Tag: interest

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Is It Possible to Earn Interest On Your Money These Days? Maybe.

The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities.

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When it comes to earning interest on your cash, for the most part you won’t get a whole lot of return without involving yourself in at least a little (and sometimes a lot) of risk. The question then becomes — just how much risk are you willing to take … and is it smart to do so?

Unfortunately, these days you’ll be hard-pressed to find a product that will provide you with a large return on your investment, whether there’s a large amount of risk involved or not. The following are some ways you may be able to grow your money, along with what type of return you could be looking at and how much risk you’ll need to be willing to take.

Remember — always do your research before investing your money, and depending on where you decide to put your cash, you may need to be willing to part with it for many years in order to reap the rewards.

Option 1: A high-yield checking account

Risk: Low
Yield potential: Low
The facts: If you’re interested in earning interest on your money, a checking account really isn’t where you’ll find the biggest rewards, but you’re also not going to find any risk, since a checking account with your bank will be FDIC insured. In actuality, it’s probably not worth wasting your time trying to earn money with a checking account, since most that offer interest ask for higher deposits to start off with, and the amount you’ll end up paying is almost never worth it. Still, if you’re interested in earning some extra money while your cash sits around, check out this link to compare checking account options.


Option 2: A high-yield savings account

Risk: Low
Yield potential: Low
The facts: Although interest potential is low for a high-yield savings account as well, you should be able to find a savings account that will provide you with higher dividends then you’d find with a traditional checking account. A couple things you’ll want to keep in mind when looking for a good savings account are that you stick within the realms of your account being FDIC insured (all US bank deposits are insured up to $250,000; if you deposit more, then open accounts at multiple banks not multiple accounts at one bank), that the interest compounds daily and that you follow the rules for withdrawals so as to not get caught paying extra fees. Check out this link for some smart savings account options.


Option 3: A myRA account

Risk: Low
Yield potential: Low
The facts: Traditionally this type of account has only been available to government employees, but in 2015 it was made available to the general public, as well. Any money you put into your myRA has a guaranteed rate of return backed by the Federal Government, so your risk is low, and you’ll can earn interest at rates more than double what you’ll find with even the best savings accounts these days (last years’ rate of return, for example, was 2.31%). As far as investments go, however, you’ll be able to find accounts that traditionally yield higher interest, but you’ll be starting to get into riskier territory. However, you may not be eligible based on your income. Click here for more information about the myRA.

Option 4: Treasury bonds

Risk: Low
Yield potential: Low
The facts: A treasury bond is a fixed-interest government bond issued by the U.S. Treasury, traditionally with a maturity of over 10 years. There are a few different ways of expressing how much a bond might return, but in general, the total return on a bond will include all the money its holder earns off the bond, to include annual interest and the gain or loss in market value, if there was any. In other words, when it comes to bonds, if you’re looking for a low-risk investment on money that you can hold off on cashing in on for at least 10-30 years, then treasury bonds might be worthwhile. You can click here for the average interest rates on bonds based on the month. (For example, returns in April on Treasury Bonds were at 4.543%.) 

Option 5: Lending Club

Risk: High
Yield potential: High
The facts: With median returns hanging out around 6.9%, you might think dipping your feet into funding people’s loans on Lending Club is a smart idea, but there’s plenty to consider before doing so. For starters, there’s no secondary market, says Nick Clements, a former banker and MagnifyMoney co-founder. “Once you buy a loan, you have to hold it until term,” he said. “There is limited performance data, too — losses will accelerate in a credit cycle or downturn, and it’s not clear how well the assets will perform.” In addition, you’d generally need to invest in at least 100 notes to get decent diversification, and you should probably invest even more if you expect high returns. 

Option 6: Index funds that target High Dividend Yields

Risk: High
Yield potential: Medium
The facts: Any time you invest your money in the market, you’ll be looking at dealing with the volatility that comes with those types of moves. Where there’s market risk, says Clements, you need to be willing to accept the fact that the price of your shares might decline. “You also need to be aware of dividend payouts,” Clements added. “In other words the company can reduce or eliminate the dividend at any time.” If you do decide to go this route, though, you could be looking at high dividend SEC yields of 3.17%.

