Burning hundreds of dollars: Knowing the difference between high- and lower-interest paying accounts
Increased interest rates over the past year have created a significant gap between high-interest paying accounts and lower-interest ones. It’s surprising how many people are unaware of the difference which may be costing them hundreds of dollars in lost interest.
For example, a local credit union was paying 0.11 percent on their “high-yield” money market fund as of March 1. Compare this with a savings account available online (with FDIC protection) paying 2.3 percent, and the annual difference on $10,000 is $219 per year.
A number of local banks are paying an equally abysmal rate ranging from 0.05 percent to 0.10 percent on balances less than $10,000. Fortunately, there are a number of alternatives available paying more attractive rates.
One resource for finding other options is www.bankrate.com which aggregates rates from a variety of different banks. Another valuable service from Bankrate is their “Safe & Sound” ratings system, which measures the financial health of banks using a five-star system. A bank paying the highest interest with questionable financial strength is not the best choice for your money.
While online banks covered by FDIC insurance protection and a high financial rating are just as safe as a local bank, occasionally there are offers that turn out to be too good to be true.
In December, the online investing company Robinhood Financial announced they were going to offer a “cash management account” paying 3 percent interest which was higher than anything else available. It turns out the account wouldn’t be covered by insurance so they withdrew the offer, but you can still find it on their website as “coming soon.”
I’m not suggesting you abandon your local bank or credit union, but I do think an awareness of the difference in rates is important to make informed decisions today.
The ideal setup is a combination of a local bank or credit union account for checking and other banking services coupled with an online savings account for your “rainy day” fund to maximize your interest income. Accounts can be linked electronically to easily move money, so the fact they’re at different companies should not be an obstacle.
The biggest challenge to earning more interest is overcoming the inertia of doing nothing, but just recognize that choosing to stay with the low-interest account is the equivalent of burning hundred dollar bills every year.
As seen in the Racine Journal Times | Burning Hundreds of Dollars | March 5, 2019