What do you do with money that you want to be able to access quickly when needed, such as your emergency fund? If you put it in a CD (certificate of deposit), you may incur penalties if you have to withdraw it before the lock-in term expires. If you mingle it with your checking account, you’re more likely to dip into it. Your savings account may not earn a very high interest rate. Under your mattress or in your cookie jar are really not viable options. So where is the best place to stash your cash?
Savings often end up sitting in the checking account just because it’s the easiest option. It’s not a good idea, though. Savings should be segregated from your day-to-day spending money for several reasons, including the fact that it’s much too easy to dip into your savings if that money is mingled with your checking account. In most cases, you’ll also earn more interest in a nonchecking account. Savings accounts usually pay higher interest rates than checking accounts because the money is expected to sit there longer. Savings accounts, especially higher-interest online savings accounts, are a good place to park your emergency savings because you’ll have instant access to your cash when you need it. Because savings-account interest rates usually don’t keep up with the rate of inflation, it’s best not to store more money than you need to cover three to six months’ worth of living expenses there.
If you want to try for a higher interest rate, look at online bank accounts. One of the most attractive features of these accounts is the higher interest rate they pay on deposits, plus they often have no minimum balance requirements. Keep in mind that it can take up to three business days to transfer money from your online savings account into your checking account. You may be able to get immediate cash if the account comes with an ATM/debit card. Be aware that you’re only allowed to make six withdrawals per month from online savings accounts.
Money market deposit accounts, as opposed to money market funds, are also FDIC-insured. They usually require a minimum balance of $1,000 or more—sometimes as much as $10,000 or $25,000—but they pay higher interest rates than traditional savings accounts. If your account balance falls below the minimum, you’ll probably be charged an account maintenance fee, which usually wipes out any gains from the higher interest rate. These accounts also limit withdrawals to six per month.
CDs are like locked-in savings accounts. You agree to leave your money in the bank for an agreed-upon term (usually three months to five years) in return for a higher guaranteed interest rate on your principal. Most of the time (but not always), longer terms come with higher interest rates. Some CDs come with step-up rates where your interest rate increases at specific intervals. If you withdraw all or part of your CD funds before the maturity date, the bank will charge a penalty.
Sometimes you can gain as much by cutting insignificant costs that add up over time as you can by earning additional income. Banking costs are a good example. Banks charge so many different types of fees, that you may not realize what your real costs are. With minimum balance requirements, ATM fees, and overdraft charges, even your basic checking and savings accounts might be costing you more than they should. In addition, if your money could be earning more interest somewhere else, you’ve lost an opportunity. For example, keeping a low-interest savings account in a traditional bank rather than moving it to a higher-interest online savings account costs you the extra interest you would have earned.
Be aware of your banking costs and make intelligent trade-offs to get the services you use for the lowest overall cost. If keeping a minimum balance in your checking account costs you $5 a month in opportunity costs but saves you $7 in fees, it makes sense to go with that option. If you have savings and checking accounts at the same bank, keep only as much money in the checking account as you need to pay bills that are due immediately. Let the rest of your funds go to work for you by earning interest in your savings account. When interest rates are very low, the earnings may be minimal, but you’ll still earn more than zero.
Most banks charge a long menu of fees for consumer checking accounts, and those fees can add up very quickly. What’s worse, when you aren’t expecting them, bank fees can even end up triggering more bank fees. You can eliminate a lot of these budget-busting fees by taking simple actions.
Bottom line: Banks charge fees for pretty much everything. Go to your bank’s website and take a look at the schedule of fees so you know exactly what the institution is charging you for.
Excellent websites to compare all types of bank rates include www.bankrate.com and www.nerdwallet.com.