I talked to a friend over dinner recently. He is about to go back to school in the fall and has a few thousand bucks to his name. He’ll need it for his upcoming expenses, including transportation needs. He asked my opinion for the best thing he could do with his money at this time.
The Benefits of Online Banks
It seems like every week I learn about a new online bank. Before the advent of online banks, most people would either go into a branch when they needed cash, or use an ATM. Turns out that having physical locations all over the place costs the banks a lot of money, but a physical bank may no longer be a necessity. Many online banks require a lot of hoop jumping, like X amount of debit card transactions, Y amount of direct deposits and so forth. That’s what drew me to Ally Bank initially, the simplicity. No fees, no direct deposit required, no minimum balances, no problems. Also, if you need cash, you can still get quick access to some crisp bills with no cost to you. The one time I needed it, I was very impressed with their customer service.
When I first opened my Ally bank account, they were paying about 1% interest, but as the Federal Reserve has increased interest rates, Ally got up to 2.2% on savings accounts. Right now they pay 1.9% as the Fed just dropped rates for the first time in years. For comparison, Chase Bank pays 0.01%, or a penny a month.
How Much Can Online Banking Earn You?
It depends on how much you keep in your accounts on the average month. We usually keep enough cash in our accounts to cover 1-4 months of expenses. Let’s say you keep $5,000 in your emergency fund (which many would consider low). Compound interest at 2% a year would provide you with $8,458 over the next 50 years (you’ll always use a normal checking and savings account right?).
Sure, it will take a long time to earn this money, but I can’t think of an easier way to make over eight thousand dollars. We all use bank accounts, and it might take some time to set up an account and redirect your bills to it, but the return on the time investment is insanely high. If you decide to keep your money with a traditional bank that pays a penny per month, you’ll only make $6 over 50 years.
Conclusion
Online banks are becoming more and more common. Personal Capital, my favorite money tracking app, is offering 2.05% interest right now. I likely would have gone with them if they had online banking a few years ago. Citi Bank is offering 2.3%, Wealthfront is offering 2.57%. There are plenty of options out there, and many have great investing platforms incorporated. I’ve considered using M1 Finance checking, as I have a lot of interest in this platform. M1 offers inexpensive margin loans which I would use for other investments, and their checking account pays 1.5%, with a rewards debit card.
The point is, there are plenty of bank accounts out there that are better than what you have now. It’s up to you to take a look, weigh some options, then take action. You almost can’t go wrong with something as easy as this. Make a 1% improvement in your life and you’ll thank yourself down the road. If you don’t, just realize that the monthly interest payments you see in your bank account of $0.01 could be $10 or $15 if you put your money in the right spot.
