I’ve recently opened my first savings account and helped my Mom open an additional savings account. With the current coronavirus times, savings have been very important especially because the pandemic has highlighted how unknown our future is. But also, since we’re staying home more and not spending as much, I had a chance to really research what the best way to open a savings account is, in my opinion.
NerdWallet is a really great resource to start your search. Their explanations and articles make it especially easy for beginners who are just starting their personal financial plan to get a better understanding of what’s out there.
As I’m writing this is May 2020, these are the 2 articles I’ve referred to most recently on this topic of savings accounts: 9 Best Savings Accounts of 2020 & 10 Best High Yield Online Savings Account of May 2020
There’s tons of savings accounts out there. The way I narrow it down is by looking at 4 different areas, which are as follows:
1. ANNUAL PERCENTAGE YIELD (APY) / INTEREST RATE / DIVIDEND RATE
It goes by many names but this basically refers to how much (and indirectly how fast) your money will grow in the account. As a benchmark, I use Chase’s savings account interest rate of only 0.01%. So to me, anything above that is good.
Let me quickly introduce you to the Rule of 72. The Rule of 72 shows you how to calculate the effect of compound interest with a very simple formula Take 72 and divide it by the rate of return (in this case the APY/interest rate/dividend rate). The answer is the number of years it takes to double your money. When we look at Chase’s .01% interest rate that means it will take your money 7200 years to double (72/0.01=7200). With savings accounts, I’ve seen about 1.5% as the highest rate of return. But like I said, anything greater than .01% is a win in my book. Even if it’s just 0.1%, look at it like (72/.1=720) 720 years. While the years may still be unrealistic, you can see that it’s still a difference of 6480 years.
Why does it have so many names? Most banks will refer to this number as interest rate or annual percentage yield.
Interest rate = percentage of deposit that banks pay you in order to hold your money with them.
Annual Percentage Yield (APY) = total amount of interest you earn on your savings over 1 year, factoring in compounding interest.
In essence, they are referring to the same thing. If you’re able to open a savings account with a credit union, these institutions will refer to this number as a dividend rate. It’s the same idea, just labeled a different name since it’s under a credit union.
2. MINIMUM DEPOSIT & MINIMUM BALANCE
A minimum deposit is the amount the bank requires you give them in order to open an account. Additionally, they may also call for a minimum balance, which means you will need to keep a certain amount of money in the account at all times to keep it open. Choose something that’s manageable and logical for your situation.
Since I’m just starting out in my career and this is my first savings account, I was looking for something low and manageable - like $100 and below, if possible. There are some savings accounts out there that are made specifically for the wealthy, calling for thousands of dollars for a deposit and minimum balance.
3. NUMBER OF MONTHLY TRANSACTIONS ALLOWED
This is an interesting one. Because savings accounts are meant for you to save, there’s a cap on how many times a month the institution will allow you to withdraw money. Typically the maximum monthly withdrawal limit is 6 times. There are some that may be 4 or 5 times a month too. The idea is that you’re supposed to keep as much money as you can in the account for as long as you can so it can earn the high interest that you’re looking for.
4. EASE OF USE
I’m talking about customer service support, physical branch locations, online/smartphone app compatible. No matter how good the interest rate is, if you don’t understand it or can’t even access the account, it’s no good.
Using those 4 areas to select a savings account, I ended up opening an account with School’s First Federal Credit Union. Because I work in the education industry I am qualified to open a special savings account which provides a 3.2% dividend rate - which is crazy high compared to other banks I’ve seen. I’m also allowed 6 monthly transactions, but I’m only allowed to deposit a maximum of $2000 a month. Because of this limitation, I reached out to the head of payroll at my work and learned that I am able to link up to 3 accounts to receive direct deposit and there’s several ways to divide the amounts -- I chose to first deposit $2000 into the savings account and have all the remaining amount deposited to my usual Chase checking account. And since not everyone may have access to a credit union or an account that offers 3.2%, the account I selected for my mom was HSBC’s online savings account with an interest rate of about 1.2%.
Hopefully that gives some starting points for anyone out there paralyzed by opening their first savings account!
Em Truong
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