Updated on 02.17.12

Get a Savings Account that Offers Better Interest (49/365)

Trent Hamm

Yesterday, I talked about the value of getting a (small) interest rate on your checking account. A similar tactic applies for savings accounts. Getting a good interest rate is money straight in your pocket.

Get a Savings Account that Offers Better Interest (49/365)

As I mentioned yesterday, when 365 Ways to Live Cheap went to press, we were in a bit of a different economic situation. Banks were offering much higher interest rates than they offered now and I recommended seeking out a 3% interest rate on savings accounts.

Today, I would consider a 1% rate on a savings account to be a very solid rate. Not all banks offer that rate. However, if I were switching banks right now, I would look seriously for a 1% savings account interest rate.

Of course, having such an interest rate now doesn’t mean it’ll have that rate tomorrow. What it does mean, though, is that the bank offers a reasonably competitive interest rate for the moment which means there’s a reasonable likelihood that it will continue to have a reasonably competitive interest rate.

What does that all mean in dollars and cents?

If you put $1,000 into a 1% interest savings account as your emergency fund and then (luckily) didn’t have to touch it for a year, the bank will give you $10 in interest. You don’t have to do anything other than just leave the money alone. The bank will actually pay you for maintaining an emergency fund or other savings.

Another example: let’s say you decide to start saving $100 a month for your next car. If you were to just take out cash every month and put it in your dresser, you’d have $6,000 after five years.

If you put that into a savings account that earned 1% interest, you’d have $6,154.37 at the end of those five years. That extra $154.37 is pure interest, paid to you by the bank.

This money won’t make you rich, of course, but it’s certainly worthwhile considering you don’t have to do anything to get that money.

Should you switch banks just to earn this level of interest? Unless you’re maintaining a very large balance, the interest rate on a savings account isn’t going to make or break the decision to use a bank. After all, even if you’re holding $10,000 in a savings account, the difference between a 0.5% and a 1% interest rate savings account is $50. A bank with a poor ATM network and bad online banking services will cost you more than that interest rate difference.

If you’re just looking for a place to stash an emergency fund, there’s nothing wrong with chasing the best interest rate. However, it’s not a cost-effective use of your time to obsess over it. Pick a bank with a good rate, put your money there, and forget about it (at least until the interest rates begin to rebound).

If you’re responsible with your money, even a bit of interest can put some cash in your pocket without any effort on your behalf.

This post is part of a yearlong series called “365 Ways to Live Cheap (Revisited),” in which I’m revisiting the entries from my book “365 Ways to Live Cheap,” which is available at Amazon and at bookstores everywhere. Images courtesy of Brittany Lynne Photography, the proprietor of which is my “photography intern” for this project.

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  1. Roberta says:

    The pictures…… my first thought on the #1 was that it was a homemade marker colored age number on a chocolate frosted birthday cake…. pretty clever and frugal for a baby who wouldn’t know any better. Then I thought maybe it was supposed to represent the amount of interest you could get on your checking account. Wrong on both counts. OK – I give up. A marker-colored number on a bumpy painted wall? Water colors on mud? Some kind of art statement I’m not clever enough to understand? Please… Trent or Brittany..explain it to us. It’s haunting my dreams…..

  2. Roberta says:

    OK… maybe the nubmer of the topic in this particular genre of frugality ideas, like the series on transportation?

  3. Roberta says:

    that would be “number” not “nubmer”

  4. Katie says:

    I think the numbers are the amount of interest Trent conservatively estimated you could get on your checking or savings account when he first wrote his book. Probably not the best idea for a picture series, though I get that interest is hard to represent in a photo. But even finding an example of the numbers in the wild, so to speak, probably would have worked better.

  5. Vanessa says:

    What it does mean, though, is that the bank offers a reasonably competitive interest rate for the moment which means there’s a reasonable likelihood that it will continue to have a reasonably competitive interest rate.

    That sounds reasonable.

  6. Amanda says:

    I really think it would do Brittany some good to look at the critiques of her photos and reshoot as much of the series that remains as possible.

    I mean, a homemade paper 3 on a pile of green-brown paint really isn’t going to look great in a portfolio.

  7. Jen says:

    It’s not a three-year old Texas sheet cake?

  8. BD says:

    Roberta – When I first saw it, I thought it was the letter “m” cut out by a small child. Took me a second to realize it was the number 3.
    Either way, the picture is distracting from the article.

  9. ChrisD says:

    In the UK if a bank offers an interest rate, it is guaranteed for a year. After that of course it drops down to 0.5%. So to get back to 2.5-3% (we seem to get somewhat higher rates) you have to put in a bit of work every year (this refers to a savings accounts, checking pays nothing, even before 2008). One bank offered me a ‘new’ account at the end of the year (basically I had to phone up and say ‘please give me a new account with the good rates’) this rate was not the best anymore, but the reduced hassle was well worth the loss of 0.25-0.5% over the next year.

    Those graphs/stories that illustrate the power of compound interest by saying you forget $5 in an account and 200 years later you own the earth, really annoy me as the banks make sure that will NEVER happen (the Futurama episode gets a pass as it is a good joke).

  10. Robin S says:

    Didn’t we skip number 2? I’m so confused.

  11. deRuiter says:

    “…the bank offers a reasonably competitive interest rate for the moment which means there’s a reasonable likelihood that it will continue to have a reasonably competitive interest rate.: If I had a passion for writing there’s a reasonable chance I would invest in a copy of Roget’s thesaurus for easy access to synonyms which would improve the quality of my writing considerably.

  12. pollyanna says:

    the only comment that even touched on the subject here was ChrisD. i really hate reading through all the article critic to get to some real talk about the subject.

  13. Alice says:

    @12: Several commenters are reacting to the unusual nature of the photo that accompanies the post, which demonstrates that the photo is a distraction (rather than an enhancement) to the post.

  14. Kai says:

    to #11
    I would deliberately have repeated ‘reasonably competitive interest rate’, which is the topic in question. I think there are some words/phrases used in every post which could really use a change-up, but this doesn’t seem like an example of a problem.

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