Why Brick & Mortar Savings Accounts Suck

Note: In any other personal finance blog this post might seem too obvious, a useless rehash of an old tenet. But here at burnfive.com I'm assuming that sometimes my readers aren't aware of what might be a big fat 'duh' to people who've been studying personal finance for a while.

Your savings account probably isn't giving you nearly as much money as it ought to be, especially if it's held at the same walk-in (brick & mortar) bank as your checking account. Nearly all brick & mortar banks have dismally low interest rates on their savings accounts. We're talking less than 1%. For example, Washington Mutual's Regular Savings Account? A puny .25%. Nearly all online savings accounts start at 2.0% or more. You're lucky to earn a nickel a month keeping your savings in a brick & mortar bank, but with an online savings account you can get a much greater return on the same amount of savings.

What blows my mind is the sheer amount of people my age who don't realize they could (and should) be earning a much greater return on their cash. Then again, most of them aren't really saving anything either. But once you've started to stash money away (and keep it stashed) - you should be earning the highest return possible while still keeping some of your savings easily accessible for emergencies.

$100 kept in a traditional brick & mortar bank savings account at .25% will earn a quarter in a year. $100 kept in an online savings account with 2.5% interest will earn $2.50 in a year. Granted that's not a load of cash, but it's still money that you don't have to work for. Those earnings go up if you're constantly adding more money to your savings. Here's a simple calculator you can play with to find out how much interest you could potentially earn if you can find some money to squirrel away.

A potential downside to online savings accounts is that it may take longer for your money to get back into your liquid accounts, should you need it. But for me, that's a blessing. When my money is harder to access, it makes it easier to only use it in the case of a true need.

I've used ING Direct for 4 years, and they're one of the most beloved online banks that I know of. They generally offer one of the most competitive interest rates around (3.0% as of 4/20/2008) , and they've got a great referral program: you refer a friend, they fund a savings account with $250 - you get $25, and they get $10. Even if your friend then turns around and withdraws all of his or her savings back into another account, the $25 & $10 are yours/theirs to keep. I've got plenty of referrals, if you've got some savings ($250 or more) and you want to earn a higher return on them, email me and I'll send you a referral.

Take a good look at your account disclosures. Are you earning less than a 1% return on your savings? If so, get your money into an account that will pay you! Even if you choose a bank other than ING, I cannot emphasize enough the importance of a good interest rate- money you don't have to work for is the best kind of money.