Becoming Bullish on Internet Savings Accounts

Lately, I’ve been collecting my 1099s from banks for interest income that I received in 2005. The disparity in my income from these banks as reported in my 1099-INT is surprising.

I opened my first bank account when I was 14. I was fairly content with the interest income from Coast Federal since my savings was small, the amount of interest was greater than a couple of dollars per month, and I have not taken a class on personal finance. Although I was able to balance a check book, I was not introduced to the concept of compounding interest and rate of return until I studied AP microeconomics and macroeconics under Mr. Lamb. He encouraged his class to investigate mutual funds and gather prospectuses. Mr. Lamb showed how people could have become millionaires after contributing a couple of thousand dollars to an IRA over twenty to forty years. He also introduced me to taking risks, and since he knew that most of us were going to Las Vegas at some point in our lives, he suggested that blackjack was the table game with the best odds against the casino. Mr. Lamb and his class provided a lot of concepts that have been useful in my life. These concepts include measuring risks versus returns, evaluating opportunity costs, and determining marginal utility. Whatever we do with our finances, we should start early. This includes taking greater risks for a chance at higher returns while still young with plenty of years to recover from failure.

I opened a savings account with Wells Fargo when Home Savings of America bought out Coast Federal and the lines to see a teller went out the door. The move was one of convenience rather than on financial prowess.

Recently, I opened a savings account with California National Bank. At the time, the Wells Fargo’s savings account gave an APY of 0.1% while California National Bank offered a savings account with an APY of 0.6%. I left my Wells Fargo account open since it helps provide me with a longer financial history. I was content with the increased interest income from California National Bank. Within a year of opening an account at California National Bank, a colleague referred me to ING. While California National Bank had an APY of 0.6% and Wells Fargo had an APY of 0.1%, ING had an APY of 3.25%! I opened an account with ING, but I deposited only a small amount of money. I am very paranoid, especially when it comes to money and banks that do not have visible branch offices in my area. After completing a year with all three of these savings accounts, I was able to more clearly see how much money I lost through complacency and unfounded paranoia by looking at my 1099-INTs.

After ten years with the above annual percentage yields denoted above, $10,000 would become $10,100 at Wells Fargo, $10,616 at California National Bank, and $13,768 at ING. A good first step in managing money wisely is choosing a relatively safe and conservative savings instrument, such as an Internet savings account. The significant difference in the growth of one’s savings through interest should be enough to encourage one to become aware of the rate of returns provided by several banks and to seek a more competitive savings account.

ING has recently increased their APY to 4%. Email to request a referral and receive a $25 credit upon opening a new savings account with an initial deposit of $200. For the sake of completeness, $10,000 would become $14,802 after ten years of 4% annualized returns.

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