Updated: Oct 1, 2020
Forget everything you know about putting your money in a bank, the right way to save is by hiding it under your mattress in the form of gold coins. Just kidding, but you will need to re-imagine your savings techniques to maximize how much you save per month with the highest interest possible. This post will cover the best strategies to save your money and let it grow into a sizable nest egg.
To begin, a brief description of savings and checking accounts to catch everyone up to speed:
Savings Accounts: A savings account is a type of bank account that is backed by the federal government (typically up to $250,000). It is a safe place to store money and banks usually pay a small bit of interest to the account owner. There are generally few limitations regarding deposits into savings accounts, but only six withdrawals are allowed per month. This is because banks have federally mandated reserve requirements meaning that they must keep a certain amount of cash in the bank at all times.
Checking Accounts: A checking account is a type of bank account that generally has unlimited deposits and withdrawals. You can write checks from this account and may have a debit card connected to it. The drawback of a checking account is that most banks pay very minimal or no interest to the account owner. This account owner also has to make sure that they don’t withdraw more than their balance in the account because otherwise they will be charged hefty overdraft fees.
Ideally, everyone has at least one savings and one checking account to allow for safe money storage with some account growth through interest, and enough liquidity so that account owners may pay their expenses. However, with a little research, you can use banks and accounts that will best maximize your interest rate so that your money works for you. The following are strategies and tools that I personally use to increase my savings rates.
An Essential Financial Tool:
Online savings accounts. Online banks have been around for a while now, but have been gaining popularity in recent years. You may have heard of Ally Bank, a well-known name in the online banking industry. Most popular online banks are as safe as your regular local bank, but make sure the account is "FDIC insured" (the insurance that protects up to $250,000) just to confirm. Also, just to clarify: SIPC insurance is NOT the same, as it only applies to brokerage accounts. The reason why online savings accounts are superior to a savings account through your local bank is that they offer higher interest rates. I encourage you to check your own account’s savings rate, I would be willing to bet that it is .3% or lower. Online banks' rates fluctuate often, but just a few months ago many accounts were offering 2% rates. While that may not seem like a lot to you now, I promise it will lead to enormous changes in account growth over time. Besides, if you could go from making .3% to 2% interest for only 10 minutes of real work, why wouldn’t you?
How Can These Online Banks Offer Higher Interest Rates?
When you walk into your local bank, you are stepping into a brick and mortar location. There are probably 4 or 5 people working, most likely all salaried workers. If you walk by the bank at night, you likely notice the lights remain on and cameras are rolling. These are all expenses that the bank has to cover. They pay for these expenses partly by reducing the interest rates that they offer for their services. With an online bank, the expenses are much lower. Instead of paying for a building and a decent-sized staff, online banks just need to pay to run the servers and hire a few on-the-call people for customer services. Their expenses are much lower than brick and mortar banks.
You may have noticed that many national banks with brick and mortar locations are now also offering online accounts with competitive interest rates. I personally prefer these, because I would like to be able to walk into a bank if I am looking to get a loan at some point in the future through the same bank that I store money with. I use the Capital One 360 Savings Account and have had no problems with their service. Not everyone may have this option, therefore you should simply research an online bank that has all the services you require.
Does This Mean I Should Close My Current Bank Account?
No, I would not, unless you are paying unusually high fees. I recommend keeping both your current local bank account in addition to your online savings account. A system that works for me is I have a savings account with a little bit of reserves with a local bank, but I primarily use them for their checking account. I like being able to drive 2 minutes down the highway and deposit cash, which is more difficult with an online bank. I also hold that Capital One 360 Savings Account that I mentioned earlier, where I transferred most of my funds from my other in-person account and where I continue to deposit the majority of my earned income through checks. You deposit checks to online banks through an app on your phone, and essentially just send them a picture of it. I believe that you can also make cash deposits through ATMs, but I prefer just depositing cash to my local bank and transferring the funds through their system. I find that works better for me, however, you may feel differently.
Also, to note: Withdrawing funds from an online savings account can occasionally be a little tricky, but most banks will allow you free ATM withdrawals even if the ATM is not with your specific bank. You may need to send in a receipt to actually be refunded the ATM withdrawal fee. On the bright side, not being able to withdraw funds instantly may be a benefit to some people who have trouble not spending their money frivolously.
Finally, an online savings account is a beneficial, personal finance tool for anyone looking to maximize their savings. With higher interest rates, you can use your money to make more money, rolling that snowball of savings down the hill making it larger and larger until you are sitting comfortably on a beach in Bali.