With the dawn of mass internet access has also come online banking. Online banks are generally able to offer higher interest rates than brick and mortar banks for a simple reason - buildings cost money. Online banks, which don’t have a storefront, are able to pass on that savings to customers in the form of interest.
To the surprise of some, I do not personally use an online bank account, and I wouldn’t suggest that you do either. The answer lies in economics.
The Frugal Economics
Imagine, momentarily, that you live in a world where everyone is a Frugal Bunch member. While bank account balances might be collectively high, there would be a notable absence of certain jobs and businesses, including coffee shops, fast food chains, restaurants in general, car wash services, and pet groomers - there wouldn’t be sufficient patronage to make owning such a business a viable income. Because of this, many jobs would simply not exist, and money circulation would be low, which is absolutely fine - until I want to go out to a nice restaurant on my anniversary, or Mr. FB decides to call it a Subway night because our house is too hot to cook dinner without sweating into it. Then I would be very, very sad and lament about how I like being frugal when I get to choose it, not when there are no other options.
The long and short of it is this - there is a sweet spot between everyone desperately clinging to every dollar and not ever spending it and the rampant use of money to alleviate in and every perceived want and need everyone has. This is the place where the dollar is actually worth the most, because either extreme ultimately leads to the takeover of an alternative currency (one that is actually worth something in terms of transactions). This is the economy I want to live in, because a) I worked hard for these dollars and want them to help me to eat and live and pay rent, and b) because I want to live in a community where people are, overall, employed (even if I don’t specifically patronize the many businesses that I don’t personally find satisfying).
But What Does This Have to Do With My Bank Account (or Its Location)?
I am so glad you asked!
Banks exist to do one thing, and one thing only - buy and sell time. As a byproduct, they make it feel like there are more dollars circulating than there actually are.
Just hear me out. You take out a mortgage on your dream house. You could have saved and saved and saved until you could buy it outright, but you didn’t. Why? You wanted the increase of quality of life - in other words, you wanted to spend more years in that house. So many more years, in fact, that you are willing to pay tens of thousands of dollars extra (known as “interest”) to have that privilege. Your bank, having sufficient cash-flow to negotiate such a transaction, decides to sell you those years. Both parties are happy.
But wait - there’s more!
Enter young Mr. and Mrs. FB in their awkward teen years, who attend the high school your property is in. Your property taxes directly support our school orchestra (which actually is how we met, by the way) and other learning experiences we participate in. In giving you that mortgage, the bank didn’t just give you time - it gave me time in art programs and quality experiences I cared about, time that was purchased in dollars and cents.
But Mrs. FB, Couldn't Any Bank's Mortgage Have Done That?
Why yes. But wait - there’s more!
Supporting any local business is an act of supporting oneself. Dollars spent in your local community tend to be circulated before exiting to a larger community, so it’s as if your specific community were wealthier (the same dollar is buying the collective more things). This encourages job growth, which curtails crime and enables you to spend money frivolously in a variety of methods (as long as it’s in your budget, of course). When that local business is your local bank, this positive effect is compounded because that local bank is offering loans to small, local businesses and enabling local real estate markets to perpetuate - in short, your bank is helping your local town substantially, and deserves your support because you have the option to participate in those festivities (whether or not you choose to do so frequently).
In short, your bank is selling individuals time, which buys the community resources. When you bank local, you are buying options.
But What About My Interest Rates?
While it is true that online banks tend to have higher interest rates, that doesn’t inherently mean local banks do not also have competitive rates. My local bank offers a 3% interest rate on the checking account type I use (as long as direct deposits are made at least once a month and 10 transactions occur on my debit card. Major catches, I know) and my dog got to have a treat every time we went through the drive-up window to deposit a check (before I found out he was allergic to gluten. Then I would sneak gluten-free dog treats into my purse before leaving the house so that he would still think he was getting them from the bank because I’m that kind of person). While a 3% interest rate may not be the best in terms of an investment perspective, it does outpace the standard 2% inflation and is a safe location to store my emergency fund.
While I can’t vouch for mortgage rates or loans from my bank (as I haven’t personally used those services), I can say that I would be likely to take their offerings even if I could “save money” somewhere else because I like the quality of my community and I don’t believe it would actually save me money if the many community resources I enjoy (or have enjoyed in the past) were not available. I personally benefit from both their great work and the customer service experiences I’ve had at their locations in my town, so I am highly likely to go to them when I do decide to take out some kind of loan (such as a mortgage). In my mind, banking local is the most frugal option possible because it enables me to support local business without patronage of those businesses, which enables me to simplify my life while providing necessary circulation to my town’s economy.
Do you bank local? Why or why not?
I spend most of my spare time playing with spreadsheets, my violin, or planting vegetables in my garden in hopes of bringing new insights into frugal living. Please enjoy, and don't forget to sign up for our monthly newsletter here.
Disclaimer - Mrs. FB is not a financial advisor. Nothing in these articles should be construed as investment or other professional advice, but rather personal opinion. Some links in these posts may be to affiliate sites - no products are advertised through this site that have not been personally used by the FB family unless expressly labeled.