Interest Rates/online banking

The recent economic instability has a direct impact on your finances in the form of interest rates. You may have heard that Ben Bernanke cut interest rates last week, by half a point, and two weeks ago, and by .75 of a point two weeks ago to stave off the recession, which at this point, looks pretty much impossible.

What does this mean for you? It means lower prices for housing, but also less money in interest coming into your bank account, especially if you manage your accounts online in a virtual bank such as ING Direct, Emigrant Direct, HSBC, and others. By the way, as a side note, if you haven't put some of your money in an online account accruing more interest, you should. And set up an automatic monthly contribution to at least 10% of savings to it. Pay 'yourself' first. Here is a site that outlines all the advantages - Which Online High-Yield Savings Account is Best?

While interest in personal savings accounts has always been on the low side, at around 1%, virtual bank account rates have been as high as 5&per, making it a smart decision to diversify with them. Current rates include 3,40% for ING Direct (down from over 4% several months ago), 3.8% for HSBC Direct (Down from 5% six months ago), and 4.05% at Emigrant Direct (down from 4.25% several months ago.)

It can be disappointing to see such decreases in rates, especially if you factor interest rates into your monthly budget. You may be tempted to move your money into banks that offer slightly more return in the short term. However, the best idea is to keep them there.

Basic economics tells us that, in the long run, we make money on markets. The stock market is the best example of this, but you can think of interest rates as a less-risky example of markets, in when you put your money in a certain bank, you are 'investing' in the interest rate they offer for your money and you can't switch easily.

It is important to remember that all interest rates, including what you may pay on insurance, student loans, and any that you may receive from investments vary in how much they pay out. This is dependent on several things: risk, duration, and tax considerations. Keep these in mind when you select a bank. One important point, made by the Federal Reserve of New York, is, "The longer the duration of a loan, the more likely the lender is to desire access to the funds. So lenders typically have to be compensated with higher interest rates for parting with their funds for longer periods." The same is the case with long-term banking. The longer you keep up your savings account with the bank, the more money you will receive in interest, no matter what your rate.

The Fed's site can be found here, www.newyorkfed.com and offers a great explanation of interest rates.