Cheryl Lock
Cheryl Lock |

Cheryl Lock is a writer at MagnifyMoney. You can email Cheryl at cheryl@magnifymoney.com

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Strategies to Save

Should You Chase The Highest Savings Rates?

The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities.

Overdraft_lg_mobile vs trad

Savings accounts aren’t meant to serve as moneymaking tools, but they are supposed to store your funds safely. According to CNN money, the average savings account returned just 0.06% APY last year, failing to keep pace with inflation and deteriorating the value of deposited savings – not exactly safe storage.

While rates have remained painfully low since the financial crisis, with many of the nations biggest banks offering returns as low as 0.01%, attractive alternatives in the form of high-yield savings accounts have grown increasingly popular – boasting far superior rates near, at or greater than 1% APY.

That’s the difference between earning $1 per year and $100 per year on a $10,000 savings balance.

If your current savings rate is hovering around the national average, searching for a better rate may be worth your while. You can calculate just how much you stand to earn using MagnifyMoney’s free savings account comparison tool. Enter your zip code and how much you have available to deposit to find the best savings options for you.

But what should you do when the great rate on your new savings account gets bested by the competition? Change accounts again and chase higher returns? As interest rates rise and fall in and among banking industry competitors, should you continually pursue the best APY or just keep your savings put?

The Case for Chasing The Best Savings Rate

A standard savings account typically comes packaged or suggested with your bank checking account. This default option doesn’t usually offer top rates, which is why shopping around and exploring the alternatives is almost always best practice when starting out.

Not only do higher yield savings options come with better returns, they tend to come with more favorable fine print as well – low account minimums, low fees, etc. When switching savings accounts, you’ll have the opportunity to not only to secure a higher rate, but choose a bank with features that best serve your lifestyle needs – easy mobile access, a vast ATM network, etc.

The more money you keep in savings, the stronger the argument for chasing top returns. For example, if you have $10,000 in savings and stand to earn $100 per year in interest, the time it takes to change accounts is minimal compared to the potential return. If you have a smaller balance of $1,000 and only stand to earn $10 per year, the hassle of additional paperwork and time spent changing money around may not be worth the additional amounts earned. 

The Case Against Chasing The Best Savings Rate

Online banking and applications make opening new accounts easier and more accessible than ever, but continually changing savings vehicles and chasing higher returns can prove more complicated than the seemingly simple ten-minute online application process.

For one, you’ll need to cancel bills and automatic transfers that pull from your current savings account and change them over to your new bank. It can take several business days to get all of your information verified and accounts appropriately connected.

You’ll also need to link your checking account to your new savings account so that you don’t end up accidentally transferring money to or from a closed account. If your savings account is at a different bank, expect transactions and transfers between checking and savings to take additional time.

You may also want to allow some extra time before closing out or liquidating old savings accounts in the event that bills or forgotten checks hit your account – have enough cash deposited to cover any additional amounts owed.

Some banks may also charge a fee for closing your account, so factor that cost into your calculations too.

In short, opening up a new savings account typically takes more than filling out a simple application – it can require a complete reconfiguration of your financial life. Should you fail to account for every transactional detail, the price of an oversight – a bounced check, an overdraft fee, etc – can easily wind up negating the potential gain of switching savings accounts in the first place.

Another consideration when chasing higher savings returns is the affect on your credit. If you’re getting a savings account bundled with other products that include a line of credit, the bank may run your credit report. This would result in a hard inquiry on your credit report and a temporary drop in your credit score.

If you’re just applying for a savings account, many banks will still pull your credit report for fraud prevention purposes. However, this usually does not count as an inquiry and therefore doesn’t hurt your credit score.

Before you avidly churn savings accounts, just be sure to read the fine print. It’s still okay to switch banks, but you want to be aware of any potential hits on your credit report and score too.

In Summary

All of that is not to say you should resign yourself to earning low interest on your savings while the alternatives continually grow and outpace your returns, but you should consider your approach thoughtfully and comprehensively, assessing potential costs and gains before making any major changes.

Be on the lookout for top rates and switch when a combination of greater returns and favorable terms and conditions make it truly worth your while – allowing for plenty of time for bills and automatic transfers to reroute to your new and improved savings account.

