“But I earn $300/year from switching banks!”

33 Comments

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A little comment exchange on yesterday’s post about not switching banks to get an extra 0.25% interest:

Mike:

I’m one of those rate-chasers, so [with $40k in emergency savings], I’ve consistently been earning anywhere between 0.65-0.85% higher than my operating money market account… That’s an extra $300/year in interest, which is definitely worth changing banks every 4-6 months for me.

My response:

Mike: If you were smart enough to sock away $40k in an emergency fund (which is really impressive, btw), I bet you’re smart enough to spend your time doing something better than earning $300 year — something that will sustainably let you earn much more. You’re only earning $0.82/day doing that!

How about spending the same time optimizing your asset allocation? That step alone is probably worth thousands per year. Or starting a side business? Have you considered reading 5 new books about personal finance, entrepreneurship, psychology, whatever? Or even spending those few hours with your family? I don’t know what you value, but in my eyes, any of those things would produce more value than $300/year…especially for someone who’s so far ahead of everyone else, like you are.

This is just my 2 cents…~1/40th of what you earned today (sorry, couldn’t resist).

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33 Comments

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  1. I don’t understand. While your suggestions are sound in general, I don’t see anywhere in Mike’s response where he said he didn’t do any of those things. Nor did I see anywhere in Mike’s response where it said his constant switching of banks cost him a lot of time. What if he does all of those things? Isn’t that extra $300 worth it then?

  2. You are carrying the same logic as the people who receive minimal interest with their local banks… “It’s just a few cents more PER DAY!”

  3. It’s not 82 cents per day if it only takes him a few minutes three or four times a year to do it.

    And how do you know he’s not optimizing his asset allocation, starting a side business, or reading finance books, as well?

  4. Dude! You are assuming that Mike is a young man…
    What if he is a 65 year old man who has enough in his 401k and does not want the market to do any more damage to his net worth?

  5. It’s not like it really takes all that long to switch your savings account. Why not take a few minutes to get an extra $300 or so?

    Anyway, the posts here have been pretty bad lately and this is just another example. Unsubscribed.

  6. Ramit, sometimes you come across as a real dick. This is one of those times. Let the guy do his thing, and try not to accuse him of being a horrible father, person, idiot, etc.

  7. Well, I know the other people are saying Ramit is coming across as a dick, but that’s the reason I like him: he doesn’t sugar coat it. The guy should really consider diversifying, or just putting it all in a good long term stock. Berkshire Hathaway typically does 5-10% of growth a year, and right now it’s at an extreme discount. Put his 40k in a few shares of BRK.B, come back in a few years, and he’ll be doing much better than $300/yr.

  8. Lets see,
    First off, yeah, the posts have been quite sucky of late. I demand a full refund of the $0 I paid. But seriously, can we have more cowbell please?

    Second, yes, the we do not have enough details to draw an informed conclusion. That said, in 90% of the cases, I’d say its a bad idea to jump around banks.

    Umm… when did Ramit accuse the guy as being a horrible person? Saying that you could spend more time with family does not imply that I think you are a horrible dad. Family is like ice cream, theres always (more) room for it :)

  9. @Tom

    The money is his emergency fund. He needs it to be liquid. Investing it in stock kind of defeats that purpose.

    I don’t even know what the reason was behind Ramit’s surly response, but it was uncalled for IMO. There is a big difference between not sugar-coating something and being an a**hole.

  10. Wow…everyone’s being harsh here, including the commenters. I think Ramit’s trying to point out that sometimes we have to consider if the money is worth our effort.

    And Ramit, I agree that your posts have been under-par recently, but perhaps that’s because you’ve set the bar so high in the past. Keep up the good work.

  11. Good comments. I didn’t mean to be surly, and even though I can’t see any ass-holeness in my own post (because I can hear my own beautifully friendly and melodious voice in my head), my tone in the above post obviously struck a chord. To clarify, I admire what Mike has done, and the fact that he’s accumulated such a sizeable emergency fund means he can probably do more than optimize for such a small amount. At his level, he can afford to think bigger than $300/year.

    No harm intended. But I appreciate the comments bringing me in line and checking my tone.

  12. I agree with Ramit on this. He is merely pointing out the value over a year. I don’t jump around banks so I don’t know, but unless transferring savings is as easy as eating a ham sandwich, I don’t see how it would be worth it. Also, couldn’t something go wrong with the transfer? Just the risk of getting that much money tied up in a customer service snafu would be a turn off for me. About like jumping for joy over the money you make from jury duty.

