last payment on my last credit card with a balance! No more debt
yay.
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I like ING. In the 2 years I’ve been their customer, not once have they pulled funny business on me. No reordering transactions from highest to lowest, no exorbitant fees for overdrafts, consistently good rates. Maybe not the ‘best’ rates anymore, but consistently good. Opening subaccounts is super easy. Very easy to manage CDs. Partnership with Sharebuilder. Half a percentage point is not worth these other non monetary benefits that I get. I reward superior customer service.
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50k in the bank, I’d definitely rate chase. I mean, what is it going to take, 30 minutes to set it up? Well worth the gains. Just make sure they offer everything else you are looking for (like customer service) as these are items that don’t relate to $$ in the bank.
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I have to admit to being somewhat of a rate chaser. Yes, it’s a hassle, but if you find a much better deal, sometimes it’s worth it–especially if it’s an online account. Those are way less hassle to set up and close down. I wouldn’t advise doing it often, though. I think opening and closing accounts too frequently can hurt your credit score.
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Going back to the original post, I’d say for your first savings account, having a high-quality, reliable bank is more important to start with. I do most of my banking through USAA (amazing service, but exclusive membership) and only have the DSD accounts to hold savings that I don’t need in the next year or so.
I started using DollarSavingsDirect a few months ago to try our their high interest rates. It seemed a little risky, but at least they are FDIC insured. I’ve been earning interest for a while now and have since moved money from an older WaMu account (after rates tanked following the Chase buyout). DSD also offers subaccounts similar to ING (I just opened a 2nd savings account with them).
As far as service goes, I’ve only had to call them once and the rep was pretty helpful. Really though, since I don’t use DSD for regular transactions, I’m more concerned with the interest rate.
@Neal (28): if your *time* is worth $40/hour (not just your salary/wage) you’d have to be making about $350K/year. If that’s the case, congratulations! I would hope that anyone making that much wouldn’t have to bother with rate chasing since they’d have much more lucrative options. It also shouldn’t take more than an hour to find a high interest rate and open an online account. Ultimately, like all *personal* finance decisions, the key is that it’s personal and will depend on what people are willing to do for a few hundred bucks. I wouldn’t consider myself a rate chaser, but if DSD drops again and someone is still offering a 1% improvement, I’ll probably move.
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Tom S has a good point… I have just one debt left (student line of credit). I’m constantly torn between saving money and paying off the debt faster.
Basically it boils down to this problem: My line of credit charges me a higher rate per month than I get through my savings and investments (thanks to the economic downturn). I could come out (slightly) ahead by getting rid of my debt — but then I’d be left without an emergency fund and would have to rely on a new line of credit if something happened. (A chance friends tell me I should take).
Are people like me and Ashley better off getting out of debt faster, or building our savings sooner?
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I wouldn’t rate chase to much just b/c the potential of more people having your personal info. I used to work at a credit union and when we closed an account it would be closed but the system keeps the info just in case they want to reopen it. Its the same w/ a lot of places. Doctors offices keep files forever.I actually wanted mine shredded when they mixed someone else with the same name as me and charged it to my insurance. (I no longer went there) It all got worked out but mistakes happen. They told me after 7 years its gets stored.I then tried to get my expired insurance account closed and they wouldn’t do it. Remember any employee can see all your info. keep it in mind. Be choosy. By the way doctors office will ask SS # on forms but I’ve been asking if they really need that and they assign me a different number. Always ask.
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I’m not a fan of rate chasing either. I think the value of an emergency fund is to salt it away and (for all intents and purposes) forget about it. Chasing rates or handling the money just increases the risk of dipping into it. I’m not a huge fan or CDs but the concept of laddering an Emergency Fund would accomplish 2 objectives – it makes the money harder to get to AND provides a better rate than just the base account rate.
