I haven’t touched on Finance 101 in a while, but I’ve actually had multiple friends ask me for some financial advice regarding the basics of money management. First up, SAVINGS. I thought this would be the perfect time to talk about what to look for in a savings account since I just preached pretty hard about how my savings saved me.
First off, if you’ve been around on the internet and searching for “savings accounts”, you’ve probably seen ads for
CIT Bank and their $100 bonus (using promo code PREMIER) + 1.3% APY (the deal’s dead now, now they’re offering savings with 1.35% APY). I was pretty skeptical since I’m just wary of ads on the internet. But I did a little digging on FDIC’s bank search, and indeed they are officially FDIC insured. They’re based in Pasadena, CA. Since I absolutely love free money and I knew the deal was ending September 8, I figured I owe it to myself to look into the deal a little.
This brings me to 3 points that I’m going to touch on.
- Why keep your savings in a dedicated account made for savings.
- The types of accounts you can keep your savings in.
- How to research savings accounts other than just picking an account off Nerdwallet’s Best Savings Accounts or Bankrate’s Top Savings Accounts. I know some people will trust these resources and honestly I think their suggestions are pretty spot on. But sometimes you like to do a little bit of your own due diligence as well.
Why Do I Need A Savings Account?
The biggest institutional benefit of opening a new account for your savings is compound growth of your money in an FDIC insured account (aka…FREE MONEY/passive income). Compound growth in these accounts occur through compounding interest. Interest is an easy way to earn money on money you don’t plan on using. Why specifically money you don’t plan on using? Because accounts that pay interest generally have more limitations on how and how often the money may be withdrawn.
Interest payments on money in accounts for the purpose of saving is made possible by the limited usage of these accounts. The money in a Checking account is meant for daily spending and Checking accounts have features for paying bills, shopping with a debit card, withdrawing money 24/7, writing checks, etc. banks can’t use the money in your Checking account to lend to other customers because there’s always the possibility you may withdraw it.
Due to the less liquid nature of the money in savings accounts, banks are able to temporarily lend out the money in your savings account to other banking customers while paying you an interest rate on the money they’re borrowing from you until you need it.
Let’s take a look at the comparison:
|Year 1||Year 2||Year 3||Year 4||Year 5|
|Checking Balance @ 0% APY||$10,000.00||$10,000.00||$10,000.00||$10,000.00||$10,000.00|
|Savings Balance @ 1.2% APY||$10,000.00||$10,120.00||$10,241.44||$10,364.34||$10,488.71|
Or for greater effect, let’s look at $100,000 stored in a Savings account. In reality, you might never have this much in a Savings account since you can get much more growth through investing it.
|Year 1||Year 2||Year 3||Year 4||Year 5|
|Checking Balance @ 0% APY||$100,000||$100,000||$100,000||$100,000||$100,000|
|Savings Balance @ 1.2% APY||$100,000||$101,200||$102,414||$103,643||$104,887|
The biggest psychological benefit of using a savings account is the mental partitioning of your money.
1. You’re less likely to touch the money when it’s in a separate account.
2. It’s easier to keep track of the total balance if you’re saving for a specific thing.
3. Many automatically direct deposit a % of their paycheck directly into this separate account so it’s out of sight and out of mind.
Where Can I Park My Savings?
There are a few types of accounts you can park your savings that will give you that sweet sweet compound interest passive income. You may have read about them before. Let’s go over them again:
You deposit money into a savings account the same way you would a checking account, but the account generally pays interest on the deposited money. Some savings accounts pay a higher amount of interest on balances up to a certain number. There are sometimes maintenance fees and minimum opening deposit amounts. You can only transfer money out of the account 6 times a month (by federal law).
You can’t generally directly/immediately access money in a savings account. Examples of direct access include swiping a debit card, writing a check linked to the account, withdrawing money at an ATM. To access the money, you need to initiate an online transfer into a checking account, which can take a few business days to process.
Money Market Account
You deposit money into a money market account the same way you would a checking or savings account. Money Market accounts also pay competitive interest on the deposited money. Some accounts also pay a higher amount of interest on balances up to a certain number. There are sometimes maintenance fees and minimum opening deposit amounts. You can only transfer money out of the account 6 times a month (by federal law).
Most money market accounts have some features that allow instant withdrawal, so it’s great if you can’t wait a few days for an electronic transfer to hit your Checking account. With many money markets, you can withdraw cash from the account at an ATM or write checks from the account, though you’re still limited to being able to do so only 6 times a month.
Certificate of Deposit (CD)
CDs are funded through a one time transfer from another account upon opening. CDs pay different interest rates based on the CD maturity term. The caveat is you can’t withdraw your money from the CD until it reaches maturity, which can be as short as 3 months to as long as 10 years. Generally the longer the maturity term, the higher the interest rate.
