Why I Stopped Using Brick and Mortar Banks

Saving money is important, we all know that. By saving, we can purchase a home or investment property, by saving we can go on amazing vacations overseas without worrying that we don’t have enough money, and by saving we don’t have to worry about emergencies which may cause us to use credit cards or forgo paying our mortgage or rent payments in order to survive.

Typically, we would just simply stash our money into a local branch savings account and forget it. Some people prefer to put their money into a CD of some sort but that makes it a bit difficult to get to and, if prematurely withdrawn, would have the unwanted added monetary penalties. Fortunately, there’s a better way!

Online savings accounts

When Ally Bank came around and I heard how much yield they gave compared to the brick and mortar banks without having a location, I was a bit skeptical. It’s silly really since it was already backed by the FDIC (Federal Deposit Insurance Corporation) but I was stuck in my old ways. I didn’t trust nonconventional savings banks back then and when Ally came about, I felt that it wouldn’t last.

I was wrong about that.

The other silly fear that I had was the idea that I needed to have immediate access to my money. If I had saved properly and lived below my means, this wouldn’t have been an issue for me and what I had in my savings account wouldn’t have lost its value.

How did it loose value? Well, let me explain.

It’s all about the yield that these banks give you. You see, brick and mortar banks typically give around .06% APY (annual percentage yield) when you leave your cash with them. It’s chump change really but for the purposes of having liquid cash for big purchases and emergencies, it’s something you just deal with, right?

Wrong!

We all seem to forget about something big. Something that affects prices of everything we buy and use on a daily basis. What is that thing? That nasty inflation rate. It changes every year and eats away at our hard earned money which we put away for a rainy day. 

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What is inflation?

Inflation is defined as an environment of generally rising prices of goods and services within a particular economy. As general prices rise, the purchasing power of the consumer, decreases. An example of this is how you were able to buy a gallon of milk for $1 (or less) many moons ago but now it costs around $5. Things become more expensive over time due to inflation and your $1 isn’t able to buy what it used to. 

Last year, the inflation rate was around 1.9%. With a local bank that gives you a measly .06% APY, you’re walking away with less value than what you had put in.

Let’s shoot for an example. Say you had put away $10,000 in a regular savings account. In 1 year at .06% APY, you’ll have $10,006. Now let’s add a dash of that inflation in there, what do you get back now? $9,815.89!! Of course it won’t look like that on paper. Your account will still show $10,006 but the value of that $10,006 is now $9,815.89. Got it? Good!

This is why I will never look at a regular savings accounts ever again unless they up the antie! Why would I if they can’t even keep up with inflation?  I am practically helping them build their wealth with my money on their investments but they can’t even keep up the pace with inflation for me? I mean, if you are going to use my money to generate an income for your business, I should get more, no? Because of this, I have turned to those high yield online savings accounts instead.

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High Yield Savings Accounts

High yield savings account is just that, a savings account that gives you a high yield. There are some that give 2.10% APY and others that give 2.35% APY. There are some out there that give an even higher APY’s, however, I would scrutinize their fine print. Why? Well, when banks have a higher APY than their competitors, it becomes an unsustainable business model on their part because they would loose money instead of make money. In order to balance that out, those really high APY banks tend to have transaction requirements, deposit requirements, or limit the amount of the money you can get at that higher yield.

Here is an example of what you could make with a high yield savings account. Let’s say you have put your $10,000 into an account that gives you 2.20% APY, after a year you would have $10,220. But let’s add that evil inflation in the mix. Based on last years inflation rate which was 1.9%, your $10,220 would be worth, $10025.82. Still isn’t grand, however, at least it’s not loosing so much to the point that your money is valued less than what you had put in and you are making more than you would at the old fashioned brick and mortar banks.

Keep in mind, inflation fluctuates every year, so it can go higher or lower however it averages around 2%.

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Of course, the higher yield the better but you really need to be sure that, after looking through their fine print, they are really giving you what they say they will give you without any strings attached. You also have to do research on the bank to see if you will have issues getting to your money when you need it.

Here are some well known high yield savings accounts that you can look into. Some of them are federal credit unions, others are online branches of well known banks, and a few are ones that I haven’t even heard of.

  • Barclays Bank – 2.20% APY, no minimum balance
  • Ally Bank – 2.20% APY, no minimum balance and you can get a free checking account
  • American Express National Bank – 2.10% APY, no minimum balance (and no fees)
  • CIT Bank – 2.45% APY, $100 to open
  • Vio Bank – 2.37% APY, $100 to open
  • Citizens Access – 2.35% APY, $5,000 minimum balance amount
  • PurePoint Financial – 2.35% APY, $10,000 to open
  • HSBC Direct – 2.22% APY, $1 minimum to open, no minimum balance to earn APY
  • CIBC Bank USA – 2.39%, $1,000 to open
  • Popular Direct – 2.36% APY, $5,000 to open
  • USALLIANCE Financial – 2.30% APY, $500 minimum to open
  • Alliant – 2.00% APY, $5 to open and ATM access
  • Digital Federal Credit Union – 6.17% APY up to $1k

Are there other ways to save? Of course, but then you will limit your accessibility to your funds. Some people like buying short term bonds, some will still want to look into CD’s but since they have timeframes, you won’t get immediate access to your money and for savings purposes, I think high yeild banks are the better way to go. 

Although I stay clear from regular savings accounts, any savings is better than just keeping your stash of cash in a bottle. At least your money will loose less value than if you kept it under your mattress.

If there is an alternative out there, I’d love to hear about it! Please share your thoughts and expereinces in the comments!

 

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