Why the rates differ
Large branch banks pay close to nothing on savings, often 0.01 to 0.5 percent, because most customers never move their money. Online banks have no branches to support, and they compete on rate instead. On $10,000, a rate of 0.01 percent earns $1 in a year, and a rate of 4 percent earns about $400. These rates are variable and follow the Federal Reserve's benchmark, so every advertised yield falls when the Fed cuts. Judge an account by its gap over the alternatives, not by the number on opening day.
What to check before opening
- The institution carries FDIC insurance, or NCUA insurance for a credit union, which covers $250,000 per depositor, per institution, per ownership category.
- The account has no monthly fee and no minimum balance.
- The rate is not a short teaser, and it is not limited to a narrow balance tier.
- Transfers to your checking account take one to two business days.
- The account is held directly with a chartered bank. A finance app that merely places your money at partner banks adds a layer that can fail on its own.
Other places for cash
A money market account is a savings account that may come with checks. A money market fund is a mutual fund held at a brokerage that owns very short-term debt. It is not federally insured, although losses have been extremely rare. A certificate of deposit fixes a rate for a term of three months to five years and charges a penalty, commonly three to twelve months of interest, for leaving early. Treasury bills mature in four to fifty-two weeks, carry the backing of the federal government, and pay interest that is exempt from state and local income tax. Series I savings bonds track inflation, cannot be redeemed for the first twelve months, and forfeit three months of interest if cashed before five years.
Matching money to the container
An emergency fund belongs in the savings account, where it can be reached in a day without penalty. Money with a date on it, such as tuition due in ten months, suits a CD or a Treasury bill that matures just before the date. Interest is taxed as ordinary income, and the bank reports it on a 1099-INT once it reaches $10 for the year.
Note Do not chase rates. Moving $10,000 to gain a tenth of a percentage point earns $10 a year, which is poor pay for the paperwork.
