(Photo by RNM)
0.06% – According to the FDIC this is the current national average interest rate for savings accounts. 0.06%!!!
Factoring in gas money to get to the bank, you earn approximately the same amount of money by simply putting your money under your mattress – Nothing.
As an example: If you invest $10,000 on January 1 and make no changes throughout the year, your savings account will have a balance of $10,006 on December 31. What’s the point?? Collecting loose change throughout the year could more-than double that yield…
Why have a savings account in the first place?
There are a few good reasons to open a savings account.
1) It visually and physically distinguishes your running checking account from money you’ve set aside for a rainy day, vacation, or down payment.
2) Your money is FDIC insured (up to $250,000 with some additional fine-print details). Money under your mattress is not…
3) The money in a savings account is ‘liquid,’ meaning you have access to it immediately should you need it. There is value to having money in this form rather than invested in stocks, real estate, or a business. It could take days, weeks, or months to actually see money from those investments, and in times of crisis that could put you in a tough spot.
4) The fact that you have an account created for ‘savings’ may mentally push you to save more than if you just kept your cash in the checking account.
5) It will earn some interest…
I get the fact that there is a point to having a savings account but there has to be a better option than 0.06%.
Remember, we’re talking liquid savings here – so stocks, bonds, and the like are off the table. Lucky for us there is a better option that fits our criteria.
I’ve recently dug into high yield savings accounts which have interest rates hovering around 1.00% (a 0.94% increase from our traditional savings accounts of the past). Take our $10,000 example from above and we’ll have around $100 in earned interest after the year is up. Now, I can make a payment, take a day trip, or (shh…) reinvest that money to start compounding interest. $100 is a real number that actually makes a difference.
It’s not huge but for a liquid account, it’s about 15 times better than the alternative.
Why do these accounts offer much better rates?
High yield (or online) savings accounts are offered by credit card companies and large banks as an alternative to the traditional saving account.
You can’t go to a bank to open one – all your banking needs are done online. Because of this, the banks eliminate costs for overhead in the form of buildings, bills, and staff salaries. Lower costs mean the banks have more room to charge lower fees to us consumers (I’m confident the difference is more than 1% but hey, we have to start somewhere).
All of these benefits – what’s the catch?
So far I haven’t found one. Your money is still FDIC insured, liquid (by electronically linking your checking account to the high yield savings account), and now earning more than 15X the interest.
Sounds great, what are some options?
NerdWallet has a great post comparing the different options but right now I’m leaning toward the Ally Bank High Yield Savings account. I get a 1.00% interest rate, great mobile and web integration, and tremendous customer service. Sounds tremendous.
Let’s do ourselves and our finances a favor and ditch the traditional saving accounts. The high yield savings account is just as secure, accessible, and produces much higher returns!
See you guys at the virtual bank…
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