Stefanie O
Stefanie O'Connell |

Stefanie O'Connell is a writer at MagnifyMoney. You can email Stefanie at stefani@magnifymoney.com

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College Students and Recent Grads, Pay Down My Debt

You Need to Understand How Interest Impacts Your Student Loan Payments

The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities.

mortar board cash

If you’re a recent college graduate who has never had any debt besides the student loans you graduated with, you might not fully understand how interest works when it comes to your loans.

How payments are applied can be a little confusing to someone who has never had to deal with it before.

If that’s the case for you, then you should read on, as we’re looking at how payments go toward the interest of your loans first, and explaining how you can reduce the interest you’re paying on your student loans.

This information can save you thousands of dollars over the life of your loan if you apply it correctly.

How Are Payments Applied to my Loans?

For most student loans, your payment is going to be applied to interest first, and then to principal. If you have any fees associated with your loans (such as a late fee), then your payment will go toward paying your fees first, then interest, and then principal.

If you’re repaying your loans under an Income-Based Repayment Plan, then your payment will be applied to interest first, then fees, and then the principal.

How Is Interest Calculated?

Interest accrues daily on your student loans, so if you check on your balance a few times throughout the week, you’ll see the amount owed increasing. Student loans use a formula of simplified daily interest, which means interest is only accrued on the principal balance.

Let’s take a look at this in action using an example. Feel free to follow along by plugging in your specific loan numbers.

This is the example we’ll be using: student loan balance of $8,000 at a 6% interest rate on a 10-year term, with a minimum payment of $88.82.

Forumla 1

To calculate your daily interest amount, use this formula: (Current Principal Balance x Interest Rate) / 365.25

Using our example: (8,000 x .06) / 365.25 = $1.314168377823409 in interest accrues daily.

Forumla 2

If you want the monthly interest amount, use this formula: (Daily Interest Amount x Number of Days in Month)

Using our example: $1.3141 x 30 = $39.42 in interest accrues monthly.

Forumla 3

Some student loan providers use the “interest rate factor” instead, which is essentially the same thing – the amount of interest that accrues on your loan.

To calculate the interest rate factor, divide the interest rate of your loan by 365.25.

Using our example: .06 / 365.25 = .0001642710472279261.

The formula for the monthly interest rate using the interest rate factor will yield the same results – (Number of Days Since Last Payment) x (Principal Outstanding Balance) x (Interest Rate Factor).

Using our example: 30 x 8,000 x .0001642710472279261= $39.42 in interest accruing monthly.

Takeaway

What you should take away from this is that of your $88.82 monthly payment, $39.42 is going toward interest. Ouch!

[Read more about how to handle student loans here.]

What Can I Do To Lower How Much Interest I’m Paying?

Seeing how much of your payments go toward interest can be painful. By paying extra toward your student loans, you can accelerate your debt payoff date and pay less overall.

This is because every time you make a payment over the minimum amount due, more of your payment is applied toward the principal balance. Remember, when the principal balance goes down, the amount of interest accrued does as well.

We know that a 6% interest rate on our $8,000 loan means $39.42 of interest accrues monthly. However, 6% interest on a $6,000 loan is $29.57. It makes quite a difference!

Let’s take our original example from above. If you simply pay $88.82 for the entire 10 years, you’ll have your loan paid off on time, but you’ll actually end up paying $10,657.97. That’s $2,657.97 more than you signed up for, due to interest!

If you add just $100 more onto your monthly payment so that you’re paying $188.82/month, your loan will be paid off in 4 years, and you’ll have saved $1,619 off your total bill (paying a total of $9,038.97).

Alternatively, if you can’t afford to pay more in one chunk, you can make extra payments when possible, such as paying $20/week, every week, toward your loans.

What Does It Mean When Interest Capitalizes?

It’s important to know what this term means – this is something you only have to be concerned about once, and only if you have unsubsidized loans.

Let’s quickly cover the difference between federally subsidized loans and unsubsidized loans. With federally subsidized loans, the government pays the interest for you while you’re in college. With federally unsubsidized loans, the interest starts accruing as soon as the loan is disbursed to you.

If you don’t make any payments to your unsubsidized loan while you’re in college, then all of the interest accrued while you attended will capitalize when your loan enters repayment status (right after your grace period ends).

