I was hanging with my friend Maggie the other day. We were walking the main strip in my city enjoying people watching and the warm ocean air in South Florida. We were chatting about the weather, our families, people we saw on the street, normal girl talk. Then out of the blue she asked me what type of interest rate she should get on a savings account. I nearly doubled over in fear as this comment was a red flag of someone who had not done their homework.
I’ve always been a no nonsense, tell it like it is kind of girl but I cautiously proceeded into the conversation. I was scared for her at this point.
Maggie does not know I write this column every week. She does however know that I am plugged into finding hidden ways to save money in everyday life. I haven’t told any of my friends about this column because I write about everyday life occurrences and often those involve the people around me. I do not want them to feel embarrassed when I share some very common mistakes.
Maggie revealed to me that when she got married 8 months earlier she accumulated a substantial sum of money from her wedding guests. She and her husband had deposited the money in a savings account at their local bank branch. They walked in and opened an account with a whopping 0.01% interest rate.
I know savings account interest rates aren’t what they once were. However that interest rate is downright laughable.
When you open up a savings account at a bank you’re effectively giving the bank a loan. The bank is taking the money you give them and loaning it out to others at a higher rate than what they are paying you.
Would you take a 0.01% interest rate on money you loan out? Of course not. That interest rate is ridiculous and insulting. You want to yield the highest return possible on all your investments, though people often neglect their savings account. They choose to stay with their convenient local bank regardless of rate.
I encouraged my friend to take control of her money. And that getting a return of 0.01% on her money was not acceptable.
I had a lengthy conversation with Maggie about savings and rates of return for her money. I explained that simply putting her money in an account that earned less than half of 1% was not putting her money to work for her. And I told her she should do her homework.
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Finding a higher yielding savings account takes less than two minutes and the first minute will be spent booting up your computer. Below are a few links to websites that provide information about higher yielding interest rates for savings accounts.
All of these websites show banks with interest rates ranging from 1-2%, a ten to twenty fold increase on the rate of return Maggie is currently receiving.
I find people like Maggie are often intimidated by the idea of using an online or remote bank. It’s almost like there is a strange attachment to the comfort of their local bank. I assure you there is nothing wrong with these other banks. You’re just being smart with your money.
When choosing an online bank there are a few questions you need to ask yourself. Often times the bank that offers the highest interest rate may not necessarily be the best choice. Below is a series of questions I told Maggie to think about before she opens her next savings account. You should consider these too.
-Do you have to maintain a minimum balance? Is it a daily or monthly minimum balance?
-Are there any monthly fees? What’s the point of making more money in interest if it’s wiped out by fees?
-Is the bank FDIC insured? If the institution you’re using isn’t, run like the wind.
-In the comments section of the website do customers praise or complain about the institution and/or the account type?
-Can you set up transfers in and out of the account easily? You want to be able to access this money when you need to.
-Are you restricted by a number of transactions per month?
-Do you need an ATM card for transactions or are you ok with only performing transactions online?
Savings accounts are great if you need to keep some of your wealth liquid. They’re safe and secure financial vehicles, but at an earning level of 1-2% they might not help you accomplish your long term financial goals. So you may want to aim for a higher rate of return on your liquid or semi-liquid cash.
One speculative method to earning a higher rate that I told Maggie to look into was foreign currency cds. When you invest in foreign currencies you can hedge yourself against a falling US dollar. So if the currency appreciates against the dollar you profit. Though there is more to it than that. Just because interest rates are historically low here in the states, doesn’t mean it’s like that in the rest of the world.
When you invest in one of these CD’s you also receive the local interest rate of the home country. There are two such foreign currency CD’s that I like in particular. The Brazilian Rand and Australian Dollar. Throughout this down economy Brazil and Australia have seen very little downturn. In fact their economies, especially in Brazil’s case, have been booming.
These two currency cd’s are yielding an interest rate between 3.5% and 4.5%, which is more than double the best online savings accounts in the states are offering. One such bank that offers these CD’s are www.everbank.com
There are some risks here since the dollar could also appreciate against these currencies. However the higher interest rate does provide a nice cushion.
I ended my conversation with Maggie over a beer at our favorite English pub. She left with a few essential pieces of information and I know she’ll take action. Though there are few things I’d like you to take away from this as well.
One, you are your best asset. No one cares as much about your money as you do. You must continually check that your wealth is earning as much return as possible. And if you’re getting a return of less than 1% that simply isn’t happening.
Two, do your homework. Research doesn’t have to be hard or time consuming. It took me only 2 minutes on Google to find which banks were offering the highest interest rates in the country.
Three, with a weak dollar right now you may want to look beyond our borders. Foreign currency trading has gained an enormous amount of press in the last several years because of the downturn of our economy and our dollar. You can invest your money in a foreign currency CD for a higher rate of return on your money than what US banks are offering. Our good friend Mark Patricks has talked extensively about the US dollar and foreign currencies in his Freedom By Friday column.
So I urge you to check the rate you’re getting on your savings account now. There’s a good chance you can be leaving money on the table.
Keeping Money in your Pockets (and hopefully adding to them),