  13. Peace, everyone. Let us be calm and consider what both sides have to offer.

    Cash investments have their place (such as parking your emergency fund) but there are also times when over-using it would not be appropriate.

    There’s an issue regarding whether 0.25% is worth chasing after. Normally, I would say no, but with a 40k balance, I can see why it would be worthwhile to chase after.

    However, there’s is also a bigger issue regarding whether having 40k in cash is even necessary. If one does not need all of the money liquid, then one could be missing out on much better investment opportunities for your money. For example, not out-pacing inflation is also a form of investment risk.

    But I’ll give the benefit of the doubt since only the original commentator knows for sure whether keeping such an amount liquid is truly necessary in cash….

    Personally, I am lucky that my credit union is paying 5% (yes, 5%) interest, but even then, I only have my emergency fund and various short-term money in that account. The majority of my money are put into stocks and mutual funds.

    Why?

    Because let’s face it: Even with 5%, it won’t do much to fight off the current level of inflation. Also, as a contrarian investor, I believe this bearish market represents a tremendous buying opportunity that could pan out years from now. That and I just don’t need that much liquidity right.

    Please remember that guaranteed cash investments are a double-edged sword: What guarantees you the 3 to 5% also locks you into that 3 to 5%. It’s great if you actually need the protection or liquidity, but beyond that, it can also bottleneck your portfolio.

    Ok, I’ll stop ranting now. :D

  14. This seem like the Mike and Ramit hour, LOL

    Personal finance is “personal”

    I think that putting $10K in a bank to get $25 is crappy. However, not sure why this turned into another subject.

    I agree with Tom. Investing $40K elsewhere you will get more bang for your buck.

  15. maybe ramit is trying to tell us something, I just thought of.. well.. why put my money into an IMG account when I can invest that money into IMG lol =)

  16. I think I got my 15 minutes of fame here! To address a few points, I am still pretty young (in my late 20s), but I’m married with a kid and own a house in a relatively expensive area of the country. Ramit has a good point — although I do most of the things he said, I really want to start a side business to create extra income to free myself of my 8 to 5 (or 8 to 8) job and retire early. I consider myself well-versed in the area of personal finance, but I would like to learn more about entrepreneurship. Do you have any suggestions Ramit? I have a professional background in accounting/finance, to give you an idea of where I’m coming from.

  17. It’s just opinion. That’s what a blog is for! He’s not writing an encyclopedia of personal finance here. Ramit, don’t let the naysayer(s) get you down. I enjoy this blog a lot. I don’t blindly follow your advice, mind you. I find some of your arguments convincing, and others don’t appeal to me as much.

    In a similar way, my boss uses Dave Ramsey’s method (to the very last word), and that’s great, because it works for him. I’ve heard a whole lot about it, and I’ve gleaned some good ideas from him, but a lot of what he says doesn’t quite work for me, personally, so I decide not to use those parts.

    Honestly, though, I like reading opinions on why X is good and Y is bad, just as much as, reading on another blog, why Y is better than X. It helps me make personal informed decisions. As Moneymonk said, personal finance is “personal.”

  18. [...] I Will Teach You to Be Rich “But I earn $300/year from switching banks!” [...]

  19. Ramit, I must admit I’m a HUGE fan of your blog; but with each day I visit it, there’s more ads, more giveaways, less quality posts, less interviews with entrepreneurs…The quality has gone down remarkably. I think of it as what happened to Myspace after it was bought by a large corporation.

    Now, since its free, who am I to complain – but I have a feeling your blog has a LOT to do with your future, and your karma, and I’d love to see you go back to your roots and do some hard-core writing, the good ole way :) Even if you have to outsource most of it and only edit the posts !

  20. I agree with Anand, Ramit I’d like to see more of your thoughts. At the end of the day personal finance is a constant learning process and it would be great to know how your experience has influenced your decision making. I think you have a great opportunity to build on this community by addressing that.

  21. Anand and DMH, good feedback. I hear what you’re saying. Look for more stuff here! And thanks for taking the time to leave your thoughts.

  22. Err I cant see Ramit being sharp with Mike, despite the description of being a sugar-coated iceberg, but Mike you could easily get a better return on your 40k for very little risk and effort.

