For most people, managing money involves deposit accounts through banks or credit unions. Interest-bearing accounts like savings accounts, money market accounts and certificates of deposit (CDs) are designed for short-term savings, while checking accounts help you manage everyday banking transactions. Savings accounts, money market accounts and CDs can reside inside of an Individual Retirement Accounts (IRA) where interest earnings can receive favorable tax treatment to help grow retirement savings.
Financial institutions with deposit insurance through the Federal Deposit Insurance Corporation (FDIC) or National Credit Union Administration (NCUA) ensure that your deposits are protected from failure of the institution on balances up to at least $250,000 per institution. Online banks with FDIC insurance are just as safe as FDIC-insured brick-and-mortar banks.
Sometimes those institutions offer perks, sign-on bonuses and opportunities to waive account fees. Interest rates may change over time, but keeping your money in some types of deposit accounts helps keep it safe — and you can earn interest on the balance, too.
With the recent rise of interest rates, it’s possible to earn more interest on your deposit account than at any time in the past decade. Some banks and credit unions have aggressively raised their deposit rates, while others haven’t been raising their rates at all. It’s especially important in today’s environment to shop around for the best savings account and CD rates.
In general, online banks have been much more aggressive with their deposit rate increases than brick-and-mortar banks. This is especially the case with savings accounts. The interest rate advantage of online savings accounts over brick-and-mortar savings accounts is the highest it has been in more than a decade.
The easiest way to benefit from today’s higher rates is to open a high-yield savings account at an online bank. You don’t have to switch banks or change checking accounts. The high-yield savings account at an online bank can be opened with only a small deposit, and it can easily be electronically linked to your existing checking account. Once opened, you can quickly transfer funds between the checking and savings account.
If you already have an online savings account, don’t assume that the rate is still competitive. Many online banks use tactics to maximize their profits, and that often involves paying low interest rates to existing customers who don’t pay attention to rates. Make sure you compare the rate of your existing account with rates of other online banks. Whether you have a brick-and-mortar savings account or an online savings account, it’s especially important when interest rates are rising to shop around for the best savings account.
If you have CDs that are nearing maturity or if you’re preparing to open new CDs, it’s also especially important to shop around for the best CD rates. Banks hope that you just let your CDs automatically renew. In many cases, the new rate from a CD renewal will be much lower than what you could get elsewhere.
Online savings accounts can facilitate closing and opening CDs. When CDs mature, you can direct the bank to transfer funds to the savings account. Then the funds can remain in the savings account earning a competitive rate while you shop around for a new CD.
Short-term CDs may look more attractive, but long-term CDs may be a smarter choice, even if they don’t have higher rates, when interest rates start to fall. Once you open a CD, the rate is locked until maturity, and that can be beneficial when rates are falling.
Checking accounts help you manage everyday banking transactions such as paying bills, withdrawing cash from ATMs or making purchases using a debit card. Look for banks or credit unions that offer services that are important to you such as a mobile banking app or a large ATM network.
Interest rates are generally lower on checking accounts than on savings accounts. If interest rates are a priority, look for high yield checking accounts. These typically require monthly debit card usage to qualify for the high interest rate. Another option to earn more interest is to look for online banks that offer both savings and checking accounts. That will make it easier to keep more money in the savings account where it can earn more interest.
Checking account fees can be costly. Common checking account fees include monthly maintenance fees, ATM fees and overdraft fees. Many banks offer free checking accounts with no monthly maintenance fees. To avoid ATM fees, look for banks or credit unions with large ATM networks. To avoid overdraft, set up overdraft transfers between your checking and savings account. Many banks offer free overdraft transfers that will automatically transfer the necessary amount from your savings to your checking to ensure your checking account balance remains positive.