Rising interest rates affect far more than mortgages. Many banks are also increasing rates on their savings accounts, meaning you could earn a ton of money by switching banks.
If you haven’t yet, now is the time to check the interest rate you are earning on your savings account and move your money if it’s not competitive.
Big Banks Aren’t Increasing Interest Rates
The big players like Bank of America, USAA, and Wells Fargo haven’t increased their rates on savings to keep up with online banks and credit unions.
As of this writing, Bank of America’s highest interest rate is .04%, USAA’s is .9%, and Wells Fargo’s is 1.01%. Remember that these “high” rates only apply to customers with the largest balances.
Only customers with over $50,000 in savings will see rates over .3% at any of these establishments.
These establishments are banking on customers’ reluctance to change. They assume consumers will settle for nominal rates to avoid the hassle of switching.
So far, they’ve been right, costing consumers big time.
How Much Will You Make by Switching?
Even those without much in the bank can make money by switching.
Customers with only $1000 will make an extra $30 per year when they move their money from an account offering .01% APY to one offering 3%, not including interest from additional contributions.
Those with more in savings have even more to gain. A $10,000 initial investment will earn $300 over a year, while a $50,000 savings account will earn $1500.
To determine exactly how much money you will make by switching, head to Investor.gov, where you will find a handy compound interest calculator. Input your initial investment amount and your current interest rate to see what you will make by staying put, and compare that to what you’d make by switching.
The Power of Compound Interest
Compound interest is interest earned on both your initial savings and the principal. You’re making extra money on the interest payments you’ve received.
Most banks compound interest monthly, meaning you will start earning extra money off your interest after each month. In our example of a $10,000 initial deposit, you will earn approximately $25 in interest the first month at 3% APY.
With compound interest, you will earn even more the next month, even if you don’t make any additional deposits, because the interest is based on the new balance of $10,025, earning you an extra six cents.
That doesn’t seem like much, but it adds up over the years.
After five years, your investment will be worth $11616, over $100 more than the $11500 you would receive with simple interest.
Comparing either to the $10020 you will have if you leave your money in an account earning .04%, switching is a no-brainer.
Switch Banks: Consider an Online Bank or Credit Union
Many online banks and credit unions offer far better interest rates on savings than the big banks.
Investopedia offers a running list of where you can find the top interest rates on savings accounts in the US. Some of the most well-known companies offering high-interest rates on savings include Citi, Capital One, and Discover.
Many of these banks offer adjustable-rate savings accounts, meaning that as the Federal Reserve increases rates, they will increase the rates on their accounts. However, keep in mind that the opposite is also true, and rates will go down if the Federal Reserve reverses course and decides to lower interest rates again.
Money Market vs. Savings Accounts
Some banks may offer higher interest rates on money market accounts than on savings accounts. Remember that the FDIC (Federal Deposit Insurance Corporation) does not insure money market accounts.
The FDIC insures your money. If a bank goes belly up, FDIC insurance covers consumers. Each depositor is automatically insured for up to $250,000 per insured bank.
Money Market accounts don’t have this insurance. If you deposit funds in a Money Market account and the bank fails, you may lose your deposit.
Consider a CD (Certificate of Deposit)
If you don’t think you will need your money in the next few months, you might consider opening a CD. CDs are FDIC-insured accounts you can open with a bank, but they aren’t as liquid as savings accounts.
With a CD, you lock up your money for a specific amount of time and typically pay a penalty if you need to withdraw early. Investopedia also keeps a running list of the highest-yield CDs available, some of which are over 4%. However, you will commit your money to the CD to access this rate.
CD lengths vary, as do interest rates. You can find CDs with timeframes as low as three months, but long-term CDS holds your money for up to five years. Typically, the longer the term, the higher the interest rate, but some banks offer short-term high-interest-rate CDs.
Obstacles to Switching Banks
The biggest obstacle to moving your money is closing your old account. Most big banks don’t allow you to close an account online, so you need to call and speak to someone or visit one of their brick-and-mortar locations. Both options are giant hassles, but they are worth doing to earn more money over time.
If the thought of calling or visiting a bank is overwhelming, consider leaving the account open. If you have a no-fee savings account, you can leave a nominal amount of money in it and allow it to stay open. Check your bank’s rules and fees to ensure leaving the account open won’t cost you. Some require minimum deposits for free savings or charge other fees for low balances.
Bottom Line: Move Your Money to Take Advantage of Rising Interest Rates
If your money is locked in a big bank savings account earning paltry interest, you need to move it. It takes about twenty minutes to open a new account with an online bank and set up a transfer from the existing bank.
The additional income you can make from interest is worth the time, even if you don’t have a lot of savings. And as a bonus, it will add up and compound over time, giving you even more free money.
Move your money today and reap the benefits of rising interest rates.
Melanie Allen is an American journalist and happiness expert. She has bylines on MSN, the AP News Wire, Wealth of Geeks, Media Decision, and numerous media outlets across the nation. She covers a wide range of topics centered around self-actualization and the quest for a fulfilling life.