Gen Y Finances: Should You Be Thinking About Internet Banking
From my post on budgets, you would think the answer is yes, and you’d be right. Partly. I certainly wouldn’t be the first to point out the most attractive feature of online banks: better interest rates. Over the past two years, the main trend I’ve seen is that most online savings accounts have interest rates that for the most part rival CDs.
Two years ago, interest rates for a CD were in the low fives (mine was a special rate of 5.25 APY) and online savings accounts were high fours and low fives as well. Now CDs are in the three percent range and so are online savings accounts. Of course, the question here isn’t between the two types of accounts (CDs or online savings) but is the monetary return in interest from internet banking enough to make it worthwhile?
A friend of mine once joked that you’ve mastered the liberal arts education when you answer questions by responding “Well, it could be this but it could also be that and the only answer is there is no right answer” at which point you throw up your hands in surrender. And I have to say that, as unhelpful as it may be, my answer to the question of internet banking is something along those lines. Yes, your money should be working for you, but there’s also something to be said for the price of piece of mind.
What does this mean? Well, I have Gen Y friends who find it disconcerting to deposit money into their account at an ATM (apparently the myth that all Gen Yers are tech savvy doesn’t extend to banking), and banking online is even more disconcerting, so for them the increased interest is not substantial enough compared to the level of familiarity they have dealing with individuals rather than interfaces.
As a Gen Yer, though I’ve spent more than two thirds of my life saving, many of the first years of those savings were from making pocket change per hour (around thirty dollars a summer for picking strawberries for five or so years). My savings then is going to be smaller than someone who has similar savings habits, but has had years to contribute to savings accounts. So with quick and dirty multiplication (rather than the formula for compound interest), though I’d make three times as much in interest, the difference isn’t all that great between the two sums.
After a lengthy discussion about the benefits of online savings accounts, one person (who has a moderate level of dislike of all things electronic) said that she broke down and got an ING account to take advantage of the interest rates. The conclusion of the conversation also high-lighted what can be the most attractive feature of online banking: the out of sight out of mind principle.
My savings and emergency funds are online while my day-to-day spending accounts are based at my local bank. For me, because I can’t always walk to an ATM and withdraw money, the funds stashed online no longer feel as accessible so it overcomes the inclination to use the online savings account as a regular checking or savings account. Which means that you’re more likely to let it just sit there are grow with that nice interest rate, unlike that money stashed in your Nalgene or cookie jar (like my brother and my friend) which isn’t earning any interest whatsoever.
Not only that, but the added interest eventually leads to more money which can contribute to those larger balances where the higher interest rates really begin to make a difference. It just requires getting over the hurdle of setting up an online account…
As a fellow Gen Yer, I do the same- savings and emergency online and monthly expenses in a physical bank. But I’ve found that Internet CDs offer better than average rates too. I have ING accounts and they offer a bonus in the interest rate each time it rolls over into a new period. So even if the rate drops, you still get a better deal than buying a brand-new CD.
Elizabeth: Good point about the out of sight, out of mind principle. It works with paying down debt, buying real estate out of state, and automatic savings and investment plans. Out of sight, out of mind typically works to one’s advantage when it comes to money!
Elizabeth – great post! I work in banking and have my brick-and-mortar account for day-to-day checking, and online EmigrantDirect account for our house savings. We have our auto loan through a credit union that we can only access online or via ATM (it’s an old account now in another city – but we kept the account active for the member benefits.) Like you, I enjoy the piece of mind that I can’t easily access the money, but it is working harder for me than my local bank. I must admit, though, I wish our bank did offer better rates – I would prefer everything in one place.
I’m one of those people who really dislikes technology when it comes to my money. I used to have automatic deposit for my paycheck until a former employer messed up my account so often from not depositing money when they said they would, and taking money out after it had already been deposited. Ever since then, I’m a paper check in hand kind of gal.
That being said, the more I read about online banking and the more my friends rave about all the interest they’re earning from their ING or HSBC accounts, the more I am considering opening an online account. I think this article pretty much sealed the deal for me.
I have to say Serena, I was in the same boat for a long time. Until I went to college I dealt exclusively in cash, particularly because my job paid in cash. When I got a job at school, I had no way of getting to a bank to deposit my checks, so it was direct deposit for me. Fortunately, I’ve never had any mishaps with my employers. From there I’ve gradually progressed to internet banking and I wish I had done it sooner. Of course, it’s all about what works for you but I’ve been happy with mine.
I’m definitely with Scott though. I wish it were all in one place, especially since I enjoy the interaction at my bank, but having it in an online account removes the temptation which is great. One of my co-workers also has it set up to automatically shunt a percentage of her paycheck directly into her online account which she says works well. I haven’t gotten there, but it’s a goal.
Kim, I didn’t know that about the online CDs so thanks for the heads up. After having to use my emergency fund last year for a plane ticket that was twice as much as my first car (although it was a very cheap car), I’ve worried about having my money tied up in CDs. For a special purchase savings account or vacation fund though…