It’s not possible to control all the events that impact your life, but one thing you can control is your ability to save. It’s not just about the amount of money you save, but how and where you save it. Maximizing your savings isn’t something that should happen only when you near retirement age. It’s something everyone should think about — even in your 20s or 30s.
- If you deposit $3,000 in a savings account that earns 5% interest each year, you’ll earn about $150 that first year.
- If you keep your money in the account, you’ll earn interest on your new principal balance of $3,150.
- Your new balance of $3,150 will earn you $157.50 in interest the next year. This will continue year after year and year.
- In a decade, you’ll have about $4,886.68 total – without even adding another dime into your account.
- If you deposit more money monthly or annually into that account, your earnings can grow at even higher proportions. But even if you don’t, your initial deposit will continue to grow.
Because of the benefits of compound interest, it doesn’t pay to store all of your money in a checking account (or a low-earning savings account). Even if you think you have the best interest rate out there, there’s a chance you can find one better. So, are you ready to find out even more ways to maximize your savings for a brighter financial future? Read on to find out how you can.
1. Open An Online Savings Account
One option to consider is opening an online savings account. Unlike a traditional savings account provided by a brick-and-mortar bank, an online savings account typically has a higher interest rate and lower fees. Online savings accounts can offer high yields because they don’t have to pay for expenses like physical locations or branch employees. As such, most online savings accounts also require no minimum balance.
When choosing an online savings account, it’s important to consider the advertised interest rate, but there are other factors you should think about. Do some research on the bank’s commitment to service, how the interest rates have trended over time (have they kept their rates steady or lowered them?), and transfer limits. (Transfer limits become really important if you link your online savings account to your current checking account, from which you may be doing a lot of transferring each month.)
2. Open a Money Market Account
A money market account works similarly to an online savings account, but there are some differences to keep in mind. The first and most important difference is that money market accounts typically earn a much higher interest rate than basic savings accounts (online or otherwise). Because of this, money market accounts also require a higher minimum balance.
The good thing about the higher balance requirement (besides the higher interest rate), is that there usually isn’t a monthly fee associated with these accounts. The thing you might have to worry about is, again, transfer limits. While you can access your funds in a money market just like any other savings account, there are limits to the amount of withdrawals and transfers you can make.
Here’s something else to consider: if you’re putting your money away into high interest rate savings accounts, it’s because you want that money to grow. Even if you weren’t charged a fee or limited by a maximum amount of transfers and withdrawals, taking money out of your savings account impairs your its potential to grow. When using these types of accounts, create a budget first so you know exactly how much you can afford to save without dipping into your savings accounts.
3. Invest In a Certificate of Deposit
If you’d like to earn the maximum amount of interest on your savings, a Certificate of Deposit (CD) is a good bet. A CD is a savings certificate that pays a fixed amount of interest on a fixed deposit amount. CDs can be opened at a variety of banks and credit unions (traditional and online) and they can come with an assortment of terms.
The major difference between a CD and a savings account or money market account is that the money is locked up for the duration of the term. While you can access the money if you need to, you will get hit with a fee for doing so. However, since CDs can come with a higher interest rate than a savings account, it might be worth it to keep that money locked away until the CD matures.
Not sure if you can afford to keep your money locked away? Check out CDs that offer a term of only a few months rather than a year or more. This will affect the amount of interest they pay out at the end, but it’s a good option if you want to try CDs out with less risk of needing a withdrawal.
4. Maximize Bank Incentives
Many banks (and credit unions) use a number of incentives to win over customers, including offering rewards savings accounts, promotional deals, and demographic specials. If you’re strategic about it, you can find rewards that fit perfectly with your lifestyle.
The key to evaluating a rewards program (through online banks or otherwise) is to understand what kind of rewards are most valuable to you. The next step is understanding your banking behavior and whether or not it fits into the criteria the bank requires. If a bank has rewards that are right up your alley and their requirements fit naturally into your banking behavior, then you have a good fit.
In other words, don’t open a bank account you’re not going to use just for the rewards – you may end up paying more in penalties later than what you earned in the first place.
Banks can offer all kinds of rewards, from cash bonuses and incentives to introductory high yield savings rates to programs targeting specific demographics. For example, members of the military can utilize a savings deposit program through the Defense of Defense and also through various credit unions. The idea here is to think about what sets you part and to see if there are programs out there to benefit you.
Discipline for the Win
No matter how you choose to maximize your savings, staying disciplined in your saving will win the game. Evaluate your income and spending to give yourself a strong knowledge of what you can afford to put – and keep – away every month. Avoid the temptation of withdrawing from your savings accounts. Keep your eye on the prize.
Saving money isn’t always easy, but watching that number grow is definitely worth it!
Daryl is a staff writer at MyBankTracker.com who specializes in consumer spending, student finances and debt.