If you're looking to save some cash, you have a few options.
Investing holds the most potential for high returns, but also the most risk. That's why it's generally recommended for money you won't need in the next five years: If the stock market takes a dip and your portfolio dips with it, you'll have some time to recover.
In the short term, however, two easy options are checking accounts and savings accounts. Traditional checking accounts are straightforward perhaps you have paychecks direct-deposited there, you write checks from that account, or you use a debit card that withdraws from that account. They tend not to be the best option for saving, though, since they earn no interest.
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Traditional savings accounts don't earn interest, either but high-yield savings accounts do. Those are savings accounts like the ones offered by Ally (2.2% APY), Goldman Sachs (2.25% APY), or Wealthfront (2.24%). That money isn't invested in the stock market so it doesn't have the risk (or potential reward) of investments, but the bank does pay you a small amount to keep your money there.
High-yield checking accounts exist, but the best options tend to be at credit unions, which often have monthly requirements for eligibility, like a number of transactions, you generally won't see with a high-yield savings account at an online or traditional bank.
According to a list of top-rated high-yield savings accounts from Bankrate , savers can expect annual interest rates to range between 2% and 2.5%. That sounds like very little growth, but a saver putting money into such an account will, over the long run, accrue far more than one using a checking account that does not accumulate interest.
This chart compares the results of putting $100 each month into a savings account with a 2.4% annual interest rate compounded monthly with putting that $100 into a non-interest accumulating checking account. The difference is apparent over time:
After one year, there isn't too much of a difference: The checking account will have the $1,200 principal from the 12 monthly $100 deposits, while the savings account will have a balance of about $1,214 .
After five years, the difference becomes noticeable. The checking account will have a balance of $6,000 , while the savings account will be at $6,368 : Over $300 of interest will have accrued over those five years.
After 10 years, the checking account will be at $12,000 while the savings account will have a balance of $13,547; after 20 years the checking account will have $24,000 and the savings account will have $30,765; and after 40 years the checking account will have $48,000 and the savings account will be at $80,450 over $32,000 higher.
That's not to say that keeping money in a savings account for 40 years is the most advantageous move. Generally, if you don't need the money for four decades, most experts would recommend investing it in the stock market. In this scenario, we've projected out 40 years just to show how compound interest (even a little) can work in your favor.
The key difference between the two accounts is the compound interest rate for the savings account. Interest accrues both on the principal put into the account the $100 per month in the above example and on the interest already earned. That leads to an exponential growth rate for the savings account that, over time, far outstrips the linear growth rate of the non-interest-paying checking account.
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