This is the third part of a series on setting up a financial plan.
The beginning of the series is here.
The previous article is “5 Accounts, #1 – Checking“.
The next article is “5 Accounts, #3 – Online Savings“.

Last time, we looked at the checking account, and paring it down so that you’re not storing unnecessary money in there. There’s another very good reason for doing this which I didn’t touch on in the last post – practicing frugality.

With only the money needed for your “day to day living” sitting in your checking account, any sudden impulsive purchases have to be planned for. You can’t wander out to the stores and drop $350 on a “spur of the moment” xbox 360 purchase, because the money isn’t available to your debit card (and if you’re seriously impulsive, you’re sensible enough not to carry a credit card around all the time, right?)

Expensive purchases suddenly have to be thought through, weighed against your other financial priorities and then “budgeted” – before you splurge on plane tickets or games consoles, you’ll need to move that money back into your checking account especially.

This is where an online savings account comes in.

Most (if not all) major banks offer them, and they’re usually quick and simple to open.

Ideally, it’s often easiest if your savings account and your checking account are at the same bank, since transfers between the two should be instant, making the money in your online savings account almost as accessible as that in your checking account (just log onto online banking and make the transfer), but just separated enough that you can’t spend it without thinking.

Not all Savings Accounts Are Created Equal

I’m amazed at the range of savings account terms available out there on the market, from the shocking, rat-bastard rip-off at one end, right up to some fairly good deals at the other. It appears that the savings account market is split in two – those consumers who’ll automatically open a savings account with their checking bank (for the convenience mentioned above), and those who are looking for a good rate of return on their money.

Examples to avoid

• Bank of America’s regular savings account – Touted as their “most popular” savings option, this pays 0.20% APY. Pffft.
• Wells Fargo’s offerings, since they think you’re a dumbass – This page makes me kinda angry, not only because the interest rates are a joke for most levels of savings, but they’re actually encouraging you to deposit more than $100,000 in an account by dangling an improved interest rate for balances above that level. You should never have more than $100,000 in an account, because that’s the level FDIC insurance will cover you to if the bank falls over and dies. However venerable and unlikely-to-fold the bank is, they just shouldn’t be encouraging this behaviour.

Cream of the Crop

There are some good accounts out there. If you want the convenience/simplicity of having your savings linked to your checking account, though, you may either be stuck with your current crappy bank (like I am at Bank of America), or need to consider changing to a more reasonable institution. That can be a big hassle (re-arranging bill payments, salary deposits, etc), but may be worth it in the long run. If you shop for a new bank, also consider their policies on ATM fees for checking accounts – these can add up, and make it harder to get to your own money.

So, onto the banks with the best savings accounts:

• CitiBank – A good range of offerings in general, including an ‘e-Savings’account with few restrictions and a 4.25% APY.
• WaMu – The Online Savings Account is a good deal (5.00% APY, no fees) only if you have a linked checking account.
• ING Direct – Their Orange Savings Account is one of the best in the business, with a 4.50% APY. Bear in mind, though, that they have no physical locations, which may make ING less attractive as a “main bank” to some people.
• EmigrantDirect – With a 5.05% APY, you don’t get much better than their AmericanDream account. However, I’m not going to use that as my “online savings” account – we’ll see why tomorrow.

These are all starting points. If you want to open a new savings account, you really should read all of the fine print, and work out if the terms of the account suit the way you’re likely to use it.

Using the Online Savings Account

Because it offers a better interest rate and separates my money out, my online savings account is the first port-of-call for all my “non-essential” money, and serves two distinct purposes. Firstly, it acts as a “discretionary spending” fund. If I can truly justify an out-of-norm expense (a flight to attend a wedding, say), I can decide to use some of the online savings money to do that.

But more importantly, it allows me to build up “tranches” of money to transfer into slightly less-accessible (but important) accounts over time. The two accounts in question are my “emergency fund” and my “investment fund”, which we’ll cover later in this series. Because I’m looking to build my financial health and net worth right now, the majority of the money in online savings should find itself in one of these accounts in fairly short order.

Over the next six months, I’ll probably keep the balance of online savings slightly higher than necessary to cover any budgetary mishaps whilst I adjust to my new regime. The core principle, though, is that any money I don’t need to spend right now should move further down the “chain” of my accounts into ever more productive places.

Disclaimer: I’m not a financial advisor, and I’m just sharing my own financial plans because, well, I like to share. It’s also a good exercise in “thinking out loud”. You choose to follow any advice in these posts at your own risk, though – I’m not responsible if you overdraw or suffer other financial calamity…

The “Treasure Bowl” photo on this post is from Bob.Fornal on Flickr.

This article first arrived on the interwebnet on Thursday, August 16th, 2007 at 1:00 pm .
It's arbitrarily categorised as being about: Finance, Financial Planning, Thinking.
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You know, this article used to be 4000 words longer, but right before I pressed 'Save', the dog ate it. Honest.