Featured, Finance 101, Saving

What to Look For In A Savings Account

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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.

  1. Why keep your savings in a dedicated account made for savings.
  2. The types of accounts you can keep your savings in.
  3. 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?

Institutional Benefits

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 Because accounts that pay interest generally have more limitations on how and how often the money may be withdrawn.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

Psychological Benefits

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:

Savings Account

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.

Checklist

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.

5. Fees

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.

7. Accessibility

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?

8. Bonuses

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.

Research Example

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!

Jing is currently a software engineer based in Oakland, CA. She left her job in New York, moved to San Francisco unemployed, and more than doubled her salary in 4 months.

12 thoughts on “What to Look For In A Savings Account

    1. Thanks Lily! When I started writing this post, I immediately ran across the question “Why don’t I just keep all my money in savings?” since the interest rate is so much better! That really caused me to think of the differences!

  1. Nice rundown! We have our savings in Ally Bank (current APY = 1.15%), but the CIT terms seem great 🙂 We have been happy with Ally’s ease of use and customer service over the years, but if we look to switch, I’ll have to check out CIT!

    1. I was choosing between Ally and Barclays in 2012–I can’t remember why now I chose Barclays! I figure if I don’t like CIT bank I can just move my money back after 3 months. It doesn’t cost anything to close an savings account, thankfully! 🙂

  2. I almost want to apologize when I write a personal finance 101 blog post but I’ve found that even after years of learning, there are things I always pick up or that have changed.

    This is a solid rundown on savings vs CDs.

    1. Haha, I know what you mean! I’m learning things, CONSTANTLY, even about the most basic personal finance things! At first I find it boring writing these 101s, but I always end up learning cool new things!

  3. Great breakdown of the different savings accounts that anyone can open and benefit from. CD accounts are nice to have when don’t want to use a certain amount and just leave it for at least a year and get some interest out of it.
    I need to look into that CIT bank promo you mentioned, I’ve seen their ads too and sounds tempting to open an account with them. Thanks Jing!!

    1. Thanks Kris! I still haven’t looked into implementing CD ladders because I feel I’d always rather stick it in for investments if I’m going to really have my hands off that money for so long! I might feel differently once the bull market ends 😛

  4. Hey Jing, I used to do CD’s quite a bit, a while back. But no more. The return is paltry. I can spend the interest I get in one year going out to a fancy restaurant with the wife XD I don’t know. I think it’s not a bad idea for most though; especially if for emergency fund purposes.

    1. Yeah I’ve personally never gone the CD route since I feel an emergency fund should be more liquid than a CD can offer, and unfortunately all the shorter term CDs (like 3-10 months) all offer worse rates than a savings account!

  5. Ah, savings accounts, the bane of my existence. I have a little over $60K sitting in BOA earning practically nothing. Mrs. Groovy and I have been meaning to address this but we keep putting it off. Why are human beings so prone to procrastination? Meh. Thanks for this overview, Jing. It will definitely help us.

    1. I hear ya Mr. Groovy on the procrastination! It took me 2 years to combine my old 401k with my current one! Savings accounts are probably the least exciting account in history, but still such a financial staple.

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