Online Banking: The Only Way To Go
Written by Bryan Los on March 29th, 2006 @ 1:11 PM
With interest rates getting a quarter-point boost, and at least one more expected to come the next time the Federal Reserve meets, there is no better time than now to convert your small town and local branch banking to online banking.
You’ve worked hard for your money– well, haven’t you? Why wouldn’t you want to earn the maximum return on your wealth? With a little web-work, now you can.
Online banking rates are at the highest they’ve ever been, and put local banks to shame. Let me give you an example of online vs “brick and mortar” institutions that may be right around your corner.
Food For Thought
Here is the current APY (annual percentage yield) on CDs (certificate of deposit) for three local banks. All CD accounts are for a term of six months.
PeoplesBank - 0.90%
Westfield Bank 2.00%
Citizens Bank 3.25%
Here is the current APY (CDs/**Savings) for three online banks. All CD accounts are for a term of six months.
ING Direct: **3.80%
ING Direct: 4.30%
E*TRADE Bank: 4.92%
As you can see, by banking online, you will earn much higher rates of return, and even in the short term, more money. If you were unfortunate to have your money in PeoplesBank, as my grandfather did, you lost a bunch of money over the years.
The Grandfather Paradox
And that really is the point. Most people do business with local banks because they’ve always “been there.” Why would you want to shake things up and change banks. They’ve served you and probably your parents for years, so why change?
Well, cold, hard cash is the reason to change– and you don’t get any with local banks.
As I mentioned before, my grandfather was unlucky enough to have several accounts open with PeoplesBank, our local bank. He’s had accounts with them for years and years, and why would he need to change? He had enough money that he didn’t care what he was making on interest, so why rock the boat?
Full Steam Ahead
Not only did I rock the boat, I sank the boat– and that turned out to be the best thing for him.
I will use one of my grandfather’s CD accounts as an example. This account was opened in December 1993. The starting balance was $52,840.77. The interest rate at the time was 2.90%. This account was open just shy of twelve years, with a closing balance in October 2005 of $115,499.38. The amount was much higher not because of the interest earned, but from deposits into the account during that time. At the time of closing, he was earning 0.90% APY, and his last interest payment was a horrid $88.25 for the last full month.
No Gain, Much Pain
A paltry $88.25 interest on $115,000.00. That’s just painful. And that was going on for years! Let me give you some comparisons vs today’s online rates. Below are the one-month interest amounts for $115,000.00 at the current rates.
ING Direct: $404.00
E*TRADE Bank: $461.00
I Series Savings Bond: $645.00 (currently earning 6.73%)
Still want to bank locally? I should note about the Series I bonds, you can only purchase $30,000.00 per year, for each electronic and paper bonds, totaling $60,000.00 per year. So you can’t just drop $115,000.00 into I bonds. However, you can with E*TRADE and ING Direct for their CD accounts.
In the same boat? Try some calculators and see what you are losing!
When It Rains, It Pours
And if the disparity for the $115,000.00 wasn’t bad enough for my grandfather, he had much more deposited with his local bank, plus some old series E Savings Bonds. All these years he was earning money off his deposits, but not as much as he should have been.
I’m happy to say however, that right now I have taken charge of his finances, and finally got his money making real money. Today, his money is invested in CDs, Savings Bonds, Money Market accounts, as well as a selection of mutual funds. Every month he adds $1,000.00 to his mutual fund portfolio, divided up between the funds. He is very diversified in the funds, so no one fund can kill him. At his age, 87, I don’t know if I want him holding single stocks, but that’s something we’ll work on down the road.
Stats Tracker
So how much interest is he now making each month? Well, between all accounts, and not factoring in mutual fund gains/losses, he will earn just shy of $1,000.00 for each month this calendar year. And because of compounding interest, that number will grow every year, not counting the $1,000.00 he adds to his mutual funds each month.
So please, if you know anyone who is languishing in low interest savings or CD accounts, please help them. Although it may seem a daunting task, getting set up with E*TRADE is the easiest thing you could do, and will be very beneficial and lucrative to the account holder in time. Don’t let the banks make all the money, take some back!
