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Plan Well, Retire Well

Saving and investing your money
Online banking

Dear Young Friend: Thinking About Online Banking


Dear Karen,

One way I might be different from a lot of other young adults is that I'm not enthusiastic about online banking and I haven't done much of it. Other than being able to bank from home and potentially finding higher interest rates on savings accounts, are there any advantages? Other than losing the experience and comfort of in-person banking, are there any disadvantages?

Young Friend

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Dear Young Friend,

When I think about online banking, I'm including online bill pay, transferring money from one account to another or from one financial institution to another, checking balances, and accessing statements. So you may have done more online banking that you realize.

A lot of brick-and-mortar banks are encouraging customers to do most of their banking online, at least in part because it's cheaper for the bank.

Advantages of Online Banking

Online banking might save you a little money. You'll save postage if you're currently paying bills by mail and a little gas depending on how often you drive to the bank or the ATM.

You might also get a better deal on your checking account. If you agree to access your statements instead of having them mailed to you and have direct deposit, you might qualify for an account that has lower fees or better benefits.

Mainly, I think the advantages of online banking are about time and convenience. It may not seem like it saves you that much, but I'd compare it to having your paycheck direct-deposited. When people were used to going to the bank every payday, it didn't seem like such a big deal. But now that most people have direct deposit, they'd never go back to taking every paycheck to the bank. It's probably the same way with online bill-pay and – for those with smart phones – depositing checks by sending a photo of it. It's a change in how you're used to doing things, but once you've done it a couple of times, most people prefer it for the convenience.

The more online banking services you use, the greener it is because you and the bank are using less paper, and you might be using less gas to drive your car.

Believe it or not, most experts would say that online banking is actually better for protecting your ID. You're not leaving the paper trail that paper bills and checks create. The same reasoning applies to receiving bills electronically.

Online Bill-Pay

And just a word about how online bill-pay works: When you set up a payment to a major company, like your electric company or your credit card, the bank will do electronic transfers to pay them. For others, like your dentist, they'll cut a check and mail it. You won't be charged for the postage, but you'll probably need to enter your request at least five days before the payment is due to allow time for that. A friend of mine says one of her bills has to be submitted 10 days ahead.

You can also schedule payments in advance, to be paid on a later date. That's a benefit for someone who likes to sit down and pay all their bills at once.

I like being able to schedule recurring payments so that those bills are paid automatically without me having to do anything. I'm guaranteed they'll be paid on time, and that means no late fees or interest because I goofed up. For a car payment or another bill that is the same every month, setting it up through the bank would make sense. It would be quick to set them all up at once, and I'd have all my bills in one place.

But the amount on a lot of my bills varies from month to month. Instead of setting them up through my bank, I set them up through the biller (the electric company, the credit card, etc.), authorizing them to automatically deduct the amount I owe each month from my checking account.

A variation on that is to have the payee charge your credit card every month. That could be a good idea if you pay your credit card balance in full every month so that you never pay any interest and your card lets you earn cash rebates or other perks. But I digress…

Moving Money

One more potential benefit of online banking: it might make it easier to transfer money from one place to another, or one account to another Say you decide to put the money for Bucket #2, which is most of your emergency fund, into a CD (certificate of deposit). But you want to open the CD at a different bank from the one where you have your checking and/or savings account. You could open the new CD account online, and arrange for the money to be transferred directly from your checking account. And when the CD matures, you can tell that bank with the CD account to electronically deposit the money back into your checking account.

It would work the same way if you decide to open an IRA at, say, a mutual fund company. You could send a check through the mail, but you could also have the contribution to the IRA transferred directly from your checking account.

Online Banks

And now, to close, a comment about online banks: The main reason you would choose an online bank instead of a brick-and-mortar bank is to find an account that better meets your needs. That generally means either lower fees or better interest rates. Because they don't have physical locations, their costs are lower. They may have very low or no minimum balances on their accounts. They typically reimburse ATM fees that you pay to withdraw cash. If you're currently paying fees to your bank for these services, changing banks could save you money.

Sometimes the differences in rates and fees between online banks and what you can find locally are significant; sometimes they aren't. It's just a good idea to shop around, the same way you shop around for a car loan or a credit card.

For someone who has been doing online banking already, switching to an online bank won't seem much different.

I feel like I've gone on a bit too much. I hope this was enough, but not too much, information. Let me know what you think!

Karen

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This post continues a series based on conversations with a young friend of mine about the financial decisions and challenges of being an independent young adult in today's world. You can find other posts in the series by clicking Organizing Finances in the Category list on the right side of this page. ~Karen

 



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