How to Get the Highest Possible Interest Rate on Your Savings
We all want to get the highest possible interest rate on our savings. Although all of us want to have cash readily available to use when an unexpected expense or emergency arises, low interest rates pose a challenge when it comes to finding the best place to keep your cash supply until you need it.
In most cases, online savings accounts can provide a solution to this problem. Most online savings accounts offer higher interest rates than the rates offered by local credit unions or savings and loan institutions.
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How can I get a high interest rate on my savings?
This was my question back in 2012. I had sold a house and had a large check that I received the day of the closing. I knew that I would invest the money eventually, but I needed time to research investment options and wanted to earn a decent return on my cash while I did my research. The fact that my credit union’s interest rates on savings accounts were so low prompted me to begin to begin looking at the possibility of opening an online savings account.
After researching various online savings accounts, I opened one with Goldman Sachs Bank, which is now called Marcus Online Savings. I still use my online savings account to house my emergency cash and keep the cash I use for monthly living expenses at my local credit union.
Can you lose money in a savings account?
Yes and no.
The Federal Deposit Insurance Corporation (FDIC) insures the money you have deposited in a bank, and virtually all banks carry FDIC insurance for their depositors. The FDIC’s coverage is limited to $250,000 per depositor. For this reason, the amount of money you deposit in a savings account is insured up to $250,000.
However, money is only valuable because of its purchasing power. The currency itself is virtually worthless–it’s just paper and metal; the value of money lies in what it can buy for us. For this reason, if the money you have in a savings account is earning an interest rate that is lower than the rate of inflation, you are losing money, or purchasing power, as your money sits in a low-interest savings account.
Currently, the 2021 inflation rate in the United States is around 2.25%. Interest rates for savings accounts range from .06% to .50% nationwide. Because interest rates on savings accounts are so low right now, your money will be losing some of its purchasing power in a savings account. However, it is important to keep some cash available to use when emergencies arise.
A high-yield savings account provides an option for you to earn a higher interest rate on your cash reserve.
What is a high-yield savings account?
As the name suggests, high-yield savings accounts pay higher interest rates than those paid by standard savings accounts such as the accounts offered by traditional site-based institutions. In the past, most people conducted all of their banking at the same place, such as a local bank or credit union. However, the rise of the internet has opened the doors to new banking options, including internet-only banks and online accounts offered by traditional brick and mortar banks. Although your local bank may offer an option for opening a high-yield savings account, usually online banks offer the highest interest rates.
Are online savings accounts safe?
As someone who had always used brick and mortar banks, at first I was very concerned about how safe my money would be in an online savings account. However, making sure that the provider of an online savings account is FDIC insured provides the same level of protection in the online banking world as it does in traditional site-based banking.
Actually, all banking in today’s world takes place online in varying degrees. Although brick and mortar banks keep a certain amount of cash on hand, it is not as if the bank keeps a vault full of money equal to the entire amount deposited in their bank. Rather, deposits and accounting take place in the online environment.
What should you consider when choosing an online savings account?
Although the desire to earn a higher interest rate drives most people to open a high-yield savings account with an online bank, you will want to consider several other factors when you are deciding on the bank you will use.
After making sure that the online bank you are considering is FDIC insured, which guarantees your account is insured up to $250,000, consider the bank’s policies on the following:
What is the required minimum initial deposit?
You will need to find out the amount of the minimum initial deposit that the account requires. Before completing an application, make sure that you have enough money to open the account. If the initial minimum deposit is a high amount, you will want to make sure you feel comfortable depositing that much money in an online account.
As you look at the different minimums that various accounts require, you also want to see if the online savings account provider offers any type of bonus for opening a new account. Some banks offer bonuses, so if you can get a bonus for opening the account that’s going to give you more money for meeting your financial goals.
What is the required minimum balance?
Another important consideration is whether the bank requires you to keep the minimum balance. In some cases, falling below the required minimum balance will cause you to incur fees, or you might not receive the interest rate that you were expecting to receive on your money.
Will you be charged any fees?
With so many options available for opening an online savings account, you should be able to find a bank that does not charge any fees. However, before opening an account, definitely make sure you understand what, if any, fees you might incur. If fees are associated with the account, consider whether there are ways you can avoid them–for example, by maintaining a minimum balance.
How do you deposit and withdraw money?
Although your purpose for opening a savings account is to put money away for some time in the future, you need to be able to access your money easily whenever you need it as well as make deposits. For this reason, make sure you understand the procedure for making deposits as well as withdrawals.
You will need to know the following: Will you be able to link your online savings account with your other bank accounts? Are withdrawals made through electronic transfers? Does the online bank offer an ATM card?
Also, you may notice that banks limit your withdrawals to six per statement cycle. This withdrawal limit is imposed by Regulation D of the Federal Reserve Board. Because savings accounts are “non-transaction” accounts (as opposed to checking accounts, which are “transaction” accounts), the account holder is limited to a maximum of six withdrawals per statement cycle.
What is the interest rate and the compounding method?
As you explore your options for an online savings account provider, consider the interest rate being offered. High promotional interest rates are great, but understand that the promotional rate will only be paid for a limited amount of time. Look for an account offering a high interest rate for the long-term.
Understand as well that all online account providers have flexible rates tied to the interest rates set by the Federal Reserve. Because the Federal Reserve adjusts interest rates periodically, online banks adjust their interest rates from time to time as well.
Banks have the option of compounding interest daily, monthly, quarterly, semi-annually or annually. This variety of compounding methods can be confusing when you begin comparing account providers. However, if you will compare Annual Percentage Yield (APY) instead of the Annual Percentage Rate (APR), the compounding method will already have been taken into account.
What is the best online savings account?
Comenity, Marcus, and Synchrony are just a few of the well-known leaders in finance whose names are on the list of online savings account providers. There are many other banks to choose from as well. Bankrate.com offers a list of current interest rates for online savings accounts that they keep updated.
How do you open an online savings account?
After you choose a bank, the process of opening an online savings account is much the same as opening any other type of financial account. You will fill out an application and select the type of account you want to open. The next step will be to designate beneficiaries and to fund the account. Finally, you will set up your login information.
How do you keep your online account safe and secure?
Following general best practices for online security will keep your online savings account secure from criminals and hackers. Installing effective antivirus software and keeping it updated, developing strong, unique passwords for your different accounts, and using two-factor authentication are all things you can do to keep your online savings safe so it will be available when you need it.
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