Checking accounts offer a convenient way to take out cash, write checks and make purchases on a debit card — but they aren’t the most effective way to earn interest on your money.
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If your excess balance is starting to accumulate, it might make more sense to transfer it to a savings account with high APY. Some online savings accounts will compound your interest over time, gradually earning money without the risk or the additional effort of investing on your end.
Unlike mutual funds or retirement funds, savings accounts also keep your money liquid, so you have access to cash if an emergency comes up.
Seek Out High APYs
Annual percentage yield (APY) is the total amount of interest your accounts will add in a year, written as a percentage of your total balance. Banks usually use compound interest, which at the end of the period rolls the percentage you’ve earned into your total and then pays out interest on the combined amount. Most banks compound interest annually, but some compounds as frequently as every month or every day. The more often the interest compounds, the more interest you’ll earn in return.
While savings accounts at traditional banks top out around .08% APY, high yield savings accounts offer APYs of 2% or more. Often provided by online banks, who have less overhead than their physical counterparts, high yield savings accounts can help you build your balance and put away more money.
Here’s an example of a high yield account: If you open your account at the beginning of the year with a $5,000 balance, come December you’ll have $5,100.92 if your bank compounds interest annually. If you continue to add to your savings account over time, the money and additional interest will start to accumulate.
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Interest builds up gradually. Savings accounts that rack up too many fees can cancel out the benefits of higher interest.
Some financial institutions will charge you maintenance fees or if your balance falls below a certain established minimum at the end of the month.
If you’ve stockpiled more savings, a minimum account balance might not affect you, but customers just starting out on their savings plan should look for offers without extra surcharges. Fiona can help you preview the fees associated with the account and alert you to any minimum balance requirements ahead of time.
Add To Your Savings Over Time
Compared to offers from traditional banks, 2% doesn’t sound like a lot, but regular deposits into your savings account can help you build a greater safety net and earn more interest overall. Automatic transfers from your paycheck can help you put away extra money without seeing it in your checking account (and feeling that temptation to spend). You could even deposit your tax refund directly into your savings account to receive a regular boost each April.
With an online savings account, your balance will do the work for you and set you on the right path toward your financial future.
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