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I rate chased about a year ago, moving my cash savings from HSBC Direct to E*Trade to earn an extra .6% or so (as I recall – that figure is approximate). I’m torn as to whether I’d do it again. In terms of support and interface, I’m slightly more happy with E*Trade than I was with HSBC. The extra interest was nice, though certainly not mind-boggling (the interest difference is now negligible – .05%). The biggest downside of the switch was that it was a hassle. I live in a rural area, and whenever I open an online bank account, there’s a run-around with address verification.
In the end, I’m mostly glad that I switched (and hope that lots of other people do) because rate-chasing (at least in theory) keeps pressure on the banks to keep their rates as high as possible. No matter how good the ING Direct interface is, I won’t use them because they have a lower rate AND they advertise a ton – two facts which I imagine are related.
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To answer your question, Beth: Yes
Save up a small emergency fund (quickly), then STOP putting more money into savings and redirect your extra income to your debt.
Once you’re out of debt THEN you can start saving regularly.
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Another plug for ING: When I first set up my accounts, they started mailing postcard offers to my home for mortgage loans, etc., and other products I didn’t need. I e-mailed them ONE time & asked them to end the junk mail, & they did. Just like that.
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I’m a rate chaser. I currently have my house DP fund parked in a CD at HSBC, yielding 4% APY. I’m kicking myself for not opening up a CD at Wamu/Chase at 5% in the fall of 2008. There was just too much uncertainty back then so I couldn’t pull the trigger. It would have almost netted me $200/month… gosh!!!
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Concerning what Diatryma says: You should make ever effort to close that $4.00 account. An inactive account can be charged a fee, and if you don’t have the money to cover said fee, you’ll get charged more fees. Make sure you send everything certified mail, even if you talk to someone.
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Open an online savings account unless you have a larger amount and won’t need to touch it for awhile then I would recommend a CD find the best rates at bankrates.com.
For me I started savings just $10 a month automatically from my paycheck each pay period, then I have bumped this amount up each time I get a raise I’m currently at $70 a month and don’t miss this in my paycheck.
I agree I wouldn’t chase rates unless you would make at least $10 more a month.
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How to save:
Once you choose an account, I would totally recommend starting small with whatever you can afford each month or paycheck ($10-$20 is a perfectly acceptable way to get into the habit) and then slowly increase the amount, adjusting every quarter. I would also recommend either driect deposit or auto withdrawls on payday. If you do choose to go with an online account like ING they have the $25 reward if you open with a min. opening deposit of $250. In which case you may want to start by putting that $20/paycheck in an envelope somewhere safe until you have the $250 to get the bonus.
Or, if you don’t trust yourself, just do it. The only bad idea with savings is to do nothing.
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Tom, thanks for the reply. Normally, that would be my approach and that was my approach before the economy took a nose dive. Now I’m confused — if I focus on getting out of debt, does that mean I’m missing out on great buying opportunities?
For instance, one of options for Tax Free Savings Accounts is mutual funds. With stocks being as low as they are, it could be a great buying opportunity now because I won’t pay tax on the income and there’s solid potential for growth.
If I direct all of my extra income to the debt, I can pay it off in a year and half (instead of three years). But am I shooting myself in the foot if I don’t take advantage of investing now?
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Wow, that TFSA sounds like a great deal, I wish we had them here in the US!
If you can really withdraw from it for any reason at any time, you could use it for Dave Ramsey’s Baby Steps 1, 3, 4, 5, and 7 all at the same time!
I’d also be tempted to start putting some money in while the market is so low, perhaps your $1000 or so mini emergency fund can satisfy that itch? The once your debt is paid off you can really pour it on. Just make sure some it is in a safe, liquid investment so you can get at it in an emergency.
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I chose ING even though I never had an online savings account and had nothing to lose (only money to gain) by choosing a different higher yielding bank.
Why ING:
Full disclosure: I only looked at banks with 4 or 5 star bankrate.com ratings.
Like all of you I started doing research. However, I didn’t just look at rates today. I looked at rates over the course of 1 year. What I looked for was how often each bank adjusted its rates.
