It’s always smart to have money in the bank so that you have extra cash on hand for emergencies, large purchases, and new investment opportunities as they arise (i.e. “dry powder”).
But if your money is sitting in a regular savings account today, it’s barely earning any interest at all.
According to the FDIC, current savings account interest rates are at a national average of just 0.06%. This means that you only have the potential to earn a few dollars in interest a year with your regular savings account.
The good news is that you have options to help you grow your savings while still keeping your money liquid.
What Affects Your Money in the Bank?
Interest on money sitting in the bank
Many banks offer interest on money placed into the account. Most banks offer interest on savings accounts, while a few financial institutions also offer interest on checking accounts. Interest on savings accounts is minimal, as they range from 0.01% to a possible 0.06%. There may also be a minimum deposit amount that may impact the amount of interest you could get back.
Another downside is that the savings account may be subject to monthly fees or yearly fees. The little interest that you make in your money may go directly back to the bank as fee payments.
How much money will I make if my money sits in the bank?
The amount of money that you can gain from interest will depend on the bank's interest rates for that account and the amount of money you have available. Another factor depends on how long that same amount is held in the account.
Seeking the highest interest rates for a savings account is ideal when trying to make the most of your deposited money. However, even with high-yield savings accounts, the amount earned is still small when taking into account any possible fees. Another pitfall of a traditional savings account is that rising inflation rates can often overtake the interest rate of the account, causing your money to actually depreciate in value. In order to make more interest on your investment, you will need a higher-deposited amount for a longer period of time.
In what case should you keep money in the bank?
While getting interest on money kept in the bank is not a huge payout, there are times when you should have some cash in these accounts.
Emergency Fund: Always have some extra money that you can access immediately for emergencies. An emergency can be medically related, a sudden car breakdown, or home repairs after a storm.
Making an Immediate Purchase: Using cash versus a credit card for a purchase is always a better option so as not to take on excess debt.
Education Expenses: There are many education-related expenses that require access to funds on a regular basis. Having the money in a savings or checking account will not lock it up for a certain time frame and you can use it whenever you need it.
Home Purchases: Unless you plan to take your time in purchasing a home, such as 10 to 15 years in the future, you will want to hold the money in a savings account for the home purchase and for maintenance costs.
Best Places to Save Money and Earn Interest
Certificates of Deposit
Certificates of deposit, also called CDs, may have set short terms or longer lock-in terms for your money. They are issued through traditional banks and credit unions. These accounts are FDIC-insured and you have to keep the money in the account throughout the entire specified term. Some CDs have a minimum amount to open an account while offering interest rates anywhere from 0.14% to 0.27%. CDs will have a maturity date, and levy penalties if you withdraw the cash early.
Demand Notes
Demand notes are loans issued by corporations to customers who have good financial standing and creditworthiness. There is usually no fixed term, but they are typically shorter than a bond but longer than a demand bill. Interest rates may range from 0.5% to 3%, yet higher yield notes can go up to 5%. Demand notes may require borrowers to repay creditors at a predetermined date.
High-Yield Savings Accounts
A high-yield savings account has higher rates than a standard savings account and allows for larger initial deposits. While you still have access to the funds in the account with the use of checks, the access is limited to 6 withdrawals or transactions a month. Some financial institutions offer sign-up bonuses or interest rate bonuses to attract customers.
Money Market Funds
Money market funds are mutual funds where your money is invested in low-risk securities. Banks and brokerage firms offer these funds, as the return you receive will be similar to interest rates that are short-term. Your funds become pooled with other investors that go toward short-term securities.
Money Market Deposit Accounts
Money market deposit accounts are similar in many ways to savings accounts. They are offered by banks as you provide a minimum initial deposit and account balance. These accounts are FDIC-insured, and you may make very limited check transactions to the account. You can access the money more easily. See Money Market Account Alternatives for 200%+ higher earning options.
Treasury Bills
Treasury bills are backed by the U.S. government as they are the safest investment that you can make. They are sold at a discount and the bills will mature to their face value. So, the face value of the bill is the interest. The Treasury bill can be purchased at a minimum of $100 and have different maturity rates.
Bonds
Bonds come in short-term and long-term investments. They are considered low risk as you are lending money to a company, government entity, state, or municipality. They have fixed interest rates for a specific time period as the issuer of the bond pays interest for the entire length of the bond. The issuer also provides returns at the face value of the bond when it reaches maturity.
Conclusion
When it comes to making the most of your money, there are numerous places to invest to make your funds grow. You may even opt to select a variety of different investment vehicles based on differing rates of maturity to bring in constant, passive interest returns on your money.
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EquityBrix is not an investment adviser. This information is for educational purposes only and does not constitute investment or tax advice. It’s important to be informed and to make your own investment decisions or do so in consultation with a professional financial advisor. Under no circumstances should this material be used or considered as an offer to sell or a solicitation of any offer to buy an interest in any investment. Any such offer or solicitation will be made only by means of a written online prospectus relating to the particular investment.
FAQs
Should I let my money sit in the bank?
Only consider letting your money sit in a bank account when paying monthly bills, or when saving your money to purchase a home, make a large purchase, or pay education-related expenses. You should also have an emergency fund set up.
What do you do with money in the bank?
Many banks offer other investment vehicles that offer higher interest rates, such as CDs, money market funds, money market deposit accounts, and demand notes. You may consider diversifying your funds into these other investments to reap higher interest returns.
What should you do with money sitting in savings?
If you have a large amount of money in your savings that is not accessed more than six times a month, you may consider moving it to a high-yield savings account with better rates.
