Now that we’ve beaten you down with all the ways that interest is killing you slowly (just kidding…but seriously), let’s talk about some ways that interest can actually work in your favor.
The first is with basic checking and savings accounts. You may not realize it (because it’s generally very small), but many checking accounts and all savings accounts actually earn interest for you. In fact, if your checking account does not earn interest, we recommend putting the extra amount in a savings account or finding a bank with an interest checking option so your money doesn’t sit idly.
Yes, there is hope!
You may be scratching your head at this point, thinking “Isn’t interest something a lender gets for letting people borrow their money?”
You’re absolutely right. Astute observation.
Here’s the deal.
When you open an interest checking or savings account, the bank pays you a small amount of interest every month (called the dividend) because the bank is using your money to make loans for other people.
While they’re paying you a small amount to borrow your money, they’re charging way more in interest to those taking out the loans (see mortgages, credit cards, and personal loans), so they’re easily able to pay you a small amount of interest AND make bookoo money!
Pretty cool, huh?
The thing is, you won’t get rich by having an interest checking or savings account. The amount of interest paid each month/year is simply too small to amount to much unless you have hundreds of thousands of dollars in the account (and if you have that much it better be somewhere it can really work for you!).
The interest you’ll earn varies, but the average savings account is now around 0.06% APY, with some banks going as low as 0.01% APY. Also, you’ll typically need to keep a minimum amount in the account to avoid penalties.
Another thing to look for is how often the interest is compounded, or when you’re earning interest on interest. At best, interest checking and savings accounts compound daily, but they can also compound monthly or quarterly, or even less often. You can play around with compounding interest at http://money.cnn.com/calculator/pf/moneygrow/index.html and get a better idea of the interest you’ll earn when shopping banks and accounts, but generally you’ll earn a couple bucks a year.
Not much, but it’s something.
Another option for parking your savings is to stick them in a high yield savings account.
This is a relatively recent trend, but there are an increasing number of online banks as well as traditional banks offering savings accounts that yield a much higher rate, anywhere from 1.8% to 2.25% a year.
Again, you’re not getting rich with these rates, but putting your money in a high yield savings account will provide you with a return much higher than a basic checking/savings account.
In fact, we recommend putting your emergency fund or other savings not invested and not immediately needed in a high yield savings account so you can get the most for your money while still having quick access to it.
I (Tawnya) currently have my emergency fund parked in a high yield savings account with Ally Bank, but there are many options out there. Check out this article from The College Investor to see the best options out there and see if one is right for you.
Hey, Money Saved is still Money Earned.
- Start Taking an Interest in Interest
- Start Taking an Interest in Interest: Mortgages
- Start Taking an Interest in Interest: Credit Cards
- Start Taking an Interest in Interest: Personal Loans
- Start Taking an Interest in Interest: Student Loans
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