  23. Hey Ramit,

    I have money spread out in different banks. The majority of my money goes to ING -> in terms of liquidity. I also think it is important to put a small percentage in a local bank, as well as a small percentage in a commercial bank.
    Here is why:

    1) ATM fees ->talk about wasting money. A finance instructor told me that if you compounding the interest on say the ATM fee over your life, you end up paying like 98258259838583% interest on your money. It is a complete waste
    2) The service of a local bank ->wherever you live permanently, you should definitely have business at a local bank. One, a genuine relationship can help you later down the line (look at the bigger picture).
    3) The commercial bank -> Goes back to the ATM fee. I personally only put like 250-300 in these banks, just in case I need money. I have it in BB&T -> the best customer service for the larger banks
    4) ING – Obviously, the best bank in terms of ROI.

    So in terms of liquidity, I’d say 1) ING, 2) Local, 3) Commercial.

    Ramit, agree or disagree? And please, don’t post your reply into a new blog ;)

    -Brandon

  24. Wow, I’m officially deleting your site off my bookmarks jerk.

  25. Ramit, I still love you and appreciate the time you take to share your knowledge. :)

    Would have loved to hear suggestions as to what to do with that 40k. Did you mean diversify within his 401k? i wasn’t sure.

    thanks!
    NM

  26. Ohhh… shut up allaya!!

  27. Hey Ramit, I saw you 2 years go when you came to MIT. (I graduated in 2006.) Weird that I’m revisiting your site now, but thanks for coming. Your advice has helped me immeasurably! Anyways, here’s my take on this.

    I currently have 2 sets of banking/checking accounts, and plan to open one or two more. I pay all my bills online and manage via MS Money to keep track of expense w/ credit cards (I never carry a balance) so it’s very easy for me to manage multiple accounts.

    I have:
    Bank of America
    Why: Great ATM network, but rock BOTTOM interest rates (last I checked, the savings pay less than 50bps). This was my first account (back when it was Fleet in Boston), so I direct deposit here and pay all my bills here. Btw, I have a strong distaste for BofA.

    Citi:
    Why: They offered a great rate, and still have a semi-competitive one with their Ultimate Money Savings account (as long as you pay two bills a month, which I do.) Nonethless, no fees for these accounts anyways.

    HSBC: (may open soon)
    Why: Stronger Int’l Network for when I’m travelling abroad.

    Online Bank (Maybe Emigrant, or ING, may open soon)
    Why: Though it may lack the ATM convenient, it pays a high interest rate.

    My plan. Keep some money in each account (enough so I can comfortable take out a few hundred if I need it.). Check interest rates periodically. Write one check to move money into the account with the highest rate. I will essentially have all my money in one account, and just move it periodically.

    Now I’ve done a lot of typing, which people automatically assume means it requires a lot of work. For me it doesn’t. And since my monthly interest payments I receive are in the hundreds of dollars rather than tens, writing one check and having the money sit there earing a higher rate seems pretty easy and worth the 10 minutes to me. Just my 2 cents.

  28. $0.82 a day makes it sound like he’s wasting an entire day for $0.82 cents. The invested cash is earning $0.82 more a day passively with much less active time on his part to move the money. I can’t say how long it takes, but if it’s every 4 to 6 months, and let’s guess he’s got a few banks bookmarked to check the rates since he’s done this before so say it takes an hour to switch (generous, since opening an ING account takes like 10 minutes). That’s 3 hours a year. That’s $100 an HOUR.

  29. hmmm…$300 is nothing when you have $40K?

    I have close to $500K saved up and even a $1 means a lot to me.
    Technically, for Warren Buffet with assets more than $60 Billion, $2 million should mean nothing. He should have donated that money himself and avoid that lunch those investment guys from Hong Kong bid on ebay. His time is certainly worth more than that. Especially last year when the auction only closed for few hundred thousand.

  30. I love your savyness in this post. I also write a financial blog at http://www.smarterwealth.net and I love the way you have responded to this reader.
    Time is so valuable, and to be earning less than $1/day making all this effort it could definately be spent better by starting a side business or something. I definately would
    Thankyou for your advice

  31. [...] roadside assistance or purchase protection or extended warranty, you save more than you would with stupid 0%-balance-transfer/bank-transfer games. no comments yet.Gallery of Thunderstorm Wallpaper [Wallpaper] »« Episode 61- IWF [...]

  32. Ironically, while many commenters here mention unsubscribing, this is my first visit to Ramit”s blog from a link on another site… watched the 2 minute CNBC video clip and read this post.

    Subscribed – at least for a few months :)