One thing that our family has been going through is the decision of where to sit money in the down time between investing and actually accumulating the capital necessary to make the investments. While many banks and credit unions are paying you roughly around 0.09 % there are other options to explore online called high yield savings accounts with APY ‘s (annual percentage yields) from around 1.75 % to as much as 5.15%. This allows you to earn as much as 10 times the amount of interest you would earn in traditional brick and mortar banks, allowing you to take advantage of everyone who is trying to build wealth’s best friend: compound interest.
Before we list our top three favorite online banks and the pros and cons of each let’s take a minute to talk about compound interest. Compound interest is basically the interest that you are making on your money (principal) and that interest actually making money for you too. Let’s say you have $3000.00 deposited into a high yield savings account that has a APY of 1.75% and compounds monthly. At the end of that year you would have $3053.00 without any additional deposits. For the next 12 months that 53.00 dollars you earned would continue to earn interest along with your original $3000.00 principal so you would have about $3,107.00 at the end of year two without making any additional deposits.
That is the power of compounding and over time it can grow the size of your bank account significantly. Below are some great online banks that will let your money work harder for you. Don’t get confused though, saving to ultimately INVEST is the goal! Just saving will leave your money worth less over time as inflation steps in making the prices of goods and services go up.
1. Ally Bank- 1.90 APY, no minimum balance, and you can get a free checking account.
We like Ally because of the ability to get a free checking account making funds accessible by transferring them via ATM, checks, and debits. Ease of funds access is important to many customers and a consistent leader in this is Ally. They also have a great app and user interface.
2. Marcus by Goldman Sachs– 2.05 APY, no minimum balance, but no ATM access
One of the most appealing aspects of their online savings product is the high APY they offer. Some would hesitate because of not having ATM access but funds can be transferred via electronic or wire transfer, usually in a few days. If immediate access is a trade off your are willing to make for a slightly higher yield then this may be the product for you.
3. Digital Federal Credit Union- 5.12 APY on balances up to 1k
Some may be surprised to see this company on our list but for those just beginning to save it is an excellent product. They are willing to give you 5.12 APY on balances up to $1000.00! After you reach that limit one of the other accounts online will be a better fit but when just getting started it is almost impossible to beat that savings yield.
The key is always to make your dollars work harder for you than you do for it. Find consistent ways to do so on the road to financial freedom and the ride will be a lot smoother.
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