Online savings account interest rates are not very high these days. It wasn’t long ago when you could get 4% or 5% on your savings which seems pretty good right now! It’s very easy to dismiss rates that are as low as 1% or 2% but keep reading – I hope to show you that it’s still very worthwhile to put your savings into a high interest savings account.
Do you keep some savings in a bank account? Perhaps your emergency fund, perhaps a house down payment or saving up for a new car or house remodeling? Sometimes when you are saving for a specific goal, you get so focused on the goal that you don’t think about some of the details like where to invest your money. Most people get their paychecks in a checking account and will either leave their savings there or will open up a savings account at their bank assuming that the interest rate paid will be competitive. It’s possible that your normal bank pays a competitive savings account interest rate but don’t count on it. There are banks that are offering 2% interest rates right now – if you aren’t getting close to that amount then shop around.
I don’t have much money – Is it worthwhile to look for a higher interest rate?
While it’s true that the less money you have in your savings account, the less the interest rate matters – let’s take a look at an example to see exactly how much impact the interest rate has.
Read a full review of Ally Bank which has very competitive interest rates on their savings account.
Let’s say you have an emergency fund of $2,500. Now in reality this amount might go up or down depending on emergencies that might happen. For the sake of this example let’s say your emergency fund never changes. I’m going to use a 10 year example but it’s very possible that your emergency fund might be in existence a lot longer than that.
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You can see from the table that while the differences in total interest paid between a higher interest rate (2%) and a lower one is significant. Keep in mind that this example is only for 10 years – if the savings account is maintained for 20 or 30 years then the differences will be that much more dramatic. If your savings account is only paying 1% or less then it’s probably worthwhile for you to switch to a high interest savings account.
I have a lot of money saved for a house downpayment
One of the times in your life when you might have a lot of cash is when you are saving up a down payment for a house. Sums like $10,000, $25,000, $50,000 are not unreasonable for someone who has been saving for a while. In this scenario we have savings of $35,000 and we are going to buy a house in exactly 1 year. Should you be happy with getting 1.0% from your bank or should you shop around for a higher rate of around 2%?
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In this case there are very dramatic differences in the total interest paid for the different interest rates. If you are getting paid 2% on your savings then the total interest earned in the year will be $350 more than if the account only pays 1% which is pretty common. Getting paid $350 to switch to a new bank is great reward. $350 will also help pay for your moving costs!
Read another interesting post about High interest savings accounts.