Updated 7/18/2024

Have you ever heard some of the horror stories of regular savings accounts?  Maybe that was a bit harsh, but there is nothing in the personal finance world; in my eyes, that is more deceitful!

“Wow, Andy – you followed it up with something even more harsh!”  Dang right, I did.  But hear me out – I’m not saying that the banks that offer them are being deceitful, but I am saying that it’s disingenuous in the way that people use them. 

Click to jump to a section:

• What’s Wrong With a Normal Bank?
• An Example of Inflation vs. Savings
• How to Improve Your Savings Performance
• High Yield Savings Accounts
• CDs

What’s Wrong With a Normal Bank?

I know many people who put their money into regular savings accounts, thinking that they’re setting themselves up for a better future. But guess what. They’re not.

You see, most regular savings accounts earn less than .1% interest! That is an insanely small amount of interest to earn from a bank. I have often talked about how, when I first started my personal finance journey, I learned that my money was sitting in an account with Fifth Third, where I was earning .01% interest, and it just made me so mad.

That means I earned 1 penny for every 100 dollars in my savings account. What’s the point of putting money in a savings account? You have ZERO incentive to do that because the interest is so negligible!

I mean, you are technically earning money, but when you compare it to inflation, you’re actually losing money…and a lot of it!

Since 2000, the average inflation rate has just been over 2%, which means that on average your money is going to be worth 2% less next year than it is this year.  Of course, inflation is actually a really good thing as long as it’s controlled and intentional, but you need to make sure that you are investing your money in a way that is going to cover inflation at LEAST! 

In other words, you basically need to be making at least 2% on your money to stay steady. Any more than that becomes income.

The same theory applies to your salary. You’d need to get at least a 2% raise to stay in the same boat because if expenses increased by 2% and your money didn’t go up that much, your purchasing power would be worth less than it would be currently.

An Example of Inflation vs. Savings

Imagine this situation: You think you’re being smart and stashing money away with the intention of pulling it back out in 30 years. Sure, it’s not much, but you’re going to save $1000 and not touch it again as a little bonus for when you retire! I’m also going to assume that you’re earning .1% interest, which is 10 times more than I earned with Fifth Third, but still complete trash…lol. 

Let’s see how things would shake out!

As you can see, your money wouldn’t have even grown by $30 over your initial investment of $1000.  But your purchasing power would’ve shrunk by nearly $750 because inflation was growing by 2% every year.  So, in other words, you’d need to have $1020 in Year 2, $1040.40 in Year 3, and so on and so forth just to be able to buy the same things.

You’ve been saving money for 30 years and are just now finding out that you’re worse off than when you first started. That would be a tragic but realistic situation.

How to Improve Your Savings Performance

So, what’s the best way to combat this?  Well, the simple answer is to evaluate your different investment options and ensure you’re properly aligned.  Of course, there are obvious answers, like investing it in the stock market or paying extra on debt, but I think that there are some other options that are more similar to putting your money into a savings account.

You see, typically when you’re putting your money into a savings account it’s because you’re looking for a very safe investment.  There’s nothing wrong with doing this, but you need to ensure you’re making your investments as efficient as humanly possible! 

I think that 100% of your money needs to be in the market, except an emergency fund or a short-term purchase that you’re saving for, like a car, vacation, or something similar. Over time, investing in the stock market has proven to be beneficial for investors. 

In fact, the market has always gone up unless you have gotten in your own way and sold your stocks or done something crazy! Within the last week, I had someone tell me, and it was a debate honestly, that the stock market is risky. NO!

The stock market isn’t risky. 

Is it volatile?  Most definitely! 

Risky?  Absolutely not. 

How can something be risky that averages an 11% return over the last 70 years?  The key is that you have to be ready to invest for the long term.

I also invest for the short term, but if I put my money in the market for 3 years or less, then I am simply accepting the risk that comes with it. I recommend that most people who have an investing period of 3 years or less consider a much safer investment tool where they know they aren’t going to lose any of the money that they have saved up.

Two of the best options that we have available to us are using CDs and looking at high-yield savings accounts. 

High Yield Savings Accounts

This is likely the best way for you to stash your money away and earn some interest on it to stay near inflation or even potentially beat it.  I personally use Ally as my High Yield Savings Account provider but I know that there are many other options out there as well.

