Money Questions.

[Andrew Michaels]

So I just opened a online banking account with etrade that offers 5.05% APY, much higher than my old brick and mortar bank account, which was under 1%. I'm really just starting to get into personal finance, so I have a question.

These high interest savings accounts are relatively new, and so perhaps it may take time for the rest of the financial market to catch up, but why are other savings methods not beating the interest rates paid by these online savings accounts?

Treasury bonds are generally under 5%. Same with CDs. The stock market of course gives higher returns, but is not guaranteed.

What am I missing here? Why would you want to tie up your money in a bond or CD if you can get an equal or greater interest rate in a flexible savings account?

Thanks,
Andrew

[ahimel]

Andrew:

Check your agreement with e-trade, but I'd guess that your 5% isn't guaranteed either. My 4.something% at Paypal isn't. Now, it's guaranteed as long as Paypal has the money to pay, so I'd say that odds are pretty darn good that I'll get my money, but I am technically placing a bet on Paypal Inc staying in business.

Your etrade money also isn't insured. Bonds are backed by the federal government (read: if this isn't honored, you've got bigger problems than your retirement plan) and bank CDs are federally insured up to $100,000. But if etrade gets robbed, or goes under, no one else is going to bail you out. (Again, not much of a risk, but you are placing a bet on whether or not etrade will stay in business.)

Finally, web business are cheaper to run than brick-and-mortar stores, so they can afford to pay higher interest rates. Your local bank literally can't match that, so they don't try. They tout their "safety" instead.

It comes down to what you're comfortable with. My sister doesn't trust Paypal. I think that if they took my money and ran, there'd be such a huge cry that I'd end up with more money than I started with. But that's the reason.

[Dani]

I laugh when people worry about something like Paypal taking their money and running.

Because Paypal will make faaaar more money by staying legit than by stealing and running. If they did that they will have police all over the world on them.

Who is richer and happier, the bank robber or the bank owner?

I also doubt that all the banks in the world would provide the funds for a sudden withdrawl on every account paypal has.

I am far more worried about giving my cc details to small sites. God knows what they will do with them. Store them? delete them? Sell them? Small sites can vanish easily.

[twins15]

Originally Posted by Andrew Michaels

So I just opened a online banking account with etrade that offers 5.05% APY, much higher than my old brick and mortar bank account, which was under 1%. I'm really just starting to get into personal finance, so I have a question.

These high interest savings accounts are relatively new, and so perhaps it may take time for the rest of the financial market to catch up, but why are other savings methods not beating the interest rates paid by these online savings accounts?

Treasury bonds are generally under 5%. Same with CDs. The stock market of course gives higher returns, but is not guaranteed.

What am I missing here? Why would you want to tie up your money in a bond or CD if you can get an equal or greater interest rate in a flexible savings account?

Thanks,
Andrew

Essentially all of these online banks have none of the expenses brick & mortar banks do... they're not paying for all of the building space, etc. The salaries they pay are less. Everything is cheaper for them, which is why they can pay out much higher interest rates.

Also, with regards to your money not being secure (as a previous poster mentioned), that is completely false. Online banks such as E*Trade savings account, ING, HSBC, etc. ARE FDIC insured, meaning that you have the exact same security that you have at a brick & mortar bank. Your 5.05% rate may change (a lot of rates jump around), but it IS insured, and it IS safe.

Good call moving at least some of your money to earn some solid interest.

[Dani]

you know..

Interest in Japan on borrowed money is only 1-2%

If I borrowed 100k at 2%
= 2k a year in interest

Then invest it at 5%
= 5k a year in interest

= 3k a year free money.

Now I just need to convince a bank in Japan to lend me $100,000. Which could be tough considering they don't even want to give me a CC.

[ahimel]

Originally Posted by Dani

Then invest it at 5%
= 5k a year in interest

= 3k a year free money.

Now I just need to convince a bank in Japan to lend me $100,000. Which could be tough considering they don't even want to give me a CC.

Welcome to the wonderful world of investing. You've got the concept down pat.

Don't try to convince them to lend the money to you. Convince them to lend on the investment. They frankly don't care about you, but they like the idea of a secure backing that will practically guarantee that they get their principal back with interest.

Easiest to do in real estate (seeing as how there's this big chunk of land that they can sell if you default) but it really comes down to convincing them that their money's safe. (And you thought those persuasive essays you wrote in English class were a waste of time...)

[ahimel]

Originally Posted by twins15

Also, with regards to your money not being secure (as a previous poster mentioned), that is completely false. Online banks such as E*Trade savings account, ING, HSBC, etc. ARE FDIC insured, meaning that you have the exact same security that you have at a brick & mortar bank. Your 5.05% rate may change (a lot of rates jump around), but it IS insured, and it IS safe.

I apologize; I was unaware that the brokerage accounts offered FDIC insurance. Thanks for the info.