Why a Separate Savings Account Is Important
Last week, I helped you set up the best checking account to help you minimize banking fees and maximize your savings. This week, we’ll get you set up with the best savings account out there to maximize your earnings and improve your saving experience.
I often receive the question as to why you need two bank accounts. Isn’t a checking account good enough?
Checking accounts are designed to help facilitate simple, automated movement between your salary and expenses, kind of like a conveyer belt at a manufacturing plant. A savings account, however, is important for parking your hard-earned money for emergencies and life’s biggest expenses. Using only a checking account would be difficult to differentiate between the savings you have for future life events and the money you need for immediate expenses. A savings account helps make this distinction, both physically and psychologically.
There’s something behaviorally magical about transferring part of the money in your checking account over to your savings account. You’re less likely to think of your savings account as spending money and more likely to view it as an investment account. Many life goals can exist in your savings account: business school, emergency funds, vacations, children, or a home. Wouldn’t it be great if a savings account let you split up and earn towards these different savings goals? You see where I’m going with this…?
What to Look for in a Savings Account
First off, there’s one thing you NEED to take away from our discussion today. Do not get a savings account with a big bank like Chase or Bank of America. These banks offer the worst interest rates out there – you have several better options.
Savings accounts are simple to differentiate. Most savings accounts do not charge any fees, as long as you meet a minimum threshold. To make a decision between your savings account options, you need to evaluate two things: interest rates and functionality. Again, interest rates are extremely easy to differentiate. Which interest rate is high? That’s the better savings account, assuming that there aren’t any additional fees you need to be aware of.
Functionality can be a little more difficult to decipher. Most savings accounts are the same. You transfer money into the account and have a restricted number of times that you can submit transactions to withdraw during each billing cycle. Why do banks do this? Well, banks are able to offer you a higher interest rate for parking your money in their savings accounts, because they can more easily lend out or control your money. By restricting the speed and frequency at which you withdraw and transfer money, the bank can make better-informed decisions as to how much value in customers’ funds it has to work with. Thus, the bank is willing to offer you a higher interest rate in exchange for more reliance on your money not moving.
The real difference between savings account functionality shines in my recommendation below.
As of the date this article was posted, the Capital One 360 Money Market and Ally Online Savings Account offer some of the highest interest rates I have found. The Capital One 360 Money Market account requires that you have $10,000 in your account to earn 1.2%, whereas Ally will grant you this 1.2% automatically at all balance tier levels. Both of these banks also offer savings accounts with minimal fee structures, ensuring that you avoid stupid costs that would bite into your savings.
Capital One 360 has one glowing functionality leg-up on its competitors though. With a Capital One 360 savings account, you can organize all your savings into separate goals. Are you saving towards a home and business school? Awesome! Create these savings goals online, enter a savings dollar value, and watch as your savings bar grows for both goals separately. Have 20 savings goals? No problem, Capital One lets you create up to 25. This is a pretty fun functionality tool that Capital One has built into their savings accounts, and I haven’t personally been able to find the same functionality elsewhere.
However, if you are using a budgeting software like YNAB, this functionality is pretty worthless. Since you’re able to separate your money into different budgeting and savings categories through YNAB, it won’t matter how your savings account is viewed through Capital One online. You will have already organized your money.
So grab yourself a Capital One 360 or Ally Online Savings Account, and begin saving towards your future. Let me know which one you decide on!