Friday, February 8, 2008

What to do with cash savings

You’ve always been told that you should save your money, put it in the bank, and earn interest. That’s how you will become rich – compound interest. It sounds like a wonderful (even inspiring) plan until you get your bank statement in the mail and realize you are earning only 0.10%. But don’t worry, as soon as your account reaches $10,000, you will earn a whopping 0.80%. Even at that rate, your interest earned will equate to just $80 a year.

There must be some mistake here. Inflation is reported to be around 3% and the banks are offering a mere tenth of one percent!

Say hello to High Yield Savings Accounts.

High Yield Savings Accounts offer a much higher rate of return and are typically done through online banks. I have a high yield account with Capital One. My last statement shows it is paying an annual percentage rate of 4.41%. That is down slightly from the introductory rate of 5%.

How are online banks able to offer such a high rate of return when brick and mortar banks do not?

It mostly has to do with overhead costs. Online banks don’t have to keep up with building maintenance, landscaping, and staffing hundreds of locations. Plus, I’m sure they wouldn’t mind if you signed up for a credit card or two ;)

If the high interest rate is the obvious advantage, what are the disadvantages?

You will have to get over your fear of online banking.
It takes about three days to transfer money from your High Yield Savings account to your original account.

I recommend keeping just enough cash in your checking account to cover bills, expenses, entertainment, et cetera, and then put the rest in your high yield savings.

Check back tomorrow for current rates from the most popular online banks. I’ll do a little research in the meantime…

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