The best savings account has no fees, no minimums and a good interest rate. But the best feature of this savings account is automating your savings.
This week, I’m sharing my favorite accounts with you.
In my last note, I talked about why American Express Starwood card is the best all-around credit card and the one I personally use.
Today, I want to talk about another crucial piece of your personal finance system: your savings account.
Savings accounts really matter because they’re where you save for mid-term and long-term goals: your wedding, house/car down payment, vacation fund, etc.
Instead of intermingling these funds with general spending money in your checking account (where it inevitably gets spent) it’s psychologically important to set mid-term money aside in its own, separate savings account.
But beware the big banks. Extortionate fees and terrible customer service make them a bad deal for most people. As I write in chapter two of my book:
“I would not encourage anyone to use a standard Big Bank savings account. Online savings accounts let you earn dramatically more interest with lower hassle. And because you’ll primarily be sending money there, not withdrawing it, what does it matter if it takes three days to get your money?”
There are plenty of good online savings accounts to choose from, but after evaluating many options, here is…
The best savings account is…
I use Capital One 360 (formerly ING Direct).
This is the account I recommended in my book, and it’s still the account I use today, years later.
The psychology of sub-savings accounts
I mentioned how psychologically important it is to have sub-savings accounts, rather than one lump “savings” area.
You see why this matters?
If your friends call you up and say “Hey dude, let’s roll to Vegas this weekend,” you’re not going to be like, “Hang on guys…let me initiate a transfer from my ‘down payment’ sub-savings account, which should take 24-48 hours.”
You could…but you won’t.
This is a GOOD THING.
Using your automated personal finance system, I use monthly automatic transfers to funnel money into each of my sub-accounts. Now that these transfers are in place, I’m getting closer to each of my goals automatically, month after month, without having to remember to set money aside.
This is precisely how people get rich automatically. Because when you don’t see the money — when it’s automatically withdrawn from your checking account and shunted to specific savings goals — you will never miss it. However, a few months later, you’ll be amazed at how fast you’re accomplishing your goals.
By the way, it’s possible to simulate sub-savings accounts with any savings account (for example, by manually creating your own “subaccounts” in Excel.) But I like Capital One 360 because it just does it for me. Why give yourself another financial chore to think about? I cover the use of sub-savings accounts in more detail in my blog post Using Sub-Savings Accounts For Unexpected Expenses. It’s an incredibly powerful way to make your savings more streamlined and purposeful.
Other benefits of the Capital One savings account
- No fees, no minimums
- Good interest rate (see below)
- You can do everything online in an ultra-simple interface
- No annoying upsells sent via postal mail = paper cuts
- Links to your checking account (even if not in ING) via electronic transfer
One thing about the interest rates these banks pay. A lot of people ask about the 4-5% interest rate that ING and other high-interest banks used to pay, which I quoted in my book. Unfortunately, those interest rates are variable, meaning they change with the economy. Do NOT waste your time chasing rates. A 1% difference on a balance of $10,000 is $8.33/month, hardly worth your time.
Let me say it again. DO NOT BE A STUPID RATE CHASER. If you write me and say, “But Ramit, XYZ bank has 0.2364% higher interest rate. LOL! U R WRONG!” I am going to (1) mock you, (2) unsubscribe you, and (3) hate you.
Find a bank you trust, stick with it, and get on with your life.
NEXT STEPS: Open a savings account
By the way, if you’re wondering if I still endorse this account, click here to see my thoughts on the ING-to-Capital-One transition.