Saving money in an FDIC insured bank is always a better option than burying your money in the backyard, or slipping it under your mattress for safe keeping. You simply can’t grow your money with the at-home methods of saving, and taking advantage of earned interest is the way to bank better and manage your money more effectively. Interest-earning bank accounts help you make more out of your money.
How Your Interest Is Calculated
Getting the most out of your banking involves understanding how your interest is calculated and earned. Believe it or not, the savings accounts that list the highest interest rates are not always the ones that actually pay you the most interest. It’s actually more important to understand what method is used for compound interest than the amount of the interest rate. The more often the interest is compounded (reinvested into the principle amount you’ve saved); the more money you will earn in interest.
Here’s a chart that shows how much $1,000 will earn at 3% interest over 3 years (without any additional contributions made to the account), using different methods of compounding interest:
- Compounded monthly: $94.05
- Compounded quarterly: $93.80
- Compounded semi-annually: $93.44
- Compounded annually: $92.72
The more frequently a bank compounds the interest, the more money you will earn. It is very possible that an account that offers a lower interest rate but a more frequent compounding schedule could earn you more money than an account with a higher interest rate but less frequent compounding schedule.
Most Commonly Made Banking Mistake
There are many people who make the common mistake of having their paycheck deposited into a non-interest earning checking account. From this account, bills are paid, money for entertainment is withdrawn, and if there is any money “left over” it often just sits there until it comes time to pay another bill. The money that sits in a non-interest earning account is a waste!
If you don’t like to have more than one bank account, you should at least choose a checking account that earns interest on the balance. That way, if there is some money in the checking account, it will earn a small amount of interest rather than just “collect dust”. What you need to watch out for are checking accounts that offer a low interest rate, but charge high monthly maintenance fees in exchange for doing so. If you’re paying more in fees than you are earning in interest, it doesn’t make sense to use that account.
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