At Super Monedero, we cover everything as it relates to personal finances. When many readers think about personal finances, the first thing that comes to mind is probably retirement accounts, investments, taxes, or home mortgages. While these are all important, let’s not forget about the “little things” in your financial life – checking and savings accounts.
We’ve covered checking accounts in detail. In this article, we wanted to explore the personal savings account. Before we get started, let’s quickly review the difference between a checking and savings account.
Checking accounts are the most commonly used type of bank account in the United States. Checking account are designed to accommodate a high level of daily transactions. These could be purchases at the grocery store, gas station, or from online vendors. They are called checking accounts because originally paper checks were used to draw from the account. These days, most Latinos use a debit card as a way to make purchases with funds from their checking account.
Personal Savings Account
Savings accounts are the second most common type of account found at banks at credit unions. As the name implies, they are designed to hold personal savings which do not need to be used daily. Because these funds are not used on a daily bases, banks or credit unions will pay the account holder a higher rate of interest on funds within a personal savings account than funds held in a checking account.
Both of these types of accounts play an important role in how banks and credit unions make money. Remember, banks are for profit businesses at the end of the day. If you don’t have a firm grasp on how a bank or credit union works (or what the difference is between the two) we recommend you read our article on the topic before continuing.
“Interest rate are low, why would I use a personal savings account?”
Today, interest rates are at historic lows – meaning that the interest rate paid to savers is also at historic lows. According to ValuePenguin, the national average interest rate paid on a checking and savings account in 2017 was just 0.04% and 0.06%, respectively.1 This means that on average Americans were getting paid 60 cents worth of interest each year for every $1,000 dollars that is held within a personal savings account.
After 20 years, at 0.06% annual interest, an account holder would earn just $12.07 in interest on a $1,000 account. Make no mistake about it – this provides very little incentive for Americans to put money into a savings account and wait for capital appreciation. With all of this said, it may seem like there is absolutely no reason why anyone would be using a personal savings account today. Consider these two critical reasons why it still may make sense for you and your family.
A personal savings account is a great way to develop good personal financial habits. If you have a savings account, you are much more likely to put money away towards an emergency fund. It can be fun to see your personal savings account grow, and if you have the account it is easier to develop goal-based financial plans for the future. It is basic human psychology that when there is money left in the checking account – rather than a savings account - we are more likely to spend it.
With interest rates at historical lows, it is likely that rates will increase in the future. By opening a savings account now, you will be positioned to capture higher interest rates when (and if) they arrive. Keep in mind that in the year 2,000 it was not uncommon for personal savings accounts to pay between 4.00% and 5.00% interest on an annual basis.2
If either one of these reasons is important to you or your family, keep reading to learn about some of the best personal savings accounts, what to ask when opening an account, and what pitfalls to avoid.
Personal Savings Accounts – Three Things To Keep In Mind
While banks and credit unions do a great job advertising and differentiating their services, Latinos should have three basic elements in mind when choosing the right personal savings account:
- The fees associated with the account
- The interest rate paid to the account holder
- Fund availability and any restrictions on use
The fees charged, interest paid, and the restrictions on your funds should be front and center as you begin looking for a personal savings account. As mentioned, banks will try to offer incentives, gimmicks, and perks to get you to open an account with them. At the end of the day, these three basic elements are what should be driving your decision of what type of account to open.
Let’s explore each one of these elements in a little bit more detail.
Fees – The Four Letter Word in Financial Services
While the fees paid on a savings account are easy to overlook, they can add up over the course of the year. In general, fees are going to be between $3 and $6 per month. While this may sound like a small amount to pay for keeping the account open, remember that the bank is only paying you on average 0.06% interest per year. If we assume that a personal savings account is charging you $5 per month, this is $60 over the course of a year. You would need to have $100,000 in the personal savings account at 0.06% interest to just pay off the monthly fee!
Fear not, as there are several ways to get around this fee when dealing with major banks. Many banks will waive this fee if you maintain a daily balance of $300 during the entire month, linking a checking account with the bank, create a $25 recurring transfer to the account from your checking account, or are under age 18.
Interest Rates Are Low – But There are Exceptions
If interest rates were sky-high, this would be THE most important part of picking a savings account. As interest rates are near historic lows, we feel that the fees charged is the most important consideration for Latinos.
With this said, there are exceptions where personal savings accounts are paying well above the 0.06% national average. Below are a few of the personal savings accounts which Latinos should consider if they are looking for higher rates.
|Bank or Credit Union||Minimum Balance||Interest Rate Paid|
|Barclays||$0||1.00 to 1.05%|
There are a couple of points to take away from this table. First of all, there are clearly banks which are paying well above the national average interest rate. Second, it is important to read the fine print and determine when and how your bank is able to change the interest rates paid on your funds deposited. Bank Purely is a relatively new bank and it is not uncommon for banks to offer high interest rates as an “introductory rate” but lower this interest rate over time. Read the fine print and speak with your banker regarding the track record of interest rates at the bank and what the process is for raising or lowering the interest rate paid.
Fund Availability – Do You Have Access To Your Cash?
Again, this comes down to reading the fine print and developing a relationship with a bank before opening the account. Personal savings accounts are meant to store funds and have very few monthly transactions out of the account. Some banks limit the number of transfers which can be made from the account on a monthly basis and will charge you for each transaction above and beyond that. Some banks will allow you to access your personal savings account funds from an ATM while others only allow in-branch withdrawals. Read the fine print and if you don’t fully understand the agreement – speak with a banker who can explain things.
Jumbo Savings Accounts
If we think back to how banks make money, it is in the bank’s interest to hold large sums of money for extended periods of time. It’s for this reason that banks many time offer special interest rates for “Jumbo” account – typically those with over $100,000 in deposits. If you have ample cash reserves and are looking for a safe place to hold your funds this could be a good option.
FDIC Insurance and Security
While we are on the topic of personal savings accounts, it is important to touch on the FDIC Insurance available through most banks. The Federal Deposit Insurance Corporation was developed during the great depression, when many banks went out of business and depositors lost their savings. This federal agency now insures deposits up to $250,000 per depositor, per FDIC insured institution. If the bank goes out of business and cannot provide back your funds, the government will step in and make good on their promises. Even if you don’t have $250,000 to place in a savings account, it is always wise to ensure your bank is FDIC insured. FDIC insurance is NOT REQUIRED and while the majority of banks and credit unions are FDIC insured – not all are.
We’ve covered a lot in this article, and we hope it is beneficial to you and your family as you consider opening a personal savings account. As always, Super Monedero will be with you every step of your financial journey.