Sunday, March 24, 2013

Ditch Your Bank

Last time, you were introduced to the 5 first steps of becoming financially literate. Here’s the link if you’d like to refresh (5 First Steps). The focus of this update is on Step #3: “Ditch Your Bank.”

Now, contrary to some people’s opinions, banks aren't evil businesses hell-bent on steal from you. Banks play a critical role within our economy, and life would be very different without them. Imagine a world where you kept your money literally under your mattress or invested in gold bars in your closet. Sorry, but no thanks! Banks offer a safe haven for you to store money with the guarantee that, when you would like to withdraw it, there is no need to worry whether your money still exists or not. And in today’s world, you don’t even need to worry if the bank itself goes bankrupt – the government guarantees all deposits up to $250k. It’s called deposit insurance, from the Federal Deposit Insurance Corporation, or FDIC.

You might have experienced bank anxiety before. There are a multitude of banks and every single one wants to do business with you. How would you ever choose which bank to use? Many factors can go into this decision. Do you want online account access? Do you want access to an ATM anywhere you go? Do you want a personal relationship? These questions are very important and can easily differentiate between banks. However, people often forget arguably the most important question: Do you want the best rate possible?

That’s why ditching your bank is an essential piece of gaining financial freedom. The banks you know, love, and see everyday are exactly the ones that you want to diminish your relationship with. Why? Simple – you are missing out on a HUGE opportunity to grow your savings at a much faster rate. You are missing out on great customer service and extreme ease of use. Welcome to the world of online banking. Do not be afraid. Many people are apprehensive about online banking. It’s a big step. Letting your money go to someplace where you can’t see it can be hard to do. Trust becomes a big issue. But, once you ditch your normal bank, you won’t go back.

What’s so great about online banks? Let’s use some numbers. Here are the current interest rates you are earning at the following banks (you can check out many other cool facts and rates at
- Wells Fargo: 0.03%
- US Bank: 0.05%
- Bank of America: 0.01%

Now, what do those numbers mean? If you had $2,000 in a savings account at each, you would earn $0.60, $1.00, and $0.20 in interest, respectively, over the course of 1 year ($2k x .03%, compounded monthly). If you don’t use one of these banks, check your last statement. Your interest rate will not be much better. I don’t know about you, but I feel that my savings should be working better for me. Making your money work for you is the best way to gain financial freedom.

Online banks save on many expenses that a normal brick-and-mortar bank has – a building, employees, security, etc. They pass these savings on to you, the customer. I can only speak from experience with one online bank, Capital One 360 (formerly ING Direct), so please bear with me as I use it in my examples. Capital One 360 currently pays my wife and me 0.75% interest on our savings account. That doesn’t seem like much either, but do some quick math – that is anywhere from 15x to 75x the interest rate on the above-mentioned accounts. So our same $2,000 is making $15.05 per year. After 2 years, you would have $2,001.20 in your Wells Fargo account, and we would have $2,030.22 in our 360 account. At $7000, you'd make an extra $50 per year without doing anything differently. It only compounds from there! Is this making cents?

So you’ve heard the benefits, what about the drawbacks? The only real drawback is the need to plan ahead in certain situations. While you can easily link your 360 savings account to your normal checking, it takes 3 or 4 days to fully transfer money between the two. If you have a large bill coming up, you’d need to make sure you planned ahead. Otherwise, there isn’t anything major. 360 allows you to snap a picture of a check in order to deposit it. Super cool!

I've found that having an online savings account works as an excellent place to keep your emergency savings. You shouldn’t need to touch it, and you’ll get a much better return! I've mentioned it before, but if you’d like to open a Capital One 360 savings account, use this link ( It’ completely free! No hassles, no tricks, just saving! If you use that link and deposit $250, you’ll get a $25 bonus (full disclosure, I would also get $10). I really liked ING and there haven't been issues since the switch to Capital One. I have our investment and IRA accounts through Sharebuilder, which is directly linked and allows instant transfers, so I'm not looking to switch to a different online bank.

What are your thoughts? Do you use an online bank already? If no, why not?

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