MONEY recently launched Dollar Scholar, a new personal finance newsletter written by a 27-year-old who’s still figuring it out: me.
Every week, I’ll talk to experts about a money question I have, whether that’s “Are online banks sketchy? or “How many credit cards do I need?” As I learn, I’ll share simple ways to improve your financial life… and post some funny memes.
This is (part of) the second issue, which came out last Wednesday. Check it out below, then subscribe to get future editions of Dollar Scholar the instant they drop.
In the first issue of Dollar Scholar, I spoke with experts about how much money to keep in my checking account. (The answer was, surprisingly, NOT “however much is left over after rent and a trip to Forever 21.”) So it only makes sense to turn to my savings account now.
I’m relatively new to the savings world, simply because up until about two years ago I didn’t have any money to save. As a result, I took the easiest option when setting up a savings account: I opened a no-frills account at Bank of America — my bank of choice since 2010. I didn’t even think about its interest rate.
But ever since I started working at MONEY, I’ve been wondering if I made a mistake. Is my savings rate good? How could it be better?
My mission started on the Bank of America website, where I put in my zip code and pulled up a PDF showing its rates for various account types. There, I learned that my annual percentage yield, or APY, is 0.03%.
That number didn’t seem great to me, but I held out hope until I spoke with Greg McBride, senior vice president and chief financial analyst at Bankrate. McBride told me that a “good” savings rate is a moving target, though I ideally want to be earning more than the rate of inflation. Earning less than that means my money is worth less over time.
“Good rates are above 2% — 2% to 2.5%,” McBride says, crushing my dreams. “But the average is just 0.1%.”
Aaand I’m not even making that. Cool.
Before I could get too embarrassed, McBride explained that I’m not alone. According to him, most banks “don’t pay anything close” to the rate of inflation on savings.
“The big banks, they’ve got branches all over town, all over the state, all over the country. They’ve got billboards and commercials on TV,” he says. “They don’t have to pay the good rates to bring in deposits — they’re getting plenty through their presence and their marketing.”
But there is one exception: online banks. Because they don’t have the built-in customer base that brick-and-mortars do, they often try to attract customers by offering high interest rates.
In that vein, Anjali Jariwala, a California-based certified financial planner and founder of FIT Advisors, told me she typically tells clients to shop around for savings accounts. It’s as simple as Googling “high-yield savings accounts” plus the month and year. Bankrate puts out a monthly list, as do sites like NerdWallet and The Balance.
From there, she tells them to scroll through and read the details. Jariwala says there’s no reason to be suspicious of an online bank simply because it’s online — something I’m definitely guilty of — but I should make sure it is a member of the Federal Deposit Insurance Corporation.
“Do your diligence that it’s a bank, that it’s legit, that it’s FDIC insured,” she says. “Then it’s just figuring out which one meets your requirements in terms of interest rates, any corresponding fees or minimums.”
One more note about interest rates: Jariwala pointed out that the numbers tend to fluctuate. Last month, for example, Ally and Goldman Sachs told customers their rates were going down because of market conditions. As Jariwala puts it, “Just because the bank is currently offering 2.3% doesn’t mean it will consistently offer that.”
Bottom line? My 0.03% APY is pitiful. I should look to an FDIC-insured online bank to get a savings rate above 2%.