What you need to know
In this 5-minute video, we discuss the benefits of high-interest savings accounts at online banks—and how to know if this type of account would be a good fit for you.
(Full Transcript is below.)
Full Transcript of video
Hello, I’m Josh Duncan with SCB News bringing you this edition of Financial Freedom. The purpose of Financial Freedom is to provide tips to help you achieve financial freedom for personal significance.
Most likely everyone watching this video has one or more savings accounts with one or more banks. I remember opening my first savings account when I was a teenager with the local credit union. Getting that first ATM card and monthly statements was an important event in my life.
What I didn’t know about savings accounts back then was the interest rate and how it worked. Today we have additional options for our money with online banking. One benefit many people are enjoying are high-interest savings accounts. These types of savings accounts can help increase your cash flow. Let’s look at how savings accounts work and the benefit of high-interest savings accounts.
Webster defines a savings account as an account on which interest is usually paid and from which withdrawals can be made. Therefore, these accounts are great to save for emergencies, vacations, Christmas, and other short-term goals. Earning some interest while your money is waiting to be used sounds better than storing it in your mattress.
Many banks and credit unions have different interest rates based on the prime rate, the amount of money you have with their institution, and the amount of interest they can afford to pay you. Since online banking institutions have lower overhead expenses, less buildings and a more centralized staff, they can offer a higher interest rate. The trade off here is that you can’t walk into a branch and speak with someone.
Let’s look at an example of how high-interest savings accounts can increase your cash flow. Let’s assume you have $20,000 in your emergency fund. One savings account is paying 0.03% and another is paying 2.10%. The first account would pay you $6 of interest in one year. The second account would pay you $420 of interest in one year. $6 vs. $420. What could you do with 414 extra dollars in your pocket?
Here are some other factors to consider. You will have to pay taxes on that $420 you earned. If you are in the 23% tax bracket, you may net $323 after taxes. Still a big difference.
These high-interest rates are not typically found at your local bank but at online banks. This means, if you need help, you will have to search their help topics, call, or chat online. Not everyone is comfortable with this approach to getting help with their money.
You will also want to consider how you access to your money with an online bank. Do you need access from an ATM or with checks? Will you need to send the money to your local bank account for you to have access? Make sure you know how your money will flow when you need it.
Finally, high-interest savings accounts are not designed for a high frequency of withdrawals. In fact, you are limited to six per month or face paying a penalty. The bank can offer a higher rate on savings accounts because the money is expected to stay put for some time. They use this money to loan to other bank customers, charging a higher interest rate to borrowers than savers.
High-interest savings accounts can help increase your cash flow but may not make sense for every savings situation. Do your research before choosing a bank or credit union to make sure you understand how their service model works. What’s most important is that you work with a company and people you trust.
Thank you for joining me for Financial Freedom. I'm Josh Duncan with F5 Financial Planning, helping you achieve financial freedom for personal significance. Please contact me here to send topics you would like me to cover. See you next time.
Photo credit: SCB Video TV Marketing (producers of the video) on unsplash.com
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