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A PENNY SAVED: Direct savings banks offer online accounts that can be managed conveniently from your personal computer. These accounts provide many advantages, but it is best to find a good one and stick with it, rather than make frequent changes between banks that offer slightly different savings rates. (Photos.com)
With the effects of a worldwide global financial crisis still being felt around the nation, scores of Americans are in “wait and see” mode when it comes to their equity investments. Though some financial experts dispute the wisdom of this statement, “buy and hold” is an oft-repeated mantra in personal finance circles, and many Americans take that advice.
But when it comes to increasingly popular online savings banks, savers are notorious for moving funds in search of the best rate or doing what is known as “rate shopping” or “rate hopping.”
“Because of the ease of opening online accounts, savers tend to switch from bank to bank more than they would if they had their money at a physical branch location,” said Ernie Tan, vice president of online bank WTDirect.
Good News, Bad News
The good news is that Americans are saving more. According to the Bureau of Economic Analysis, the U.S. personal savings rate reached nearly 4.6 percent in 2009—this is nearly double the rate from just three years earlier.
The bad news is that by constantly switching banks, savers are likely failing to get the most out of online savings accounts and may miss the larger picture.
Worth the Rate?
Ramit Sethi is a nationally recognized personal finance expert and author of a blog and best-selling companion book “I Will Teach You To Be Rich.” Mr. Sethi says that he often sees people move from bank to bank for minuscule interest rate differences. He explains, “Rate hopping is one of the biggest personal finance mistakes you can make. If you have $10,000 in savings, moving for even an entire percentage point will save you around $8 monthly—by the time you switch online banks, rates often have changed and your goals have likely suffered.”
Keep Your Savings Habits, Change Spending Habits
Mr. Sethi asserts that a better and more lucrative strategy is to spend time looking for drains on your finances. By focusing on how to cut your personal and household expenditures, you are more likely to save money. He asserts that “taking time to find a way to reduce gym costs or your cable bill is a better strategy than moving accounts for $8 a month.”
Focus on the Bank, Not the Rate
After committing to sticking to savings goals and account benefits rather than looking strictly for temporary rate increases, the next step is to look for the right online savings bank. While you do want an institution offering rates that are consistently high, there are several additional factors to consider depending on your life stage and financial situation.
Some online banks take account history and activity into consideration when offering promotions, rate increases, and rewards to clients.
When saving small amounts for goals like vacations and electronics purchases, providers like ING Direct can be a good option. While ING Direct does not typically sit among the top rate payers, the bank offers a number of tools to help savers organize funds and prioritize goals. Given its low minimum, ING Direct is popular among first time savers and younger generations.
High-yield online banks like WTDirect have minimum balances that can put them out of reach for the recent college graduate. However, these premium savings providers offer benefits like rapid transfers between linked checking and brokerage accounts, access to wealth advisory insight, and high touch personal service. If you are saving for college tuition, investments, or a home purchase, these factors may be important.
But according to Mr. Sethi, one of the most important factors to consider is one you should avoid. “Avoid banks offering teaser rates at all costs—pick a [online] bank you can trust for the long term,” he says.
J. Todd Smith is a co-founder and former partner at a New York City-based investment advisor. He is currently a partner at The Longitude, a branding and communications consultancy to clients including financial institutions. He has earned a Series 65 designation.
