Saving for the future is crucial, but it’s also easy to put off. Whether we like it or not, coming up with a savings plan takes time. And sitting down to set a budget so you can save for a down payment on a house or grow a healthy emergency fund is the last thing you want to do on a Saturday after a long week.
Unfortunately, that’s how you end up putting your extra cash into the checking account you opened at 16. That’s not the worst thing, but there are more-effective places to keep your money that might yield more interest.
If your money is sitting in a bank account accruing absolutely no interest, the purchasing power of your cash is likely being eroded by inflation. Here’s how high-interest savings accounts stack up against run-of-the-mill checking accounts, savings accounts, and CDs.
Savings Account Interest Rates
Let’s talk about the interest you’re getting in a savings account. You can think of interest as what a bank will pay you to store your cash in their building. For example, while interest in most savings accounts gets paid out monthly, if it were to compound annually, a bank would essentially pay you $50 of interest on a $5,000 balance.
So at the end of the year, if you earned 1% APY interest, your account total would be $5,050. Savings account interest rates compound, which means that the next year, if we continue to assume that the total compounds annually instead of monthly, the bank would pay you interest on the $5,050 in your account, bringing your hypothetical total to $5,100.50.
That sounds pretty good, right? You sock away some money and it grows every year. Well, here’s the bad news: The average savings account interest rate is 0.06% and most big box banks only pay 0.01% annually . With a 0.01% interest rate, the $5,000 you saved would only earn $5 for the entire year it sat in your savings account. (Though again, this is assuming the interest compounds annually instead of monthly.)
Keeping Money in a Certificate of Deposit
Another option people use to grow their savings is a CD, or a certificate of deposit. A CD is a savings certificate that lets your money grow like it would in a high-yield savings account—with compounding interest.
Unlike a regular savings account, however, CDs have some serious restrictions to consider before making a deposit. If you put your money in a CD, you agree to leave your money in the account for a certain amount of time. This means when your cash is in a CD, it isn’t liquid in the way it would be in a savings account. If you want to withdraw money from a CD before it comes due, you have to pay a penalty.
Furthermore, the interest rates most CDs offer are tied to the length of time you agree to keep your money in the account. And typically if you sign on to keep your money in a CD for longer, you’re able to get a better interest rate. CD rates cap out at 2.5% interest —and that is for a CD with a term of five years.
Keeping Money in a Run-of-the-Mill Checking Account
The average checking account in the U.S. has $3,700 in it, which implies that most Americans store at least a small amount of cash savings in their checking account.
Checking accounts are for routine use. While a savings account is meant to go untouched (there are typically withdrawal limits), a checking accounts’ primary purpose is day-to-day transactions. As a result, keeping savings in a run-of-the-mill checking account is typically inadvisable, especially because with an average interest rate of 0.06% , there isn’t much incentive to leave savings in there.
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Keeping Money in a High-Interest Checking or Savings Account
High-interest checking accounts are designed to give you the flexibility of traditional checking, but with the added benefit of high interest returns.
Often, these types of accounts are offered by local credit unions or regional banks. The rates vary between institutions, but typically run much higher than savings accounts. In fact, some high-interest checking accounts offer up to 4%.
Unfortunately, these opportunities often come with some fine print. These requirements may be using a debit card a certain number of times per month, automating a bill pay or regular transaction, or maintaining a minimum balance. However, the main fine print to look out for is a balance cap on your interest earnings.
A balance cap basically puts a limit on the amount of money you can earn interest at the high-interest account rate. So, for example, if your credit union offers 3% interest on your checking account, but sets a balance cap at $2,000, you would only grow that interest on the first $2,000.
What SoFi Money Offers
SoFi Money® is a cash management account that lets you spend and save, all in one. Plus, it has no account fees (subject to change).
Plus, you can use any ATM that accepts Mastercard® and we’ll reimburse 100% of your ATM fees, even internationally (subject to change). You’ll still have the ability to write and deposit checks, the option to use a debit card, and the ability to send and receive money—all with the added benefit of earning high interest.
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Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
SoFi Money is a cash management account, which is a brokerage product, offered by SoFi Securities LLC, member FINRA / SIPC . Neither SoFi nor its affiliates is a bank.