Is your bank paying you enough interest on savings and CDs? Here's how to find out
Ian Pareja, a test engineer in California, says he “got super excited and went down a rabbit hole” when he learned about the higher rates that some savings accounts now offer.
“Originally, when I was banking with Chase, they would only give me less than 0.1%,” Pareja says. “I found out that's normal. A lot of Americans are losing out on free money.”
After undertaking research on savings account rates, Pareja found a new savings account at an online bank that offered a rate of about 2.2%, which meant his money could earn more than 20 times what it earned in his old account. He quickly switched to the online bank and says he’s using the savings account for his long-term goals, including saving for a house.
“People see a number, whether 0.1% or 2%, it seems insignificant to them, but if you have $10,000 in your savings account and you don’t need it immediately, you can generate $200 or $300 versus, like, $10,” he says.
Pareja has the right idea about how to approach savings accounts, experts say. Most Americans may not give a second thought to these accounts, but more than 1 in 4 now offer over 2% interest and no minimum deposit, balance requirement or monthly fee, according to a recent survey from Bankrate.com.
Despite this, only 14% of Americans earn more than 2% in their savings accounts, the study found.
“About a quarter of people with savings aren't earning any interest at all,” notes Greg McBride, chief financial analyst for Bankrate.com. “There are a lot of potential interest earnings that people are leaving on the table.”
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Don’t lose out to inflation
That’s problematic because those bank customers aren’t keeping up with inflation, which stands at about 2%. McBride says tapping higher-interest savings accounts can help protect the buying power of your money.
Certificates of deposit – known as CDs – can offer rates of 3% or higher, although they have more restrictions than savings accounts. Typically, both savings accounts and CDs offer higher rates than checking accounts. Savers can search for rates at sites like Bankrate.com and Nerdwallet, which allow you to screen by interest rates.
Not sure where to start? Here are 3 tips from experts:
1. Check your time frame
Determine what you’re saving for – including a realistic assessment of when you’ll need the money, says Arielle O’Shea, investing editor at NerdWallet. For some people, a CD might be a good choice if they know they’ll need their money at a specific point in the future, but not before.
That’s because CDs lock up your money for a specific time, typically between several months to five years, in exchange for a guaranteed rate. The longer the lockup, the higher the rate.
Some longer-term CDs offer higher rates than either savings or checking accounts, with several five-year CDs offering more than 3%.
“CDs are great if you have a specific goal in mind, but you will pay an interest penalty if you have to withdraw early,” O’Shea notes. The penalty can amount to months of interest, depending on how early you withdraw the money.
If you aren’t sure of your time frame, a savings account may be the better option, she adds.
2. To link or not to link?
Some customers may not be aware they can link a new savings account to their current bank, even if the new account is at a different institution, says Bankrate.com’s McBride.
“All you are going to do is move your money to a better-yielding account,” he notes.
For some, easy access to their savings account may be too tempting – in which case, consider keeping your higher-interest savings account separate from your main checking account, experts say.
3. Don’t forget the fine print
Research the fine print when it comes to penalties and fees, such as the early withdrawal penalties for CDs.
It’s also important to understand how you can access your savings account. For instance, some accounts allow you to withdraw funds through an ATM, while others won’t. And by federal law, you are limited to six withdrawals or transfers per statement cycle, which means a savings account might not be for everyone.
Some accounts also carry fees, so keep your eyes open for those gotchas. Last, make sure you’re comfortable with the bank and that it’s FDIC insured, says Bankrate.com’s McBride.
“If you find that you're not comfortable with a particular bank – they won't pick up the phone or their site is difficult to navigate – move to the next one,” he says.
This article originally appeared on USA TODAY: Is your bank paying you enough interest on savings and CDs? Here's how to find out