NerdWallet is always updating its list of the best high-yield savings accounts and showing the APR that you can receive from them, currently, there are many options with an APR of 1%+, including American Express, FNBO Direct, Salem Five Direct, Bank5 Connect, Citibank, Barclays, CapitalOne, HSBC and TABbank.

All of these banks are FIDC members, but I am willing to bet that you likely haven’t heard of many of them, or at least that I know that I haven’t, and that is somewhat of an uneasiness for me. When I was looking for my high-yield savings account, I obviously wanted a great APR, but I also admittedly a bit nervous about putting my money into one of these online-only accounts. 

Ally had a great rate at the same, although not the best, but it was one company that I had heard of before so it gave me some peace of mind.

At the time, their APR was 2.3% which just eclipses the average inflation rate that I listed previously so I felt very comfortable putting my money there.

In addition to the great yield, I like Ally because they have a very user-friendly platform. It’s sleek and easy to navigate, and what I love the most about it is that you can set up different buckets for saving money. 

For instance, I have a certain amount set aside for an emergency fund to pay for my schooling, a category called NEBP (Non-Emergency Big Purchases), and then just anything else that I might want to save for in the short term. That would include a landscaping project and a vacation fund as well. 

You can have up to 10 of these buckets, and they all earn interest, but it just helps me remember why I have certain funds set aside, and it keeps me from mistakenly using them for other things!

Sure, this isn’t some proprietary thing that Ally has done, but it’s something that they have added since I joined so their continued focus on improving the customer experience has kept me from looking elsewhere!

The APR with Ally is now down to 1.1%, which is still on the high end of options per that NerdWallet article, so I am also very happy on that front. My advice to you is to do some research on your options and open an account. There’s no risk, and you’re just letting yourself lose money by not putting anything into a high-yield savings account! 

CDs

CDs, or Certificates of Deposits, are another great option that allows you to loan your money to the government for a set amount of time and at a certain rate over that time period. It’s just a fixed-income product that will give you some protection in your investing journey.

I am not a big fan of CDs because I think that if you’re tying your money up for a certain period of time, you need to be compensated for your risk, and I just don’t honestly see those sort of rates very often. 

For instance, the rates below are from Fidelity and not only can you see that the rates are all well below the current APR with Ally of 1.1%, but they also require you to loan your money out for a certain amount of time.

Now, to be fair, a true apples to apples comparison is to look at the actual CD rates from Ally, so I’ve shown those all below as of 6/23:

Again, the rates are still not anything to write home about.  Why would I want to invest my money into a CD that I couldn’t get back for a certain period at a worse interest rate than what I am receiving today?  I would only want to do this if I thought that the rates from Ally were going to keep going lower, and that certainly is a possibility as they have been cut in more than half since I signed up at a 2.3% interest rate.

One thing that Dave has talked about in the past, which I think is a genius way to invest in CDs without completely losing liquidity or cash flow, is using a ladder method.

For instance, if you were going to invest in a 12-month CD and you wanted to put in $12,000, you could simply break that down into smaller chunks and do 12 different CDs, all of which would be spread apart by 1 month, as shown below:

Doing so would allow you to keep some money on hand while you’re implementing this strategy. As the CDs would expire every 12 months, you would have $1000 (plus any interest earned) that you could allocate towards something if need be. 

For instance, say a major expense comes up in the middle of March in the following year, meaning you had already put your entire $12K into CDs.  You likely would’ve already reinvested those funds back into another CD, but in April you would have a CD expiring where you could get the $1000 + interest earned.  You could take that money and then apply it towards the major expense. 

Then, in another month, you’d have another $1,000 + interest earned that you could put towards the expense or roll it into another CD. 

If that’s your preferred method, you’re essentially keeping all your money invested in a CD while also maintaining some liquidity—the best of both worlds!

I prefer just to put it in a high-yield savings account because it is the most liquid position where I can have my money within 24 hours, and to me, that’s more important than an extra couple tenths of interest, but it’s all a personal choice! 

Do the math, think about your most important factor, and invest appropriately! But most importantly, get out of those regular savings accounts!