Is Your Bank Keeping Too Much of Your Money?
You probably already know that you should have an emergency fund—three to six months of expenses saved in a place you can access it quickly and easily if needed, like a checking or savings account.
But what you might not know is that, beyond your emergency fund, a savings account is one of the worst places to keep—and grow—your money. The average savings account interest rate of the five largest U.S. banks this year was 0.08%—less than one-tenth of one percent!
And what most people don’t know (because, well, they have better things to do than read bank financial statements) is that these same banks averaged 3.11% net interest margin lending out that money. This means that, on average, for every $1,000 you deposited with the bank, you got $0.80 and the bank got $31.15.
We get it that banks are in business to make a profit, but seriously?
If that frustrates you as much it does us, there are two ways to get more of that interest your bank is earning:
First, shop for a better account such as a cash management account. You shop for everything else you buy, so why not bank accounts? There are a number of FDIC insured accounts out there that pay around 1% (some of which are online only, so they can pass some of the savings on lower overhead costs to consumers). Yes, that’s less than 3.11%, but it’s also way more than 0.08%.
Second, consider taking some sensible risks. Unless you are saving for something specific in the short-term, like a down payment on a home next year, it may be a great idea to invest for your future. Once you’ve saved three to six months expenses in a savings account, you might consider placing additional savings in a conservative portfolio of short-term bond ETFs. (These are funds that invest in bonds that will come due in three years or less.) No, they’re not risk-free, but they’re often still liquid, and they have a higher likelihood to return more than many savings accounts if you have time to ride out the ups and downs of the market.
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