You have probably noticed that savings account interest rates have dropped significantly since the Global Financial Crisis; just as you’ve seen house prices and official interest rates fall around the US as well. However, that doesn’t mean you have to give up on your savings goals when you know how to find the best interest rate for your savings account.
Online savings account
When you choose an online savings account you will be able to get more out of your savings with low or no application and account fees, and a higher interest rate. This is because with an online high interest savings account you can apply online, and manage your account entirely online too – checking your balance, making deposits, withdrawing your funds and setting savings goals. This makes it easier and less time consuming for the bank to manage your account, and they pass those savings of lower overheads onto you.
Some online accounts are offered by direct banks, which don’t have any branches at all, and operate entirely online, and you can contact them via a call centre. This reduces the bank’s costs further, and they can pass on even higher interest rates and lower fees to you.
You can also benefit from having a high interest savings account because you can’t easily access your savings using an ATM or debit card. Instead, you use a linked transaction account to make deposits to your savings, and withdraw your funds when you reach your goals. A transfer may take just one to two days, but you are no longer tempted to withdraw your savings at the sight of a shoe sale or a big night out.
There are also very few conditions to opening an online savings account to take advantage of the great rates, as there is often no minimum balance requirement, or just a $1 transfer to open the account. Online savings accounts do give you at call access to your funds, which means you have immediate access to your funds, unlike a money market account or a term deposit account where you have to wait several days for a withdrawal to be processed, and you often have to pay penalty fees too. In return for this instant access, high interest savings accounts aren’t the highest interest rate savings option, but as of July 2011, some of the top financial institutions were offering:
- A 1.04% APY at Ally Bank. The Ally Bank high yield online savings account requires no minimum balance and charges no monthly fees.
- A 1.10% APY at SallieMae. The SallieMae account also has no minimum balance requirements and no ongoing fees. Their high interest savings account interest rate is very competitive and the bank has a strong education focus, offering a 10% match on UPromise earnings.
- A 1.00% APY at ING Direct. With the Orange High Yield Savings account you won’t pay any monthly fees and you don’t require a minimum account balance to qualify for the interest rate.
Minimum deposit amount
Other high interest savings accounts will allow you to earn bonus interest if you make a certain amount of deposits each month. For example, the O Bee Credit Union offers a 2.52% APY if you set up a monthly direct deposit of $100.
While you can earn bonus interest for account deposits, if you don’t meet the deposit amount which qualifies you for an interest rate bonus you won’t miss out on interest all together as you will still earn the base rate, just not the bonus rate. However, if you set up a direct deposit each month as the account above encourages you to do, then you don’t have to remember to make your deposit, you are paying yourself first, each and every month, and you are not only earning bonus interest but you are regularly growing your savings balance too.
No withdrawals
You can also find a high interest rate on a savings account by choosing an account which rewards you with bonus interest when you don’t make withdrawals in a month. If you have a long term savings goal, or you just know you will be making very few withdrawals from your savings account in a month, then you can earn a bonus interest rate on your balance, and use this bonus rate as an incentive and reminder not to withdraw your savings. This stops you making incidental purchases with your savings account funds throughout the month, because you want to make sure you qualify for the bonus rate, which can often be one to two percent higher than the base rate.
An example of this type of high interest account is the Ultima Bank SMART Savings Account which rewards young adults with a 2.02% APY as long as they don’t make any withdrawals before their 18th birthday.
Linked accounts
Fast food outlets aren’t the only ones who try to value add to their sales, and if a financial institution can get you to sign up for more than one of their accounts, they may be willing to offer you a bonus interest rate. For example, the Bank2 Great Rate savings account must be linked to a Great Rate Checking account to earn the 2.01% APY while if you have a Dollar Bank Federal Savings Bank FreMONEYSavings account you must also have a Checking or e-Checking account to earn the 2.00% interest rate.
Having a linked transaction account with the same provider as your high interest savings account has other benefits for you too. For example, if you are making deposits to and from your high interest savings account using a transaction account from the same financial institution, then you won’t have to pay any transaction fees, because transfers between accounts with the same institution are free. It is also easier for you to manage all of your accounts in one place, by logging into just one online banking system.
Minimum balance
Some high interest accounts will also try and encourage you to maintain your savings by rewarding you with a higher interest rate for maintaining a minimum balance in your account. This may require you to maintain a balance in your account throughout the month to earn a higher interest rate, or maintain a minimum balance to avoid account keeping fees – both of which will boost your interest income and return on your savings investment.
Interest Rate Promotion
While you are comparing high interest savings accounts, look for an account which is running an interest rate promotion, offering a bonus interest rate for signing up to the account. This bonus interest rate will apply to a promotional account for between one month and one year, after which the interest rate reverts to the standard rate. However, during the promotional period you can take advantage of the higher rate, and when the promotional period is over, you can switch to the next account with a high promotional interest rate, as high interest savings accounts don’t charge application or exit fees.
Certificate of Deposit
A certificate of deposit offers a higher interest rate than a standard high interest savings account and unlike other investments includes federal deposit insurance up to $250,000 to protect your investment. A certificate of deposit is able to offer you a higher interest rate on your savings because you are investing a fixed amount of money for a fixed period of time, usually your choice of six months, on year or five years.
At the end of your chosen term you receive your initial investment back, plus the interest earned over that period. However, if you access your CD funds before the maturity date you will usually have to pay an early withdrawal penalty, or forgo some of the interest you have earned.
There are also a number of other variables you can customise when choosing a certificate of deposit, and to make sure you are making the right investment, follow these tips:
- Look at your financial goals. Before you invest in a CD think about what you hope to get out of your investment, to make sure that it is the right choice. An important factor to look at here is the inflation risk, because your savings need to grow at a rate which exceeds inflation, and long term cash deposits risk being over taken by inflation.
- Know the maturity date. Make sure you know when you will have access to your funds again as this will help you determine how much you should invest, according to how long you can afford to be without that money.
- Know the details of call features. A callable CD gives the financial institution the right to terminate – or call – the CD after a set period of time, but you don’t have the same right to access your funds in that period. For example, if interest rates fall, your bank may call your CD because they can’t afford to pay the higher rate for the whole term. If this happens you will receive the full amount of your original investment back, plus any accrued interest. Remember that the call date is not the maturity date, and it is not the date you will have access to your funds.
- Know the interest rate you will be paid and how interest will be paid. If you are locking your funds away in a CD you want to be certain of your earnings over that time, and you should receive a disclosure document which states the interest you will earn, and whether the rate is fixed or variable. You can also have your interest income paid monthly; six monthly or yearly over your term, but you will need to confirm this with the bank as this can affect the interest rate you earn.
- Know the early withdrawal penalties. Emergencies can happen to the best of us, and if you find you need access to your CD funds, you don’t want to be hit with high early access fees. Therefore, find out from the beginning what these penalties will be, and shop around for the best conditions.
This is a guest post from Savings Account Finder which helps people compare savings accounts and term deposit products in Australia. They blog about useful personal finance matters and general tips to help you achieve financial independence.
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