It’s natural for people to want to maximize the earnings from their bank accounts and a key part of this strategy is to transfer surplus funds into high interest (and ideally tax-free) savings accounts. However, there’s a fine balance that has to be struck when moving money between checking/current accounts and higher interest savings accounts as you always need to maintain enough money in your main checking account to avoid incurring charges for going overdrawn.
Choose the right checking/current account:
In general, checking accounts offer low interest rates on positive balances and they may come with monthly subscription fees. Where possible, you should look to open a checking/current account with a bank that has no (or very low) maintenance charges and which offers a competitive interest rate on any positive funds that you have in the account. A good checking account will help you to maximize your overall returns, whereas a poor checking account will act as an anchor on your financial aspirations.
Open a high interest savings account:
Most of us are not so overflowing with money that we can afford to have our savings sitting in accounts that only pay a miserly 1 or 2%. Inflation often runs as high as that (if not higher) so having your money in a low interest savings account will effectively mean that your money will reduce in purchasing value over time rather than grow. It’s important, therefore, that individuals shop around and make sure that they are getting a competitive rate.
Maximize your tax-free savings entitlement:
Banks often advertize both a Gross and a Net rate of interest. Net rates are always lower and show the rate you will get after the taxman has had his cut. If you are entitled to tax free savings, then taking up that option will make a big difference to the returns that you get. In the UK, for example, all individuals are entitled to put up to £10,200 per year into a Cash ISA (or £5,100 if they also invest £5,100 into a Stocks & Shares ISA) and these savings accounts pay interest that is free from tax. If in doubt about whether you are entitled to any tax concessions, then ask your bank and they should be able to advise.
Pay money across to your savings account on pay day:
A lot of people start off each month with good intentions but the money they had earmarked to go into their savings account ends up getting spent on other things. A way to minimize this risk is to use online banking to log in and transfer money immediately across from your checking account to your savings account on pay day. With the money out of your checking account, the temptation to spend it will hopefully disappear!
Consider fixed rate bonds and/or notice savings accounts:
In general, most people want to have the ability to immediately access their money should the need arise. For this reason, most money that is put into savings accounts goes into instant access savings accounts. However, for those who are happy that they won’t need to access a portion of their savings for a longer period, then it may be worth considering opening a fixed rate savings bond or a notice savings account.
Bonds normally require you to place a set amount of money into them and then leave the money there for the duration of the bond. For example, you might choose to place $10,000 into a 3 year savings bond paying 5%. The return you get is guaranteed to remain fixed throughout the term of the bond but the downside is that you may face penalties or loss of interest if you decide to withdraw your money early.
Notice accounts operate in a slightly different fashion. You can typically add more money into a notice account at any time but you will have to serve a period of notice before being able to withdraw any money. For example, if you took out a 60 Day Notice account, you would need to wait 60 days (after giving your intention to withdraw funds) before you would be able to withdraw the money.
Clearly, fixed rate bonds and notice accounts lack the convenience that instant access savings accounts offer. However, they do sometimes offer higher interest rates so may be a valid option for part of your savings portfolio. It’s important though that you at least keep some money in an instant access savings account, so that you have a contingency fund for any unexpected emergencies that might occur.
As a final point, it’s important to periodically review the interest rates that you are getting on your checking/current account and, in particular, on your savings accounts. If the rates are no longer competitive, then it’s important to move to a better account to make sure that your money continues to work hard for you.
Sources:
http://www.hmrc.gov.uk/leaflets/isa-factsheet.pdf