Have you grown sick and tired of the interest on your savings account amounting to pennies every year?
If your answer is “yes,” then you most likely have a savings account with an old-school traditional bank like Chase, Bank of America, or Wells Fargo. There, savings accounts have been paying interest at a rate of 0.01% to 0.05% since the financial crisis of 2008.
Since the Great Recession, the banking industry has drastically changed as the large banks are unable (or unwilling) to offer high rates on their savings accounts. Luckily, since the recession, online banks have grown in popularity, and they offer interest rates that are much more attractive than the traditional brick-and-mortar banks.
In this article, I will show why you need a savings account and how you can earn an extra $4,600 by opening an online savings account!
Why You Need a Savings Account
When you get into financial trouble, it helps to have money set aside so you do not go into debt or have to tap into your retirement savings.
Financial planners like myself recommend that people keep three to six months of expenses in a savings account to be used in case of emergency. An example of an emergency would be the loss of a job, an expensive medical procedure, or even car maintenance.
If your expenses are around $8,000 a month, you will want to keep about $48,000 in your savings account. I know that seems excessive, but having that money on hand when you need it can save you from financial distress.
A savings account is not meant for you to grow your wealth—the stock market is a much better option if increasing your wealth is your goal. A savings account is there to hold your emergency fund in the event you have an actual emergency and need money!
Low Interest Rates
The problem with keeping that much cash in your savings account is that the money is probably earning very little interest.
Example: You have a savings account (emergency fund) at Chase with $50,000 in it. The current rate on your Chase savings account is 0.01%. That means you are earning a measly $5 a year on your $50,000!
Why are the large banks being so stingy with the interest rates on savings accounts?
According to a Forbes article, large banks raise interest rates on a savings account only when they want to attract more deposits. As of right now, the author reports, large banks don’t need to attract more deposits because they have more than enough money to lend out thanks to the quantitative easing started by the Federal Reserve during the Great Recession.
Online Savings Accounts
We have found most clients are used to online banking. For a traditional bank, this would mean logging in to your Chase or Wells Fargo account via your smartphone or computer.
Some major differences exist between an online bank and a traditional bank. For instance, there is no physical access to an online bank: no branches, tellers, or branch managers. Your access to the bank is via your smartphone or computer.
These online banks follow the same rules and regulations as the giant banks: FDIC insurance, regulated by the Federal Reserve, etc.
However, because there is no physical location or staff, online banks can pay higher interest rates!
As an example, let’s use the numbers from above. But instead of having your money at Chase, let’s pretend you have it at Marcus by Goldman Sachs. The rate that Marcus offers its customers for savings accounts is 1.80%.
That means on your deposit of $50,000, you will earn interest of $900 per year! That is $895 more than Chase is willing to give you!
When you compound that over the course of five years, you will earn over $4,600 in interest!
Opening Your Online Savings Account
To open your online savings account, you will need to do some research. We have found the website NerdWallet has the best information regarding personal financial products, including a ranking of the top online savings accounts.
For most of our clients, we have been recommending Marcus by Goldman Sachs. Marcus has very competitive rates at 1.80%, a balance minimum of $1, and no fees. The best part is it’s backed by a large traditional bank, Goldman Sachs. You can learn more by clicking here.
(Important note: We are not endorsing Marcus and get paid no compensation from Marcus.)
Having money set aside for worst-case scenarios is crucial. Today, the traditional banks we grew up with are not offering interest rates that are competitive. That makes it time to consider transferring your savings account to a bank that operates entirely online and pays an interest rate that is attractive.