In 8 months, I've earned over $250 in interest just by switching to a high-yield savings account
- When I started building an emergency savings fund, I was earning a negligible amount of interest each year.
- Since switching to a high-yield savings account in November 2018, I've already earned $268 in interest in just eight months.
- I expect to earn another $500 in interest by the end of the year by switching to an account from Betterment with an even higher interest rate. After that, I'll start investing my money for higher returns.
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I opened my first bank account when I was 16. My dad took me to our local credit union - First Tech Federal Credit Union - and helped me open up a free checking and savings account. For more than 10 years, this was my only bank account.
I still have, and love, this bank account. However, as I moved into an "adulting" phase with my finances, I realized something: bank accounts are like kitchen utensils and power tools - you can't expect one to do everything well.
Opening multiple financial accounts for different purposes is the first step to making your money work for you. For short-term savings goals, there's nothing better right now than a free high-yield savings account.
I opened up a high-yield saving account with Ally Bank and transferred my savings to it last year and realized that even a 2% increase in your interest rate makes a big difference. Here's how much money I've earned in interest since I switched accounts.
How much I was earning at my old bank
I'm lucky my dad took me to a credit union to open my first bank account rather than one of the big banks, because credit unions tend to give better rates. Still, they rarely compare to the rates you can get from a high-yield savings account at an online bank.
Most big banks, such as Wells Fargo, offer a 0.01% APY on their basic savings accounts, which also tend to come with monthly maintenance fees. At First Tech Federal Credit Union, I was earning a 0.05% APY on my free savings account, although I could have been earning a 1.30% APY by upgrading to another free account that required a minimum balance of $5,000.
When I transferred my savings to Ally from First Tech Federal Credit Union, I had $13,000 in my account. At 0.05% APY, I was earning a negligible $0.54 per month. If I'd kept my money at the credit union and contributed what I'm currently putting in my Ally account (about $2,708 per month), I would have earned $6.02 in interest since November 2018. In total, I would have a balance of about $29,256.
How much I've earned with my high-yield savings account
Instead of doing that, I opened a free high-yield savings account with Ally Bank online. At the time, Ally was advertising a 2.20% APY, although it's recently gone down to 1.90% following the Fed rate cut.
Since depositing my $13,000 into a high-yield savings account in November and contributing $16,250 from January to July, I've earned a total of about $275 in interest. My savings account balance is now at $29,525.
In other words, by switching to a high-yield savings account, I earned an extra $268.83 in interest in just eight months.
Courtesy Elizabeth Aldrich
How I plan to earn even more this year
Just recently, I transferred my savings over to Betterment to take advantage of a promotion it was running that offered a 2.69% APY. About a week after switching, though, the Fed cut interest rates and I got an email from Betterment saying it would be lowering my APY to 2.41%. Still, I'm getting a better rate than I could find elsewhere.
My goal is to contribute $3,000 per month to my savings account through January 2020. If I'd kept my money with Ally Bank despite it lowering my APY to 1.90%, I would earn $349.95 in interest and end up with a savings account balance of about $47,875 by the beginning of next year. Not bad.
But by moving my money over to Betterment and taking advantage of the 2.41% APY, I'll earn $443.29 in interest and end the year with a savings account balance of about $47,968. In other words, by taking 10 minutes to open a new account and transfer my money over, I'll earn an extra $93.
Overall, I'll earn almost $500 in interest over the next six months with my new high-yield savings account.
Competition is high amongst online banks to offer the best rates right now, which is good for us consumers. I'm not going to open a new savings account every time someone offers a slightly higher interest rate than what I'm currently getting because eventually, these rates will go back down. However, when the potential increase is significant, (0.50% or more), it's well worth it to me to transfer my money.
While a high-yield savings account is great for money you need to access easily, like emergency savings, it barely outpaces inflation right now. My new goal now is to start investing the portion of my savings that I won't need in the next couple of years so that I can earn even higher returns.
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