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Why you’re losing money by stashing cash in a savings account

Odysseas Papadimitriou
Why you’re losing money by stashing cash in a savings account

In personal finance, it’s the little things that seem to have the biggest impact. A percentage point here, a day late there, and you can easily find yourself thousands of dollars behind the eight ball. By that same token, consistently saving a few dollars here and there can set you up for financial stability and an early retirement.

There are, of course, innumerable ways that we can cut costs, but few people think to question the very presence of their savings account. Sure, you might stress about how much money you set aside each pay period, but putting whatever savings you have in a savings account is a no-brainer – right?

In the words of Lee Corso, not so fast my friend!

Believe it or not, checking accounts actually make better savings accounts than savings accounts these days. In fact, you can get up to five times more interest with a checking account than a savings account, according to WalletHub’s most recent Banking Landscape Report. Why? Chalk it up to a mixture of artificially low interest rates and a relative lack of money to save. But it’s how you react to these counterintuitive dynamics that really matters.

The average household has roughly $6,000 in their savings account and $3,000 in checking. Considering current rates and the power of compound interest, not using one of the best interest-bearing checking accounts could rob you of hundreds of dollars in long-term interest: around $900 in five years, $2,000 in 10, $3,200 in 15, and so on.

If you’re convinced that it’s worth shifting your funds to a checking account in search of higher returns in this low-rate environment, here are some tips for making that move as lucrative as possible.

Start with online-only accounts:  A new hierarchy has emerged within the checking account market itself. Without the burden of supporting a physical bank branch, online-only accounts have distinguished themselves in terms of both rates and fees. The average online-only account offers roughly 175% more interest than the average full-service account and charges 40% lower fees.

But don’t be closed-minded: The Internet makes it easy to compare financial products relatively quickly and with minimal effort. So while it’s helpful to know that an online-only checking account is likely to be your best choice, you needn’t rule out branch-based accounts offhand. The same logic applies to the type of institution providing your account. Banks and credit unions both have their share of great deals, so it’s worth giving fair consideration to both. After all, the highest interest rate on the market — 3.0% on balances up to $15,000 — is offered by the Lake Michigan Credit Union on its Max Checking account.

Mind your manners: This refers to your everyday banking habits, not your mastery of Emily Post’s teachings. Effective comparison shopping is contingent on properly prioritizing various rates, fees and other account terms according to their impact on your everyday life. 

For example, if you have never overdrawn your account you probably don’t need to worry about overdraft fees. A frequent foreign traveler would also have to pay more attention to international surcharges.

Keep an eye out for bonuses: Like credit cards, though not to quite the same extent, a number of checking accounts are beginning to offer cash bonuses to people who open a new account and meet an initial usage requirement — such as making a certain number of purchases with your debit card or loading funds via direct deposit. 

Such a bonus can significantly alter a checking account’s value proposition, but it doesn’t necessarily mean that you should open that account. You have to verify that your banking habits will enable you to earn that bonus, first of all, as well as make sure the base rates and fees make sense for your lifestyle.

Don’t forget to save: Having all of your financial reserves in a checking account can easily create the temptation to spend whatever you have. Be conscious of that from the start and take some measures to protect yourself from yourself. Having two checking accounts is the easiest way to do so. Keep your existing everyday checking account and use it for routine bill payments and access to cash while on the go. Then open another checking account and treat it like a savings account. Don’t link it to a debit card, set up direct deposit for your paycheck, and automate how much you transfer to your everyday checking account each month.

At the end of the day, whether or not you begin relying more on checking accounts than savings accounts is largely a matter of personal preference and the hassle associated with the change.

There is, however, one thing that you must take away from all of this:  an understanding that labels can be deceiving in the world of personal finance.  Savings accounts aren’t necessarily best suited for their nominal purpose, and we all know that 0% doesn’t ensure zero finance charges – especially if there’s an asterisk next to the percentage symbol.

The only surefire way to avoid falling for such honest mistakes is to do a bit of homework before applying for any type of financial product.  Trust me, it will pay off in the end.

Odysseas Papadimitriou is CEO of the personal finance websites CardHub and WalletHub. He previously worked as a senior director at Capital One.