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.
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.