Though your money is tied up for a longer, there’s a guaranteed interest rate for the CD term–the interest rate you signed up with. With savings and money market accounts, a bank can adjust their rates at any time. It can be good or bad depending on whether the rate goes up or down. In my personal experience with my Barclays savings account, I have only experienced interest rate increases. Similarly, a CD interest rate could be good or bad depending on which way interest rates move after you’re already locked in to a term.
Here’s a simple breakdown of the main differences between the major savings types.
Accounts by Financial Benefits
|FDIC Insured||Interest||Fixed Interest|
|Savings Account||Yes||Yes||No, subject to change at banks decision or at dollar threshold|
|Money Market Account||Yes||Yes||No, subject to change at banks decision or at dollar threshold|
|Certificate of Deposit (CD)||Yes||Yes||Yes, interest rate stays the same until CD maturity|
Accounts by Accessibility Features
|Immediate Access||Access Method||Access Frequency|
|Savings Account||No||Electronic Transfer||6x A Month|
|Money Market Account||Yes||ATM/Debit, Check, Electronic Transfer||6x A Month|
|Certificate of Deposit (CD)||No||Electronic Transfer||1 Time During Grace Period At CD Maturity|
How to Research Savings Accounts
Establish Your Goals
It’s very important to assess your plan for the money in your savings. If you’re saving for a vacation you’re going to take in 2 years, maybe having your money completely inaccessible for 2 years in a CD is fine. If you’re finding a place for emergency savings, it might not be best to store it in an account where you can’t access the money within a few days.
1. FDIC Insured
Make sure the bank you’re opening the account with is FDIC insured. You can look up the institution you’re considering in the FDIC database here.
2. APY %
Generally the second most important thing to verify is how much interest you can earn on your money. Some accounts made for savings still have really low rates. APY is a number calculated by banks based off the interest rate offered that takes into account daily compounding. It helps you calculate how much total you can expect to earn in a year with any given starting value.
3. APY Fine Print
Many banks don’t have fine print in order to get the rate advertised, but some banks do. Some banks only offer a certain APY for the first x number of months. Other banks only offer the highest APY on the first $Y amount. And yet other banks may only offer the highest APY if you do x, y, z actions every month. Make sure you read the fine print, especially if there’s an * next to the advertised stats.
4. Minimum opening deposit
Some banks require a minimum amount to be deposited into the account when you start. Make sure this isn’t a problem for you.
Some accounts have monthly maintenance fees. Always double check the fine print.
6. Ways to waive fees
Some accounts with fees allow them to be waived if certain conditions are met, like keeping a daily balance of a certain amount of money. Find out those conditions.
One of the most important things is knowing what allowances an account makes for how/when you can access your money. Does the accessibility of the account allow you the flexibility you need if you need money in a pinch?
There may be one time/limited time bonuses on an account. Like the CIT $100 Bonus Offer, you get $100 when you open an account.
9. Bonuses Fine Print
$100 sure sounds great! Are they really just going to hand it over to me? On the offer details page, there’s a section stating that the account must be funded within 30 days and a daily balance of $15,000 needs to be held in the account for 3 full statement cycles. I would not be opening the account at all if I weren’t confident I could easily and automatically do this after the initial work funding the account. I generally don’t keep so much cash on hand. I’m working towards building a lump sum to pay my parents back at the end of the year so I may as well stick that in addition to my emergency fund in the account.
So let’s take a look at what research looks like from beginning to end for me. I saw an ad for the CIT Bank $100 Bonus + 1.3% APY deal on some blog, honestly I probably saw it on my own blog first through my adsense ads. I ignored it for a long time because under $100 cash bonus there was that little *See site for bonus details just begging to hit me with a ton of fine print I didn’t want to deal with.
After seeing these ads for probably a month and a half, last Friday, I decided to research the bank a bit.
First up, I went to the FDIC bank search. It’s as easy as entering the bank name and the url, which was all I knew about the bank.
After verifying its FDIC legitimacy. I headed over to their website. On the website, you can see their little carousel featuring the same deal but again without the fine print. It’s not a big deal since most, if not all banks, won’t allow you to actually sign up for an account without first going through their detailed offer page.
Let’s take a look at the detailed offer after I click “Get started”. Below is the first thing I see. There’s a lot of text everywhere, it’s a little difficult to parse which features the bank is trying to sell you and the information you actually care about.
That’s why I find it so useful to have a checklist of the important things I absolutely need to know about the offer. For example, “US Based Customer Service” is icing on the cake, but I don’t want to end up opening an account that’s not FDIC insured for the sake of US Based Customer Service!
Of course, your research checklist can include other items you think are Must Haves. Maybe that includes exceptional Customer Service. The ones I’ve laid out in my checklist are my most important research metrics.
What do you look for in a savings account, and what kind of account do you prefer? Did you learn anything new you didn’t know about savings accounts from this article? I sure did! I didn’t realize the 6x withdrawal from savings rule was a requirement by law!