A recorded interview with Ramit Sethi discussing how banks use promotional ‘teaser’ rates and other marketing tactics to lure customers. Sethi advises against rate-chasing, recommends using savings accounts for short- to mid-term specific goals, separating checking and savings across banks when beneficial, and highlights online banks (ING Direct, HSBC Direct) for higher savings yields and Schwab Investor for checking (ATM fee reimbursements). Practical examples and dollarized comparisons are used throughout.
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Are you a rate chaser, switching from one bank account to another just to milk a few additional percentage points? Or are you a sucker for promotional rates that entice you with lines like 6% for the first two months? Well, according to my next guest, that's just another way people fall victim to outrageous bank tricks. So to enlighten us on how banks lure us into paying extra is Ramit Sethi, author of I will teach you to be rich. Ramit, thanks so much for joining us.
Hey, thanks for having me. Congratulations on the show.
Well, thank you and welcome. Now, let's start with these teaser rates. You warn. Don't become a victim of what you call shiny marketing bank tactics. Why shouldn't we trust these rates?
Well, I don't trust anything the banks do these days when it comes to their marketing. I don't think anyone should. I have never wanted to throw something at my readers as much as when they come to me and tell me, ramit, I got the best deal. I used to get 1.2% on my savings, and now I get 1.8%. And my first question is, have you run the damn numbers? If you ran the numbers, you'd realize you just made an extra $7 a year. Wow. You want to avoid banks that offer you these promo rates because you want to focus on picking good accounts that you can stick with for the next 10 or 20 years.
All right, so also chasing rates, which we just talked about. That's not a good idea then.
No, I mean, I think rate chasing should be the new F word. You don't want to be a rate chaser. Okay. I'll actually give you an example from one of my readers. He. He's pretty sophisticated guy. He had $40,000 in his savings account, which means that he's pretty good at savings. You know, what he's doing. And yet he told me that he spent hours per month jumping from one bank to another, all to earn a total of $300 a year. That's about 25 bucks a month. And I said to him, you're obviously pretty smart. Why don't you spend your time focusing on your asset allocation, your investments, maybe a side business? Because jumping from one bank to another is not a big win. And I always encourage people to focus on the big wins.
And he spent a lot of time doing that. Like. Like we always say, time is money. Right? You don't want to spend a lot of time on your banking. So, so what if a bank requires a minimum balance? Is that also a marketing ploy of.
Course, it's a marketing trick. Yeah. They want as much money of yours as possible so they can loan it out at higher rates. What you want to do there is basically say, look, I understand this. I really like your bank. I'd love to become a customer there. But I know that there's banks down the street and there's certainly banks online that are offering me no fee, no minimum accounts, so what can you do for me? And if they don't offer you, then just move on because it's a buyer's market.
All right, let's talk a little bit about savings. Because you say we need to think of savings accounts as places for short term to midterm savings. Can you elaborate on that a little bit?
Yeah. The first mistake people make with their savings account is they kind of think of it as a really broad place of should money, AKA I should be saving money on something. So I'll just dump it in here. Well, that doesn't last that too long. So what you want to do is focus on tangible things in the next five years. These are things like vacations, Christmas gifts, even a down payment on a house or maybe a wedding. What you do there is you're saving for specific items that you want and you need. And these are things that are, you know, you're going to be funneling money towards it each month. The other mistake that people make with their savings accounts is they think, oh, if I put my money in my savings account, it'll grow for me and it'll start compounding and working for me. No, that's investing with a savings account. Remember, you're saving for tangible goods. And also you have to remember that if you pick the wrong account, for example, these big banks, they until recently used to pay 0.5% interest. That means if you have $1,000 in there, you're earning $5 a year in interest. Look, I find more than $5, $5 a day in pennies on the way to the bathroom each morning, okay? And now they pay attention. That. So you want to focus on picking good accounts.
So savings accounts, you're saying it's so much better than using a credit card, let's say, which a lot of people do. They say, I'll put it on the card and I'll pay it off. You're saying save up for it before and then pay off.
Particularly if they're. Yeah, exactly. If they're big purchases. If you're talking about, you know, gifts, weddings, down payments, these are things that you obviously want to be saving for. Beforehand and each month.
Right. All right. And should people be using the same bank for their checking and savings account, or does it pay to keep them safe, separate?
Well, you know, most of us grow up and we have the same account that we use it. And we have a checking and savings account at the same bank. I actually think if you're willing to spend a little bit more time to get a lot more reward over the long term, that it's worth taking it and breaking it apart. Because there are great savings accounts, but there are great checking accounts at different banks.
So let's talk a little bit about all these online banks. Is there a downside to having an online savings or checking account?
Well, that's the magic word. These are the accounts that I love for savings accounts. So a couple reasons for that. Online savings accounts like ING Direct, Immigrant Direct, HSBC Direct, these are great accounts. They give you roughly 10 times the interest you can make at your neighborhood bank. They're just as safe. There is one downside, which is that if you need to withdraw money from your savings account, it takes three to five business days. But it's not like I'm going to be telling my friends, hey, guys, hang on. I need to authorize a withdrawal from my savings account so we can hit the club this weekend. Give me three to five business days, right? No. Your savings account is where you put money. Your checking account is where you withdraw money.
So maybe brick and mortar for checking online for savings.
You could certainly do that. That's a very typical way. Yeah, I kind of go over all those things in my book. But let me tell you a little bit about the accounts I use now. I'm a little bit of a weirdo because I spend hours on this stuff. And, like, this is what I love to do. But here's what I do. Checking account. I use a Schwab Investor checking account. Reason for that? You get your ATM fees refunded, and you can actually earn.
Let me go back and reiterate that. Every time you use an atmosphere, you get it refunded, that charge. Refunded.
That's right. If you withdraw money at a liquor store or a third party, you get it refunded to you. That's great. And here's something a lot of people don't know. You can actually earn interest on your checking account at the Schwab account. That's what I use now for the savings account, I use ING Direct Orange account. The reason is two. One, they don't send me a bunch of crap in the mail. I like that. The second is it lets me create sub accounts that I can use to save for specific things.
All right, Ramit Sethi, thank you so much. I'm going to run out and change all of my banking arrangements right after this conversation. Thanks so much for your expert advice.
Thanks for having me.
And for more of Ramit's personal finance tips, check out his book or at his website. I will teach you to be rich.com if you have any questions you'd like to ask our experts, you can do so by going to ABC news.com business.
