Dear Mary: I’m looking for a place to earn the best rate of interest on my contingency fund, which is (drumroll, please) about $18,000 and growing. Recently, I came across a “rewards checking account.” It looks like a checking account that pays about 6 percent, when savings accounts in the same bank are at less than 1 percent annual percentage yield. Is this some kind of scam? —Jason
Dear Jason: First, let me congratulate you on your very respectable and growing contingency fund! Everyone needs money they can count on in an emergency. Good job, and keep going!
Rewards checking accounts are the latest in creative products from banks and credit unions. Whether they’re scams or not depends on how disciplined and clever the account holders are.
While I have not seen a rewards checking account paying the rate you quote in quite a long time, I’ll take your word for it. I wonder if the message says, “If you meet the monthly requirements” in the fine print—”if” being the operative word.
Before you get too excited about all the interest you can earn, know that rewards checking accounts come with very strict rules you must follow to earn that interest.
A rewards checking account is strategically connected to a debit card. To earn the interest, you must use the account a minimum number of times each month, using the debit card to make those purchases. If you fail to do this, you forfeit the rate.
And you must agree to receive your statements electronically. There may be other requirements as well, which you will find when you read the terms and conditions.
For me, the sticking point is that a rewards checking account must be used often enough to qualify for that great interest rate. That’s fine if you keep a large sum in your checking account anyway and are not opposed to using a debit card.
Human nature being what it is, for you to put the entirety of your contingency fund in a place that makes those funds so easily accessible with a mandate to use it six or more times a month would be to create significant temptation. Just one slip up could cost you far more than the paltry amount of interest you might earn if you don’t break any rules. For me, putting the money in a safe place that earns 0.05 percent annual percentage yield looks a lot better. Easier to manage, too.
Dear Mary: Where can I earn the best interest on my savings? —Sylvia
Dear Sylvia: This is a tough one, especially for those of us who remember when savings banks were paying respectable rates of 6 percent annual percentage yield and higher. Times have changed. As I write, rates on traditional savings accounts, money market accounts, and certificates of deposit are well below 1 percent.
Here are a few ideas for you to get the most you can in these difficult days:
The website SmartyPig, part of Sallie Mae bank, is offering totally free online savings accounts insured by the Federal Deposit Insurance Corporation with an annual percentage yield of up to 0.80 percent. It’s a wonderful online piggy bank that not only keeps your money safe and available but also offers incentives to save for specific purposes. Check it out.
Online-only banks such as Ally and FNBO Direct are another option. Because these banks don’t have the cost of physical locations and big staffs to run them, rates are likely to be slightly better than the big banks with physical locations. You need not worry about depositing your savings online. Provided the bank carries the logo certifying that it is fully FDIC-insured, you can rest easy.
Another option I suggest you look into would be an independent bank or credit union in your community, where you may be able to land a slightly better rate. Because credit unions are nonprofit organizations—as opposed to banks, which are owned by shareholders—credit union members benefit from more favorable rates and fees.
Credit unions often offer more creative options to get their members savings. Here’s an example I just came across:
Blue Federal Credit Union is offering an accelerated savings account with 5 percent annual percentage yield on the first $1,000. That’s quite amazing! Or open a new Christmas club account and you’ll earn 1.25 percent on your deposits up to $5,000.
While it’s appropriate that we should be earning interest on money we deposit into banks and credit unions, that’s a secondary benefit. I am so proud of you that you are saving at all! Sadly, most people are not as disciplined.
Please remember that rates are always subject to change, so be sure to do your own due diligence.
Mary invites you to visit her at EverydayCheapskate.com, where this column is archived complete with links and resources for all recommended products and services. Mary invites questions and comments at EverydayCheapskate.com/contact, “Ask Mary.” Tips can be submitted at Tips.EverydayCheapskate.com. This column will answer questions of general interest, but letters cannot be answered individually. Mary Hunt is the founder of EverydayCheapskate.com, a frugal living blog and the author of the book “Debt-Proof Living.” Copyright 2020 Creators.com