Over 1 year ING didn’t have too many adjustments. When ING did make adjustments, they were often small and in response to Fed rate changes. The fact that ING adjusts rates to the Fed is a sign of financial strength and financial prudence (conservative banking). I appreciate long term stability and that’s what ING provides.
GMAC Bank also has stable rates, but I’m hesitant to be their customer due to their relation with GMAC. They have a 4-star bankrate.com rating. However, I couldn’t find any reviews about them from actual customers.
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wow! thanks to everyone!
i’m heavily leaning towards opening an ING account. all the great reviews! also, hearing the customer service is top notch assures me this will be a great choice!
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I wouldn’t change bank accounts. Its not worth the time and effort.
-Nate
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I think rate chasing keeps banks honest. Currently, I have accounts with GMAC and Clearskyaccounts. GMAC’s account I found to be a little harder to open. For instance, you couldn’t do it all over the Internet. For me that is a pain. The people I spoke with were helpful and spoke English (two things I favor heavily). All in all, if the rates are good, I would use GMAC again.
Clearsky lets you open the account all through the Internet (currently, their rates beat GMAC’s). Also, Clearsky sent me a free $15 iTunes Card. Things like that are highly appreciated, since it wasn’t advertised. I have both a CD and savings account with GMAC. The customer service is great as well.
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Oops I meant to say, currently I have a CD and Savings Account with Clearsky.
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JD, can I get a $25 ING bonus referral link from you?
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Not a big fan of rate chasing, so two points:
1. If you have $50K+ lying around, it should be either short-term (e.g. if you’re trying to save for an upcoming purchase, such as a house), in which case the interest rate difference wouldn’t matter much, or else it should be in some other financial instrument with a higher yield.
2. The time it takes to switch should be considered a cost. If it takes me 30 minutes to switch over to a new account, I consider that time to be worth at least $10. Plus, every bank account that pays you interest in a given year has to be included in your tax return, so it’s not as if the hassle is over as soon as you move your money. The more banks you deal with in a year, the more time your taxes will take.
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My advice to the first reader is to park the money in an online account that’s accessible but not so easy that you’re tempted to pull out of it for things you don’t need. Several online accounts have some pretty decent rates and can be a beneficial addition to your finances.
My advice to the second reader is to stay your course unless it’s a deal that can’t be beat, and check with your current financial institution to see if they’ll do any rate matching. Some places will match up to 50 basis points if it means keeping the money in house. But, if you feel the need for .15% higher interest rates, then move. I don’t really see it as worth the hassle of changing accounts and moving money around. Now, if we start seeing a variance of full percentage points, sure, move that money!
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When I opened my high interest savings account, did a lot of rate chasing. I chose the bank that had the best rate.
Then, a month later the bank lowered it’s rate. Now the rate is the same as everyone else’s, so I basically wasted my time.
Lesson learned: Look for a guaranteed rate. If such as thing doesn’t exist, there’s no point chasing it.
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I re-read the OP’s concerns.
If I only had $100 in savings…I’d keep it with the local bank. Only go to online savings accounts if you’ve already got $1000 or so in buffer in your regular savings/checking accounts combined.
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I seriously cannot understand why anyone with over $50,000 would choose to keep the bulk of that money in a savings account. We’re talking about an emergency fund here, right? Does the regular Dick/Jane have $50k+ emergencies? Therefore, why even bother with rate chasing? If you have that much money saved up, why not invest the money that you don’t need in an emergency fund into something that offers more than 5% (like someone else previously mentioned in reference to inflation). A good mutual fund will do that for you.
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As someone who does have $50,000+ in a savings account currently, all I can say is that stability and maintenance of principal is pretty nice in the midst of an imploding stock market. That $50k+ is an emergency fund — should both my wife and I lose our jobs, we’ve got the next 6 – 12 months of current living expenses available without any worry. If we had a longer time horizon, sure, a mutual fund (aka the stock market) would make sense. But we’re talking short-term savings here, not investing. Not all savings should be invested, IMO.
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