Easy Money – It’s that Simple

Breaking a bad habit is hard, but not all habits are bad. I strongly recommend The Power of Habit by Charles Duhigg to reinforce how habits can be used to create successful outcomes. However, many habits, or reluctance for change actually impede our successful outcomes. And these habits can lead to us missing out on opportunities. As a business owner of a pass-through entity, I am required to pay quarterly estimated taxes every three months. This forces me to carry excess cash in the bank. Additionally, I err on the side of cautious when it comes to my personal emergency reserves. So for years, I had the bad habit of keeping this money in a well-known regional bank, accepting next-to-nothing for interest in my savings account, because….well, that’s what I had always done.

Finally, I took it upon myself a few years ago to establish an online savings account that at the time was paying 1.05%! (the exclamation mark may seem abusive but in today’s interest rate environment, this is exciting) I went from earning 0.05% to 1.05%. That’s a multiple of 21! Today, that same online savings account is paying me 1.45%. Setting up the account was simple and only took a few minutes. I am allowed to have 6 transactions per monthly statement cycle with no penalty. After a few months of occasionally moving money from my online savings account to my “local” bank checking account, which I valued for the physical location that I believed I still needed, it dawned on me that I should just move my entire banking relationship to an online one. Do you want to know what happened next? The following:

• I began receiving 0.60% interest* on my checking account – that’s 12 times as much as my old local savings account (*for balances over $15,000; balances under that receive 0.10%).
• I get free checks as often as I need them which based on how often I write a physical check today, I can’t wait to order more in about 6 years.
• I still use online bill pay with ease.
• I still can transfer money to my Schwab investment account with just a few clicks of the mouse (or taps on my iPhone app).
• I take a photo with my phone to deposit any physical checks I receive and they “magically” appear in my account a few days later.
• I can now use ANY ATM machine without concern for transaction fees because I am eligible for up to $10 of refunded ATM transaction fees each statement cycle. Most banks charge a non-customer of theirs roughly $2.00 – $3.50 per transaction here in central Ohio.
• My kids started asking if they could still get “free” suckers from the local bank.

There are countless great online banks available. Personally, I use Ally Bank and could not be happier. I chose them because it appeared to me at the time that they had the best app for my phone. Customer Service representatives have been a pleasure to work with when I have had questions as I stepped into this great unknown (which is really not a big deal I have come to learn). Once I made this change, I have excitedly (yes, with actual excitement and enthusiasm) told my clients about this experience. Each client who has followed the advice and moved to an online banking relationship has had the same question for me: “Why didn’t we do this sooner?”

In addition to great checking and savings account options, they also offer an array of Certificate of Deposit (CD) offerings, including no penalty CDs that give you an option to boost your savings rate, today as high as 1.50% for an 11 month no penalty CD (there are CDs with various maturities and interest rates to choose from, as high as I have seen anywhere else). With their No Penalty CD, you will not be charged a penalty for early withdrawal. You can withdraw your full balance and interest any time after the first 6 days following the date you funded the account. Admittedly, that is only a 0.05% enhancement over their current online savings account rate of 1.45%, but at times this spread in rates has been greater.

Other banks I personally considered when I did my due diligence were Synchrony Bank, and Capital One. I typically scan the rates available at these banks every few months and they all are usually within 0.05% of one another, certainly not enough for me to warrant a change. However, you will still want to be careful not to exceed FDIC coverage limits at any one bank, so maybe it makes sense to use multiple providers. I strongly encourage reviewing the FDIC link I have provided as it is very easy to exceed $250,000 of coverage at one bank simply through account titling maneuvers. Ally Bank and Capital One offer credit card programs as well so that can help consolidate your financial relationships as well.

You might be thinking, “we’re just talking about 1% here, it’s not worth the trouble of breaking my habit of passing up free money.” Let’s assume you are 45 years old and maintain an average daily balance of $30,000 in your savings account to cover emergencies and to help you sleep well. Let’s further assume you let the interest crediting just build in the account. In my Ally Bank Online Savings Account with a rate of 1.45%, I will have $57,340 roughly in 45 years. A recent scan of local banks here in central Ohio suggests that you might be able to get a Savings Account rate of 0.25%. In that same 45 years, your savings will have grown to $33,567. This simple change was worth nearly $24,000 for me. That might be worth a few months of retirement income for me. I guess those suckers my kids enjoyed so much weren’t free after all.

Jamie