If you’re still in college, it’s recommended that you at least try to cover the monthly interest payments while in school. It will save you more money down the road! If you’re in your grace period, there’s no harm in starting to pay early. Take advantage of being able to pay down your interest while you can.

Look At Your Payment Schedule

Most student loan servicers provide you with a payment schedule so that you can see how your loan will be paid off. This might help you visualize and understand exactly where your payments are going.

If you don’t see an option for this, try using a loan calculator.

Continue Paying, Even If You’re Paid Ahead

If you do start paying extra toward your student loans, you might notice that the status of your loans says “paid ahead”.

While that means you’re making great progress, it doesn’t mean you need to stop paying your loans. Interest is still accruing! If you take a break and don’t pay, your hard work will be eaten away by interest.

Read the Fine Print

When it comes to paying any loan back, you should be fully aware of the terms of the loan and how it functions. You’re responsible for paying your loans back according to the terms you agreed to.

It’s extremely important to know how your payments are being applied to your student loans. If you have a different type of student loan and aren’t sure how interest is being calculated (or how your payments are being applied) then call your student loan servicer. Many of them have helpful resources on their website that will help you understand how payments are applied, but it’s always worth giving them a call for clarification.

If you only take away two points, let it be these: when you make a payment toward your student loans, your money is going toward the interest on your loan first, and then on the principal. To reduce the amount of interest you pay over the life of your loan, make extra payments when possible.

Follow us on Twitter @Magnify_Money and send questions to info@magnifymoney.com 

Erin Millard
Erin Millard |

Erin Millard is a writer at MagnifyMoney. You can email Erin at erinm@magnifymoney.com

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Earning Cashback, Earning Interest, Eliminating Fees

5 Small Steps to Help You Earn More Money

The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities.

Male hand putting coin into a piggy bank

“22% of Workers Would Rather Die Early Than Run Out of Money” declared the headline of an October TIME magazine article. The article overviewed a Wells Fargo Middle Class Retirement survey, which found nearly 61 percent of middle class workers say they aren’t sacrificing many comforts to save for their twilight years. And almost 75 percent admitted they should’ve started saving sooner. For the sake of the study, middle class was defined as a household with incomes between $25,000 and $100,000, who held investable assets of less than $100,000.

The TIME article went on to state a third of participants in the study contribute absolutely nothing to a retirement account and 50 percent are not confident they’ll be able to retire. To top it all off, the average balance of Middle-class Americans’ retirement savings is a paltry $20,000.

If the average American family can only scrape together $20,000 for retirement savings – clearly, they need to be finding other ways to pad their bottom lines and decrease their spending. These five small, actionable steps can help everyday Americans earn more money (or save more) to the tune of hundreds to thousands of dollars each year.

1. Automate paying yourself first

While the advice sounds generic, many earners (regardless of class) fail to participate in the simple act of automating savings and thereby paying themselves first.

Automated savings means a dedicated percentage of income goes towards a retirement fund and a savings account before an employee even sees his or her paycheck. This small step makes it far more likely savings will accrue for both retirement and a personal savings fund, because an individual gets used to living on the money remaining after savings. It’s a way to work around the thought of “oh well, I guess I’ll just save next month because I really need the extra $200 this month to go towards those shoes I want to buy.”

Employees can set up automated savings through their employer by auto-deducting a percentage towards a savings account before the money arrives in checking.

2. Reduce interest rates on debt

Our study showed nearly half of Americans carry credit card debt with an average balance of $10,000.

Of those carrying debt, 75 percent deal with interest rates north of 15 percent.

Let’s say Samantha’s Visa card carries $10,000 in debt at an 18 percent interest rate. She can only afford to pay $250 a month towards her debt. It will take Samantha over five years and cost her $5,384 in interest alone to pay off her debt. [Calculation done using the MagnifyMoney calculator]

Instead of paying over a $1,000 a year in interest to her lender, Samantha could save herself $4,680 by slashing her interest rates down to zero with multiple balance transfers. That’s nearly a year’s worth of retirement contributions to an IR (the limit for 2014 is $5,500).

[Compare balance transfer offers here]

Balance transfers are typically only available to people with great credit scores. Those with good credit should consider a personal loan to reduce interest rates on debt.

