Now that you know all about the power of interest over time, are building (or have built) your emergency fund and have started paying down your debt, we are moving on to a new area of your finances: your savings. In the next few steps we will look at your savings in greater detail, but the first step for today is to open a (new) savings account.
Looking at the title and this introduction you might think can skip this step as you maybe already have a savings account, which you are of course free to do. But opening a new account starts with investigating what’s on the market and I recommend you at least read through this step and potentially still consider opening a new account, as it never kills to have more than one savings account, especially if they don’t involve any costs, and because it can be helpful to have different accounts allocated to different savings goals. Apart from that, it is also a good habit to compare saving accounts from time to time, to make sure you are still getting the best deal. And if you find out you aren’t getting the best conditions possible, it is a good moment to consider changing your savings money to a new account.
So what do you need to look for when you want to open a (new) savings account? Below are the main points to consider when analysing and comparing the different conditions that different banks offer.
An obvious one to look out for: how much interest will you get on your money. Bear in mind that rates vary a lot not just between banks, but also over time. When financial times are rough, banks lower the interest and might do so every so many months, so a bank offering the highest interest rate at the moment won’t necessarily still be the highest in 6 month’s time. When the economy is growing, they offer higher interest rates again. Rates might be different for new customers as banks try to attract new clients, so you might get a better deal with a new bank.
Periodic payment of interest
Some banks pay the interest out at the end of the year, other banks pay out at the end of each trimester or each month. Remember that the same interest rates paid out monthly is more interesting than it being paid out yearly as it means you are compounding interest. I.e. if you get 5% once a year, you’re paid $50 on every $1000, but if you get 5% a year and are paid monthly, you get 0,4167% a month, which ends up being 5.12% a year or $51.20 if you leave your money compounding. This might seem like a small difference, but remember what compounding interest does with time, especially if you were able to add more money in the mean time! Don’t underestimate the difference this might make longer term.
Some banks might charge you set up costs to open an account, yearly maintenance costs to “maintain” your account or charge for the debit and / or credit cards associated with your account. Make sure to check these details and see how often you are charged, i.e. $10 per month is obviously a lot more than $30 a year. A note on credit and debit cards: I strongly recommend NOT to take out cards if this is at all possible (some banks give you the option), as it makes it so much easier to resist the temptation to pay for something with your savings money. In that way you usually only have access to your money online or at a desk in one of the bank’s offices.
Another important area to consider when comparing costs is that of transfer costs. If you envisage making several transfers from this account to other bank accounts, make sure you check the rates, some banks offer this for free, whereas others can charge hefty fees, sometimes depending on the total amount transferred.
Look for other details when comparing accounts, such as how easily you can get access to your money (or not), whether you are required you to make set contributions a month, whether you need to tie your money up for a certain number of years and if you need a minimum down payment in order to open the account. There might be other features that interest you as well, such as the user friendliness of their online web or app, customer service or the closeness of the nearest bank office. This all depends on your personal preferences and situation, so I recommend you write down the main features you are looking for to start with. Lastly I do strongly recommend you check the banks you are comparing have financial protection in case the bank collapses or has financial problems, to avoid you loosing all of your savings.
Step 26 – open a new savings account – in detail
- Make a simple spreadsheet with the main details you’d like to compare the various accounts on. You might consider keeping it super simple and just sticking to two or three key features, but you might want to do a more advanced search and add in important main points as well as sub-points, which might be slightly less important but still important enough for you to consider them.
- Start with your own bank and check out or request to receive information regarding their savings account options. Make sure you get the details that you have identified as important and jot down details on the spreadsheet. If you already have a savings account, investigate the current conditions you get.
- Ask friends or family which bank they use for their savings and check how satisfied they are with its services. Request information from these banks as well to add to your comparison chart.
- Make sure to shop around at some online banks as well, as they sometimes offer better conditions as they have lower costs, than traditional banks.
- Once you’ve got several accounts (I recommend at least 4-5), look at the comparison chart, and if you are happy with one of the accounts, open a new account already. If none of the banks can offer you what you are looking for, then keep looking around until you find a bank that meets your basic requirements.
You might not have any money (yet) to put in your new savings account, but: worry not, as we will soon start adding in money to this account, once you have your emergency fund from step 16 completely together.
Read more about my 100 steps mission to financial independence or simply decide to take control today and join us on our step-by-step quest on how to make your finances work for you, starting with step 1.