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Ally Bank Savings Account Rate Increases to 1.25%

I know, I know, I know…

Saving accounts are boring.

However, saving accounts are not meant to be exciting. They’re meant to provide you with a storage space for your cash that is extremely liquid (meaning you can withdraw your cash quickly) while providing a small return via interest.

I personally use Ally Bank's online high-yield savings account, and recently got an email from them a few days ago saying that the interest rate is increasing on their online savings account!

Now I get that with inflation running at 9.1% (as of June’s CPI data), 1.25% isn’t anything to get too excited about. But remember, savings accounts aren’t for excitement (and beating inflation), they’re for providing you a liquid storage space for your cash. Below are the annual interest returns you can expect on various deposit sizes:

  • $1,000 * 1.25% = $12.50
  • $10,000 * 1.25% = $125
  • $25,000 * 1.25% = $312.50
  • $40,000 * 1.25% = $500
  • $75,000 * 1.25% = $937.50
  • $100,000 * 1.25% = $1,250

Again, nothing to get too excited about, but the interest rate you receive on your savings using an FDIC-insured online bank is much higher than you receive at a traditional big bank (e.g. Bank of America, Wells Fargo) where the average interest rate on savings accounts is 0.10%.

Image sourced via Bankrate

You receive a higher interest rate on savings accounts with online banks because their overhead is much lower than traditional brick-and-mortar big banks. Since online banks have no branch offices to maintain, they don’t have to pay for bank tellers, managers, or other required staff, meaning they can pass those additional profits to their customers!

Now personally, I am definitely happy that my online bank (Ally) is raising the interest rate on their savings account, but I want to make one thing perfectly clear.

Saving accounts are ONLY for short-term savings.

Here are a couple of examples of what I mean by short-term savings (and the only reasons I would use a savings account):

  1. Emergency Fund (3-6 months)
  2. Home down-payment for your 1st home (people can then either save or use investing accounts for future properties depending on risk tolerance)
  3. Saving for a new car, wedding, vacation, or any other good/service you plan to purchase in the next 1-2 years

Outside of those short-term savings, I would then invest all other cash (and future cash flow) into long-term assets (e.g. stocks, real estate, and personal business) so that your money can grow at a much higher long-term rate.

I encourage you to check your saving account rate wherever you bank and consider if you can get a higher return elsewhere using an online bank (like Ally).

I know 1.25% isn’t much over the long-term, but it’s at least something for the time being in the short-term for your cash savings.

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It's been hard psychologically to be putting money into my Vanguard brokerage account just to see it "disappear," so I've got a bit more cash in my Ally account than I normally would. We are preparing for an international move in the next year, so I've justified keeping the cash there by saying we may have a bunch of unexpected expenses. But once we're settled I'll need to just force myself to move the money into Vanguard.

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