Interest can be a blessing or a curse, depending on the situation. When you have a substantial credit card balance that you’ve been ignoring, interest can feel a bit like a curse. Your card’s steep interest rate can push your balance even higher if you’re not aggressive with your repayments.
On the other hand, when it comes to savings, interest is a blessing! An account’s interest rate can help your balance grow beyond your regular contributions. It will give your savings a noticeable boost, all without you having to lift a finger. The account will grow on its own.
This is why your savings should be sitting in an account that garners more interest. A standard savings account will not help with this. This type of account typically has an annual percentage yield (APY) below 1%. Some accounts will have a rate of 0.01%! That’s not enough to make a difference with your balance in a year.
So, which accounts should you consider?
A High-Yield Savings Account
This type of savings account has a much higher interest rate than a standard savings account. The annual percentage yield of this account tends to range between 2-5%, which could give your balance a much bigger boost by the end of the year.
One thing that you should watch for with high-yield savings accounts is that they tend to have minimum balance requirements. If your balance dips below that minimum threshold, you may face a fee. Your account may also pause the interest rate until your balance goes above the minimum. So, you could be canceling out the biggest benefit that the account offers.
A Money Market Account
A money market account (MMA) — sometimes called a money market deposit account (MMDA) — is another type of interest-bearing account that you can use to grow your savings. You can find MMAs with annual percentage yields between 2-5%.
One of the biggest benefits of an MMA is that it has features that you’d find in a checking account. Users can access their account balances with a debit card and a checkbook.
A Certificate of Deposit
A Certificate of Deposit (CD) is a savings tool where the user locks away a lump sum for a set term to allow it to accumulate interest. The term can be as little as a few months to several years. The longer the term, the higher the interest rate is likely to be. So, you could access an account with an APY of 5%.
The Trouble with CDs
One of the small problems with CDs is their inaccessibility. Your lump sum is supposed to go untouched until the term is over, and the account has officially reached its “maturity date.” This can be a problem if you’ve decided to put all of your emergency savings into a CD. While your emergency savings will definitely grow in this type of account, you won’t be able to use them until that maturity date arrives.
If you make the mistake of putting your entire emergency fund into a CD, you might encounter an emergency expense that you can’t pay off. In that case, you may want to find another solution to handle the problem. You could charge the expense onto your credit card, or you could apply for a short-term online loan.
An approved short-term loan would give you access to enough temporary funds to cover the urgent expense without any savings. After resolving the emergency, you could follow a straightforward repayment plan. Short-term loans are not exactly the same as long-term loans — find out the differences between them before you apply. The information could be very useful.
Technically, you can make a withdrawal from a CD before it reaches the maturity date. However, you will face an early withdrawal penalty. If you’re not willing to risk borrowing funds to cover an emergency, you can risk an early withdrawal and the penalty that comes with it.
Use interest to your best advantage. Open up an interest-bearing account and put your savings in there!