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Choosing the Right Savings Account: Getting the best return in a period of low interest rates

Updated on February 8, 2015

The January job report has once again delivered good news. More jobs were added over the month than any prior one over the past year and the unemployment rate still remains as low as pre-recession periods. Consumers are more optimistic and retail spending is on a gradual rise. Inflation has remained suppressed and the economy on the whole is recuperating. Now the question again rises among economists and policymakers as to when the Federal Reserve plans to raise its interest rates.

Interest rates were reduced to zero levels after the 2007 real estate crash, when one bank after another had an asset crisis and the government stepped in to save the suffering institutions. The strategy was meant to encourage borrowing and to help the economy stay afloat until it improved. Consumers benefited from these low rates because the cost of borrowing was significantly cheaper than it has been in record years. On the flipside, it hurt them as savers because the return on their savings accounts haven’t been very impressive.

Depending on the type of saving institution holding your funds, banks are paying anywhere between 0.20 percent and 1.0 percent to use your money. Anyone that takes the time to review bank statements understands that those returns are very small. The good news is that there are different banks to choose from if you’re looking to get the best return on a savings account.

Before shopping for a reasonable return, first start by understanding what goals you are trying to accomplish. Another consideration is the frequency of accessibility you need to your money, and the size and service that each bank provides. While banks in general are in the business of offering incentives to lure customers, not all services are the same. Fees and required minimum balances are always something to consider as well.

  • Credit unions – Small in nature and operated by members who buy small shares of ownership into the banks, credit unions now offer close to the same type and amount of services as large banks. Because of their small size, they work more for the customers and the community. Think of them as small private schools that serve the parents for a specialized service. Because they are smaller and expected to provide particular service to their members, the banks may not have a full service ATM machine. Other setbacks include having to pay for checks, being obligated to keeping a certain monetary limit in accounts. This setup also makes it less likely for credit unions to offer a high interest rate for their savings accounts.

  • Retail banks – Also known as big banks or “too big to fail” banks after the 2007 real estate bust, retail banks offer a multitude of services from various account options to mortgage loans, free checking accounts and checks. Their rates may be slightly higher than those offered by credit unions, although the variation may be small. The benefit to retail banks though is that they have the capital to offer ATMs that have become substitutes for the banks themselves with respect to the type of service they offer. ATMs now can accept checks that are digitally scanned into the machines. In effect: full service banking 24/7 at most locations.

  • Online banks – Without a physical location, online banks can save money on operation costs and therefore offer customers higher interest rates on savings accounts. These rates are above one percent now for online banks, a rate you won’t find at any other location bank regardless of its size. All banking is completed online and customers can have easy access to their money through communal ATMs, made possible through work relationships banks build to give their customers access to their money. Other banking transactions, such as deposits, are conducted online. The benefit to online banks is that most don’t have minimum requirements to open an account and they don’t charge fees.

If you’re still unhappy with the returns from your savings accounts, there are other asset types to choose from, such as:

  • Certificates of Deposits – How these work is that you tie a certain sum of money for a pre-determined range of time, anywhere from six to sixty months. There is a penalty for withdrawing money early, so you must be sure that the money you invest is not something you must use before the terms of the CD is up. Of course, the longer you agree to tie the money up in a CD, the better your return in the long run. Lately, the rates on CDs haven’t been all that high either, unless you place your money in a long-term one. Another way to earn a larger return is to request that the interest you do earn is reverted back into the CD, or that you roll over the CD funds into another CD and continue earning interest that way. The benefit of a CD is that you earn more money on it because the account can’t be withdrawn from. Unlike a basic savings account where money can be withdrawn, which eventually reduces the amount of interest you’re earning on the fluctuating outstanding balance if you are using that money from a savings account. While you can eventually withdraw from a CD, for the most part it stays put and more interest is earned that way.

  • Money Market Accounts – Offered by most banks big and small, MMA’s provide a larger return because there are certain conditions to be met. They require larger account balances, there are limits to the number of times and the quantity that can be withdrawn. Essentially, they are inflexible savings accounts. Because there is a larger account balance and limits to the number of times a customer can withdraw during a year, banks pay higher rates to use that money. Although more flexible than a CD because you’re not penalized for withdrawing cash from an MMA, the cash may not be as liquid and as accessible as you may want. If you’re looking into an MMA, only place those funds that you’re not needing immediate and daily access to.

  • Mutual funds and other investment options – Larger banks do offer investments that promise a higher return as investment banks, but once again you must consider liquidity here as well. What it boils down to is how fast you may need your money in the short run. As with all investments, mutual funds are based on a set of bonds and stocks that make up a particular portfolio. The best way to earn an impressive return on these investments is to ignore them for the long run. Although there isn’t a penalty for pulling money from an investment, there may be a time lapse as to when you can eventually have those funds in hand. Speak to your banker and when in doubt, ask around until you find the return and answers you’re happy with.

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