How should I really be using my savings account?

Submitted by mattledz t3_yg4w2h in personalfinance

I understand the basics of a savings account; You put money into an account, the bank uses that money throughout transactions, and they pay you interest for using it.

I just opened a savings account at our local bank the current interest rates are: 0.05% APY balances below $1,000 0.10% APY balances $1,000 and up

After doing some math, (Please note that I'm severely mathematically challenged.) It really doesn't seem like you gain much in interest with a 0.10%. I used the opening deposit amount, $200, to see what would be gained if you left just that in an account for 1 year. At the end of the year it would only be $201. Obviously I want to keep more than $1000 to get my interest rates higher, but other than that...

How do you actually make use of interest? How does a savings account actually help you save?

Thanks in advance!

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micha8st t1_iu6zet3 wrote

First of all, it holds your money safe. The account is FDIC protected in most American banks. NCUA for Credit Unions.

The interest the bank pays is your cut of the interest they charge when they lend out your money.

Back when I was a kid, my savings account paid 5%. I have some accounts that pay over 1% today.

Lets say on October 1, you put 1000 dollars in a savings account paying 1%.

  • on October 31, your 1000 earned 83 cents.
  • on November 30, your 1000.83 earned another .83
  • on December 31, your 1001.66 earned another .83
  • on January 31, your 1002.49 earned 84 cents

In other words, the interest compounds.

obviously it compounds faster if you can ear higher rates of interest.

A lot of people talk about HYSA -- High Yield Savings accounts.

I have a high yield checking account -- the account earns 3%, but only on the first 10k in the account, and only if I meet some other provisions.

bankrate.com lists several companies paying over 2.5% in interest for deposits there.

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mattledz OP t1_iu7k5jj wrote

Damn, okay that actually makes sense. Would applying for any of these affect/check my credit report?

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Werewolfdad t1_iu6uxaz wrote

You put money in a high yield savings account and let it sit. Interest is just a bonus

Https://www.reddit.com/r/personalfinance/wiki/commontopics

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mattledz OP t1_iu7k7tz wrote

I kinda figured so :/ I just was never sure if it was worth it or not

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Werewolfdad t1_iu7kcij wrote

I mean it’s better than nothing but you won’t get rich that way

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KReddit934 t1_iu7ikaf wrote

Because the bank interest rate for saving is so low, many people open a seperate online savings account (check out Ally, CapitalOne360, DiscoverBank, or Marcus, among others.) Then you link the two accounts and can transfer money back and forth. Current these accounts are running at or just under 3% interest.

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mattledz OP t1_iu7kru4 wrote

Do any of these check or affect my credit score? My credit wasn't fantastic last I checked and I'm trying to work on it. I purchased a car 2 weeks ago so I know it's dropped. I'm getting very picky about doing things without knowing how it will affect my credit.

I've had issues with identity theft in the past so a lot of companies deny my application because of the issues with verification so I try to apply for something, it checks my credit, hurts my credit and in the end, hits me with a, "Yeah, sorry bucko. Not this time."

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KReddit934 t1_iu7mczd wrote

I thought that bank accounts use a different score to check you out...but if you have identity theft issues, it might be hard to prove your identity online, true.

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mattledz OP t1_iu9rulb wrote

I don't know how it works, that's why I was hoping Reddit could help. 🥲😂

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Luxtenebris3 t1_iu9y4fl wrote

Savings accounts are mostly a place to stick money that you need to be both safe and available in the near term (or at least that you might need in the near term.) The interest is minor, but you may as well.

Now if you don't mind some extra complexity you can use other cashlike assets such as government savings bonds (I bonds), CDs, or Treasury bills (not an exhaustive list, just some examples) to earn higher interest. The catch is cash like assets will compromise some degree of safe and readily available and by doing so earn a premium vs saving accounts.

My opinion is that tiering your cash/cash like assets makes sense. I like to keep my deductibles covered / a major car repair, and the rest in I bonds and T Bills. But not everyone will agree with me on that. A lot of people want it all in straight cash as a savings account.

There isn't exactly a right answer. My answer will earn you some extra interest, but nothing life changing. It also comes with extra moving parts in comparison.

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