Hopefully, you’ve read some of these articles and have started saving some money. If you have a savings account at your bank, then you know you’re earning next to nothing for interest, which isn’t helpful because you need your money to work for you! If you’re like me, then you’re getting a penny or two in your savings or checking account each month. So in two years, you’ll have enough to buy a stamp, unless they raise prices by then. This is why you need an online savings account.
Why you Need an Online Savings Account
Banks aren’t offering much interest because there’s no need to right now. The Fed funds rate is currently sitting around 1.5%. This is how much banks lend to each other, so if they want to make money, then they need to pay you less. So then why is the interest you’re getting from the bank well below this? It’s simple. You probably have other products with the bank, like credit cards, a checking account, or car loan, or even a mortgage. They’re cross-selling you the savings account and it’s easy to set up since you’re already a customer. Second, branches and ATMs aren’t free. Somebody has to pay for your convenient access to your money.
But you see, since this is your savings, you shouldn’t have easy access to this money. And since you want this money to grow, you want the highest interest rate possible. This is why you need an online savings account. Right now, online accounts like CIT Bank are offering rates around 1.35% vs. around 0.05% for a regular savings account. Yes, the rate is only 1.35%, but that’s almost 30x what you’re getting in a regular one! If you have $10,000, you could be earning $135 vs. $5. The difference is only $130, but again, it’s free money. Not only that, it’s YOUR money. Also, imagine you have $100,000 in savings. Now the difference is $1,350 vs. $50.
The Compounding Effect
Remember, this balance compounds over time. Rates should rise from here, but let’s assume the 1.35% online rate and the 0.05% regular rate hold. Assuming a $10,000 balance, in 10 years, you’ll have $11,435 at 1.35% interest, vs. $10,050 at 0.05% interest. So you’ll make more the double the interest in your online savings account in the first year than you would in a regular savings account!