Recently I have begun the search for a new Online Savings account. Previously I had funds with both OnBank and iGoBanking. While my iGoBanking rate has remained competitive my OnBank rate went from a 3.6% to a 1.2%. That to me is an unacceptable change in interest income. I go about looking for a high yield savings account in pretty much the same way as everyone else, I start out at BankRate looking for both the Safe and Sound rating as well as the interest rate and minimum balance requirements, then look into reviews and other information on the interwebs about the institution.
Well my search has led me to two possibilities, ING Direct with 2.2% APY, and no minimum balance VS. Dollar Savings Direct with 3.20% APY and a $1000.00 minimum balance. I am going to be investing more than $1000 so I am not concerned with the minimum balance so much. Most people would look at this and say it is a no brainer, that is a one percent difference in the APY. There are definitely mitigating factors here that muddy the waters and make the decision not so clear.
Let start with branding/perception and usability. Just about everyone has heard of INGDirect, I personally know people who have accounts with them and have loved it. This in itself goes a long way, when you have a personal relationship with someone and they make a recommendation that means infinitely more to you than a review on a Blog of some guy you have never met. Add to it the fact you can easily create subaccounts in INGDirect allowing you track for specific savings goals and that 1% difference starts to fade away into the back of your mind.
The real kicker here though is in the signing bonus. My aforementioned friend is going to send me a referral link which will provide me with $25 when I sign up for INGDirect. So with this tidbit in mind lets run the numbers. For the ease of illustration lets assume a starting deposit of $2000.00 with no additional contributions and that rates remain static.
| Month | INGDirect(2.20%APY) | DollarSavings(3.2%APY) |
| 1 | $2,028.74 | $2,005.35 |
| 2 | $2,032.13 | $2,010.20 |
| 3 | $2,035.88 | $2,015.57 |
| 4 | $2,039.53 | $2,020.79 |
| 5 | $2,043.17 | $2,026.02 |
| 6 | $2,046.82 | $2,031.27 |
| 7 | $2,050.60 | $2,036.70 |
| 8 | $2,054.39 | $2,042.15 |
| 9 | $2,058.06 | $2,047.44 |
| 10 | $2,061.86 | $2,052.92 |
| 11 | $2,065.55 | $2,058.23 |
| 12 | $2,069.36 | $2,063.74 |
| 13 | $2,073.19 | $2,069.26 |
| 14 | $2,076.64 | $2,074.26 |
| 15 | $2,080.48 | $2,079.81 |
| 16 | $2,084.20 | $2,085.20 |
Based on this illustration it would take around 16 months for the higher interest account to catch up to the signing bonus from ING. With the way rates fluctuate as well as the additional considerations for ING I am leaning towards ING since within the first year it will actually be ahead. Keep in mind though that if you are adding to your savings monthly, and you should be, the amount of time it takes for the higher rate to catch up shrinks. At only $40 per month Dollar Savings will catch ING after 14 months, if you contribute $100 it would take 13 months, and at $200 it would only take 11 months.
For me, interest rates are not the only consideration. If you want to do your own calculations you can access the spreadsheet I used for this illustration HERE, it is a google doc spreadsheet you can export it or create a copy of it to be able to edit it. To use it just input the APY for each account, the intial deposit, and the monthly contribution amount.
Photo: (ralphunden)
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