When was the last time you thought about your checking account? If you’re like me, it was probably when you were paying a bill. Checking accounts exist in the background of our lives, warranting so little thought that many of us are still using accounts at big box banks that our parents set up for us in grade school.
Although we rarely think about their logistics, checking accounts impact almost every aspect of our lives; we use them for everything from paying for our groceries through our debit cards, to transferring money back and forth between friends, to paying our monthly bills. The truth is, however, that your checking account could be hurting your financial health through low-interest rates.
In return for putting money in your checking account, most banks pay interest. Checking account interest is a set percentage of the total amount of money you keep in your account that is paid to you. Unfortunately, checking account interest rates have been slowly decreasing.
In fact, the average checking account interest rate is only 0.05% , which means that even if you left $5,000 in your checking account for a year, you’d only earn $2.50 in interest.
Low interest rates, combined with increasing fees and other restrictions, has created a situation in which many people are actually losing money through fees, or risking the devaluation of their money by keeping it in a low-interest checking account.
There are alternatives, however. While average checking account interest rates are low, some banks and credit unions offer high-yield checking accounts. Many people are even choosing to leave checking accounts behind altogether and put their money into cash management accounts that provide higher interest rates with fewer fees and restrictions.
What is the Average Checking Account Interest Rate?
The truth is that checking account interest rates seem to be in a race to the bottom. In 2018, the average checking account interest rate is 0.05% . That’s right, for the privilege of hanging on to your cash, banks are willing to pay you less than 1% in interest. While 0.05% is the average, plenty of banks are only paying out 0.01% in interest rates.
Banks with 0.01% interest rate will pay merely 10 cents in annual interest for each $100 in your account. Sometimes, banks with low checking account interest rates also charge fees to maintain your account. Because interest rates are not high enough to offset the cost of these fees, you might actually be losing money by using your checking account.
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Checking Account Interest Rates vs. Inflation
There’s another major downside to keeping your cash in a checking account with a minuscule interest rate: inflation. While many of us think that cash is king, the fact of the matter is that the dollar devalues over time as inflation rises.
Inflation, which is the increase in prices over time, means your dollar has less purchasing power than it did when you first got it. In short, each of your dollars is worth less as inflation increases. When your grandpa complains about having to pay $15 to see a movie when tickets were only 46 cents in 1950, he is talking about the effects of inflation. The value of a movie ticket is the same, but it takes much more cash to make that purchase.
When we plan for the future, we all tend to assume that our money will be worth the same amount in the future as it is today. That’s why many of us don’t worry about leaving our cash languishing in a checking account with a low-interest rate.
The truth, however, is that your money may well have less purchasing power in the future due to inflation. The pennies that many banks pay you in interest won’t help you avoid inflation. That means that on top of losing money in fees paid to your bank to keep your checking account open, you may also end up with money that is worth less by the time you wish to withdraw it.
A measly .05% interest rate is not enough to counteract the effects of inflation [hovering around 2.9% ] on your money.
Smart Alternatives to Checking Accounts
The good news is that there are alternatives to leaving your money sitting in a checking account with a terrible interest rate. High-yield checking accounts can have interest rates over 1% and up to 5%. Sounds good, right?
Well, what many such high-interest checking accounts offer in great interest rates, they make up for with narrow terms. For example, one account that might offer a seemingly great 5% interest rate may end up only allowing you to take advantage of that interest rate on the first $2,500 kept in the account. The rest of your cash is subject to a much lower rate. This caps the interest you get and penalizes you for keeping more money in your account.
Also, because many high yield checking accounts are offered by regional banks or credit unions, you may run into difficulty finding fee-free ATMs. Don’t forget that these smaller banks and credit unions are often behind the times when it comes to mobile banking and may not offer mobile deposits or even a dedicated banking app.
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