If you are looking for ways to earn more interest with less risk,this strategy might interest you.
If your only option was to earn interest at the national
savings rate of .23%, you'd be better off putting your money under your mattress – at least you wouldn't waste gas or time driving to the bank to make a deposit.
How to Earn 5X the Average:
The first and easiest way to earn more is by opening an online
money market account. It is completely secure and takes about 5 minutes. Currently
Ally Bank offers one of the best rates at 1.29% APY.
You can open an
FDIC insured account with no minimum deposit – you are guaranteed by the Government to get 100% of your principal back. Don't worry if you don't see an Ally Bank that is near you because when you open an account, you'll be given the option to fund it by linking it to your current checking account.
How to Earn 13X the Average:
This is a little trickier. Banks will pay more interest if you commit to keep your deposit with them longer, but it's scary to think you may not have access to your cash in case of an emergency.
If you choose the right bank, you can have both: higher interest while still being able to withdraw your funds in case of an emergency.
A Tale of Two Investors:
An example scenario will demonstrate the advantage of this strategy:
Assume two investors each have $100,000 to invest and will suddenly need to withdraw their funds after 1 year.
Investor A: Opens a 12 month CD which pays 1.49% APY, at the end of the year he withdraws his money penalty free comes away with: $1,490.98 in interest.
Investor B: Opens a 5 year CD which pays 2.99% APY, at the end of the year he withdraws his money paying the 2 months of interest penalty and comes away with: $2,491.66 in interest.
Investor B earned $1000.68 more interest than Investor A.
Do Your Own Due Diligence
Now, not all banks will even let you withdraw your money early, you must check their terms and conditions before executing a strategy like this. Also, most banks charge a larger withdrawal penalty the longer the term of the CD.
Ally Bank is an exception – the withdrawal fee is only 60 days interest no matter the term of the CD and there is nothing in their terms and conditions that states they won't allow early withdrawals.
So you can earn 232% more interest with Ally Bank's 5 year CD than with their money market account which pays 1.29% APY.
To put this in perspective, this means you could even withdraw your money from the 5 year CD after only 4 months, pay the penalty and STILL walk away with more interest than you would have with the money market account:
$1000 @ 1.29% for 4 months = $4.31 interest earned
$1000 @ 2.99% for 4 months = $10.03 – $5.00 (penalty) = $5.03 interest earned
Another reason to choose the long term
CD instead of the
money market is you'll be more motivated to leave your money alone and let it grow.
A trend with banks right now (including
Ally Bank) is to offer a debit card so you can make purchases using funds from your
money market account. This is fine as long as you don't plan on putting your emergency funds in the same account you'll be making debit purchases from. Otherwise, you're not likely to maintain a balance of 6 months of expenses because of the temptation for impulse purchases.
It doesn't matter how much interest you can earn if you don't have principal to earn it on. If you want to be serious about saving for your future, you need to make your
savings as hard as possible to access.
Consider creating a complex password for your
online savings account and write it down on a piece of paper. Cut the paper in half and give each half of the password to two people you trust. Let them know of the conditions that they are to return the password to you.
Alternatively you can simply shred the paper with the password after you get the account setup and then you'll have to contact the bank in order to regain access to your savings. My mother lost her password for her ING Direct savings account and the only way she could get it back was to answer security questions by telephone and then wait for the pin to be mailed to her. You're guaranteed to rob your emergency fund less if you have to wait 5 – 7 days to get your pin.
Remember, statistics show your worst enemy when it comes to savings is PROCRASTINATION.
P.S. When you
click the link to Ally it will take you to their one year CD page, just hit the "Open an Account" button and you'll be given the option to choose the term you want.
Tagged as:
CD Rates,
cd strategy,
online money market account
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