[Find personal loan offers here]

3. Avoid bank fees

Are you losing $9 a month in “maintenance fees” or paying an occasional $35 in overdraft charges? These small leaks can add up quickly. In fact, a year of maintenance fees and two $35 overdraft charges equals $178 owed to the bank.

The creation of Internet-only banks like Ally and Bank of Internet USA now provides consumers with access to checking accounts with little-to-no fees.

These banks don’t need to shell out massive amounts of money to keep the lights on at their local branches, so they use those savings to provide a better experience for their customers, including fewer fees.

If you find yourself routinely paying the bank for the privilege of keeping your money there, then switch to a different bank! There is no reason to pay a monthly maintenance fee or a $12 charge to move your money from savings to checking to cover an overdraft charge.

[Compare checking accounts here]

4. Get more for your money with a higher interest savings account

The average savings account with a big bank (like Wells Fargo or Bank of America) offers about 0.01 percent in interest.

Those insultingly low interest rates essentially amoun to a free loan to the bank. The bank takes that money and turns around to lend it out at significantly higher rates.

Internet-only banks offer much higher interest rates on their savings accounts. Even though most savings accounts are still less than one percent in interest, the difference between .90 percent and 0.01 percent can be significant.

You’ll earn $135.61 by simply depositing $15,000 into a savings account with a .90 percent APY. By leaving that $15,000 at 0.01 percent, you’ll earn a $1.50. So, do you want to buy one soda with your interest or 27 lattes?

Moving your savings from a low to higher-interest savings account could add a couple hundred dollars to your annual income.

promo-savings-wide

5. Maximize reward credit cards

Credit cards. They lead some people down the path of over-consumption and reckless spending. Others learn how to harness the power of rewards (and reign-in their desire to splurge) by maximizing their spending habits for cash back – or other rewards.

A die-hard credit card rewards seeker strategizes to have the best card in each category of his or her spending habits: gas, grocery, travel, entertainment, eating out etc.

Others look to take advantage of upfront bonuses, like 30,000 miles for spending $3,000 in three months.

If constantly looking for the best reward card and keeping track of a dozen or more cards doesn’t sound appealing, then identify the best flat-rate cash back card. Currently, Fidelity Investment Rewards and Citi Double Cash Card both offer two percent cash back on all spend. If you spend $15,000 a year on a credit card– that’s a simple $300 in cash back for purchases you’re already making.

Remember: pay your bill on time and in full. If you start revolving and paying interest to your credit card lender, you’ll defeat the point of earning rewards.

[Find the best credit card for your spending habits here

Case Study: Hannah

Hannah keeps $13,000 in savings with Bank of America. She also keeps money in a checking account with Bank of America and has accidentally gone overdraft twice this year. Hannah has overdraft protection, but got charged $12 per incident to have her money transferred from savings to checking. She spends about $12,000 a year on a credit card that only earns one percent cash back with rotating five percent categories, which she never seems to use.

Right now, Hannah is earning:

  • Savings interest: $1.30
  • Credit card rewards: $120
  • Overdraft: -$24

Total = $97.30

Finally fed up, Hannah makes some changes. She moves $12,500 of savings to an internet-only bank where it earns 0.95% APY. She opens a checking account with Ally, which offers real overdraft protection and doesn’t charge to move money from savings to checking. Hannah puts $500 of savings with Ally in case of overdrafts. She then gets the Citibank Double Cash Back card and earns two percent on her $12,000 of spend.

Now, Hannah earns:

  • Savings interest: $119
  • Credit card rewards: $240
  • Overdraft: $0

Total =$363.52

By making a few simple changes to her financial plan, Hannah earns an extra $266.22 a year.

Moral of the story

Little tweaks to a financial strategy can have a meaningful pay off. Earning $363.52 a year from interest and cash back could go towards IRA contributions, other investment vehicles or back into a savings account to keep preparing for the future.

Want regular updates about the best financial products out there? Then sign up for our Price Checker Newsletter. Twice a month, we’ll deliver the best-of-the-best right to your inbox.

Erin Lowry
Erin Lowry |

Erin Lowry is a writer at MagnifyMoney. You can email Erin at erin@magnifymoney.com

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