The low-hanging fruit. Savings accounts can be a great way to build wealth, albeit slowly. Very slowly. In fact, many of you many of you may snicker at the “High-Interest” adjective. Most online money markets currently pay a paltry 1.70%. However, they do pay roughly 5 times conventional savings accounts and with pending inflation concerns these rates are bound to rise.
There are two valuable applications of high-interest savings accounts. The first is for the oh-so-important emergency fund. To learn more why you should have an emergency fund read here. For an emergency fund, you need to have your funds as close to liquid as possible, which means having them easily available. And an online savings account is only a click away. Another good option is putting them into CDs which, while aren’t as easily accessible, will give you a little better rate.
The other application is a holding place for investment money. If you’re starting out trying to invest your money, most investment options require a hefty minimum. It’s not easy to scrape together $2,500 to open a brokerage account. So putting away money little by little in an account that earns some interest can be a convenient way to start.
Speaking of little by little, I’m a big fan of the “pay yourself first” model for building wealth. What I’ve come to realize is that I’ll always have debts (hopefully quality debts), always have expenses, always have an urge to buy or spend somewhere. But by paying yourself first, you’re forced to make things work on a smaller budget, saving money all the while.
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I personally use both ING DIRECT and HSBC Direct. I prefer ING DIRECT because they allow me to compartmentalize my savings easily. I have an account for home improvements, an account for a new lawn mower I’m saving up for (riding one…enough of this pushing crap), an account for future investments, and so on. All I have to do is log in and I can check all of my accounts. And they’re set up for automatic deductions to coincide with my paychecks, which is very convenient. The reason I have an HSBC account is because, for awhile, they had the best rate and they are my regular banking institution which made it convenient. Interest rates on the savings accounts will fluctuate and in good times, when banks are competitive, it can be tempting to move your money all around. This becomes a big pain in the ass so I tend to stick with ING DIRECT until they piss me off (by not raising their rates).
Hopefully I’ve been able to illustrate why high-interest savings accounts are a legitimate way to make money online. They are an important tool in building wealth and with the some of the conveniences (such as ING Direct’s multiple accounts) there’s really no reason not to use them.