By Laura McMullen
Don’t give your savings account a free pass on fees and minuscule interest rates. If you’re getting dinged with fees and earning next to nothing in returns, it may be time to shop around for a better place to keep your money. Here are three signs it’s time to switch savings accounts.
You’re tired of paying fees. Paying fees on a savings account is like continuing to fill a bucket with a hole in it. The fees associated with a savings account often are set to the minimum balance. Some banks require that you keep a certain amount in the account to avoid a monthly fee or to earn a particular interest rate. This minimum balance can range from $1 to thousands of dollars.
If you’ve been hit with these kinds of charges, consider switching to an account with a lower minimum balance requirement and no monthly fees.
You want to earn more in interest. No one is making bank on their savings accounts right now, given that the average national annual percentage yield is only 0.06%. But 2017 is looking up for savers. In December, the Federal Reserve raised its benchmark interest rate — a move that encourages banks to increase the APY on their deposit accounts to attract customers. There’s no guarantee, but the interest rate hike and the prospect of more increases to come may translate to a gradual rise in savings accounts rates.
Savvy savers can snag rates around 1% if they’re willing to shop for a high-interest savings account. If 1% doesn’t sound like much, consider the beauty of compound interest. Say you start with a $5,000 in savings and add $100 a month for 10 years. Including the initial balance, you will have $17,000. In that time, a 0.06% APY would yield $66 in interest, while a 1% rate would return about $1,152.
Keep in mind that you probably won’t find this high interest rate at a large bank. Online-only banks and smaller, local financial institutions typically offer the most competitive rates.
You can set aside some of your savings. You can earn more interest on your savings by opening a certificate of deposit. With a CD, you typically earn higher interest but give up some access to your savings.
Although the specific conditions depend on the CD, you generally agree to leave your money in an account for a set period of time, typically from three months to five years. Usually, the longer the term and the larger the deposit, the higher the interest rate. Some credit unions and online banks offer CD rates above 1%. Here’s the catch: Withdrawing CD funds before the term’s end triggers a penalty that could offset much of the interest accrued.
Laura McMullen is a staff writer at NerdWallet, a personal finance website. Email: lmcmullen@nerdwallet.com.