Thank you so much for the thoughtful information! I've read through it, and now it's marinating in my brain. I like the idea of "buckets," and I appreciate you breaking things into smaller chunks. (You must have heard stories of me and my "financial fatigue.") This all does help things feel less complicated, although I don't think anything with money is ever going to be as simple as I'd like it to be. *dramatic sigh*
Dear Young Friend,
"Marinating" is good. And I'm glad you like the idea of the buckets.
Here are some thoughts about how to get a little more interest on Buckets 1 and 2. Interest rates in general are pretty low right now, so this may not seem very exciting. But it's good to get in the habit of comparing your options and knowing what's available.
A quick review
Bucket 1 is where you keep the money you want to be able to get at easily, like a savings account or money market account, or even you checking account if you won't be tempted to spend it there.
Bucket #2 is also savings, but money that you hope you won't really need in the next year or two.
Maximizing the interest
You could use a local bank or credit union for both of these accounts. But it's a good idea to compare the interest rates you can get locally with what other banks, especially online banks, are paying.
You can use BankRate.com to compare rates. Hover your mouse over the Bank Rates tab and select the type of account you're interested in. Be sure to sort the results by APY. Otherwise, the banks that pay a fee to advertise may be listed first.
Right now, it shows that the savings accounts with the highest interest rates pay up to 1.05%. On $5000, that's $52 a year – not a lot of money, but better than the $4.50 you'd get from the "average" bank account paying .09%. On 1-year CDs (certificate of deposits), the rates are only a little higher, but 2-year CDs could be 1.30%.
Know the terms of the account
Most of the savings accounts can be opened with any amount as the opening deposit; the CDs might require $1000. The CDs pay a higher interest rate because you're promising to leave your money there until the CD matures, which might be 6 months, one year, 3 years or some other time period. You can take your money out early, but you would pay a penalty such as 60 days of interest.
How to open an online account
Opening an account with an online bank or one that's in some other part of the country is very easy. You go to their website, fill out an online application to open the account, tell them how much money you want to deposit, and provide information about the account you want to take the money from, including the routing number (which identifies the bank) and bank account number. In a couple of days, the money will be moved electronically.
As an added level of security, the new bank might make a couple of very small deposits and withdrawals (like $0.07) in your old bank account, and ask you to verify the amount of those transactions. Then they know that the account you want to take the money out of is really your account.
It might seem like the extra bit of interest isn't worth the effort. Over one year, maybe it isn't. But after two or three or more years, the benefits start to multiply as you earn additional interest on that $50, and then you start earning interest on the extra $50 from the second year, and so on. That extra $50 a year becomes quite valuable. I'll look for something to share with you about compounding, AKA time value of money.
And I promise –we'll get to Bucket #3 and the investing stuff soon.
This post continues a series based on conversations with a young friend of mine about the financial decisions and challenges of being an independent young adult in today's world. You can find other posts in the series by clicking Organizing Finances in the Category list on the right side of this page. ~Karen