Online Savings Accounts and Battling Inflation
Aug 15th, 2007 by Jennifer Lynn
Here are current rates of some online savings accounts, as of August 15, 2007.
iGObanking 5.30% APY ($1 to open, no minimum, no fees, FDIC insured, compounded daily)
E*Trade 5.05% APY ($1 to open, no minimum, no fees, FDIC insured, compounded daily)
EmigrantDirect 5.05% APY ($1 to open, no minimum, no fees, FDIC insured, compounded daily)
HSBC Direct 5.05% APY ($1 to open, no minimum, no fees, FDIC insured, compounded monthly)
ING Direct 4.50 % APY ($1 to open, no minimum, no fees, FDIC insured, compounded monthly)
iGObanking still remains the top contender in terms of a low minimum of $1 to open, with no annual fees attached and an excellent high yield. I opened my first online savings account with iGObanking six months ago and have had a very positive experience overall. (You can click on these article titles to read more about my experiences with iGObanking.)
Battling Against the Risk of Inflation
All the above mentioned online accounts are attractive options for savings due to one inescapable factor eroding the value of our hard-earned dollar - inflation. US economic growth, on average, battles roughly a 3% inflation rate every year.
A wise investor knows they must seek out investments which will keep pace with continued inflation, or their money will lose essential purchasing power as the cost of living continues to increase.
If your savings are stashed at a traditional bank earning 1% APY or lower, the money is unfortunately losing value every year. And if your savings are tucked in an investment vehicle earning roughly 3% APY, you are just barely breaking even.
Consider this sobering example of inflation.
If $1 was invested in stocks at the end of 1925, your $1 initial investment would be worth $98.37 at the end of 1994, after inflation adjustment. However, if you had tucked that same $1 in your undies drawer instead of investing it, that $1 would be worth roughly 12 cents by 1994. (”A Guide to Growth Investing,” Ibbotson Associates, 1994 yearbook).
Brett Machtig offers another example of the corrosive effects of inflation in his book Wealth In A Decade:
In 1965, on one of his annual trips to Las Vegas, a gambler named Jay won $25,000 after taxes at a casino. Just for reference, Jay could have purchased a modest home for that sum in 1965. Instead, he put the money in a safe deposit box, where it remains today. While the money has been gathering dust, the effect of inflation has made the money worth less than $7,000 in today’s dollars. If, on the other hand, he had invested the money in a tax deferred annuity at 8 percent, it would have been worth more than $270,000 by 1997 - ($76,000 adjusted for inflation) - about 11 times as much (assuming a 4 percent rate of inflation).
~†~ Baby Steps Are Key ~†~ When contemplating investment options, always consider the impact of inflation and the effects of your purchasing power over time
~¤~¤~
Sayings of the Wise
“The wise man saves for the future, but the foolish man spends whatever he gets.” Proverbs 21:20
“Invest in inflation. It’s the only thing that’s going up.” Will Rogers
=^..^=
In 1965, on one of his annual trips to Las Vegas, a gambler named Jay won $25,000 after taxes at a casino. Just for reference, Jay could have purchased a modest home for that sum in 1965. Instead, he put the money in a safe deposit box, where it remains today.
Unless I’m mistaken in 1965 the casino would not have deducted the taxes from Jay’s winnings. At the time he would have also been able to not cash out his winnings (keeping them in the form of casino chips) and keep them in a safe deposit box *at* the casino. This way he could have “withdrawn” his winnings gradually, keeping them under the IRS reporting requirements for casino winnings. This was a very common practice until the last decade, and would have enabled Jay to a) not pay taxes on his winnings and b) move them into some sort investment that would have yielded interest….
I just stumbled upon your site and have found it highly informative and interesting. So, thanks!
In reading over your iGoBanking posts I thought that I would head over and start a savings account. One question I had while reading the terms and conditions is the issue of ‘early withdrawal penalties.’ Now, I would plan to use this as a nest egg/emergency fund like yourself, but one of the stipulations reads:
If your account has an original maturity of one year or greater:
* The fee we may impose will equal six months simple interest on the amount withdrawn subject to penalty.
…does this mean that even if I maintained an account for 20-30 years, I’d still have to pay a fee upon withdrawal? My understanding of a savings account is that, unlike a CD it does not have a ‘maturity date.’ I’m a bit of a dummy when it comes to finances and the like, so any clarity would be extremely enlightening. Thanks
peace out
~J
Do you have any news on Canadian high intrest bank accounts?
Investment is the way to go. Let your money work for you.