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Strategies to Save

The Ultimate Guide to CD Ladders

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

The Ultimate Guide to CD Ladders

Certificate of Deposits (CDs) are some of the highest-yielding deposit accounts offered at most banks and credit unions. But, they come with a catch: your money is locked away for a certain period of time, and generally you can’t unlock it without paying an early withdrawal penalty.

It’s also no secret that interest rates are changing these days. That can also affect the returns you get from saving with CDs.Things only get more complex if you’re attempting to create what is called a CD Ladder, which can be used to take advantage of higher APYs while staggering investments so all your cash isn’t tied up for a very long time.

If you want to save money by creating your own CD ladder, you need to juggle your own financial goals with shifting interest rates and early withdrawal penalties. It’s possible that CDs may not even be the right investment tool for you. How are you supposed to decipher what’s the best course of action when there are so many competing possibilities? Fear not. We’ll help you decide whether CD ladders are the right investment tool for you and how to get the most out of them in this guide.

What is a CD ladder?

A CD ladder is a series of several CDs that are structured with varying terms. By staggering the terms, you ensure that each CD finishes its term at regular, predictable intervals. That way, you’ve got access to a steady stream of cash while still earning higher rates than you might through a regular savings or checking account.

The main disadvantage of CD ladders is that your money is locked away for a certain length of time. This differs for each CD and is called its term. CD terms can range all the way from one month to ten years. Generally, the longer the CD term, the higher the interest rate you can get.

Logically, you’d think that the best thing to do would be to put all your money in long-term CDs, right? Unfortunately, doing so has two specific risks.

You could miss out on rising rates. If the Federal Reserve raises interest rates (as they have been doing for the past two years), many banks and credit unions soon follow by raising the rates on their own deposit accounts. But, if you’re locked into a long-term CD, you could be stuck in a high-interest rate environment with the poor interest rates from yesteryear. That means you won’t be earning the maximum amount of interest possible.

It’ll be hard to tap into your savings in a pinch. Secondly, what if something happens and you need access to that cash? Can you predict what’ll happen in five years—a home purchase, major medical bills, or some other unexpected large expense? If your money is locked away in long-term CDs, you could be out of luck unless you pay a potentially-substantial early withdrawal penalty.

Luckily, there’s an easy solution that lessens these two risks: a CD ladder.

How to create a CD ladder in 3 easy steps

A CD ladder is a pretty intricate strategy. You split your money up into equal parts and match each pot of cash to a partnering CD. Then, you line them all up in a precise order and wait for the interest to accumulate.

Sound confusing? Let’s break it down with an example to show you exactly how it works with a basic five-year, five-CD ladder.

To start, let’s assume that you have $5,000 that you want to invest in a CD ladder (although this will work with any amount of money).

Step 1: Open up five separate CDs

Divide your cash into five equal parts. What we’re going to do is open five separate CDs. So, divide your cash into five equal pots of $1,000 each.

Search and compare to find banks with the best rates on CDs. Go to your bank of choice, either in-person or online. It’s possible to open up accounts at different banks or credit unions if they offer better rates on some CDs, but keep in mind that that will increase the complexity of this strategy. Open up five separate CDs with each pot of cash all at once and on a staggered schedule. Here’s what you’ll have when you leave the bank:

  • $1,000 in a one-year CD
  • $1,000 in a two-year CD
  • $1,000 in a three-year CD
  • $1,000 in a four-year CD
  • $1,000 in a five-year CD

Mark the date that you open all of these CDs on your calendar so that you can keep up with the CDs’ maturity dates.

Step 2: Each year when a new one-year CD matures, renew it ….and convert it into a five-year CD

Every year on your CD maturity date, one of your CDs’ terms will be up. For example, if you open a CD on May 26, 2018, then your one-year CD will come due on May 26, 2019. Your two-year CD will come due on May 26, 2020, and so on.

With most banks, when a CD becomes due, it will automatically roll over into another CD of the same term length (a one-year CD will automatically roll over into another one-year CD when it matures, for example). After it automatically rolls over, you will have a grace period of around one to two weeks where you can withdraw the money, add more money, and/or change the CD to a different term length — penalty-free.

Instead of letting your CD roll over into another one-year CD, you’re going to want to switch it up. Before the grace period ends, you’ll want to renew it into a five-year CD instead. Then, in 2020, you’ll do the same thing: you’ll renew the now-mature two-year CD into a five-year CD, and so on.

If you open up all of your CDs in 2018, it’ll look like this:

  • 2019: renew the one-year CD into a five-year CD
  • 2020: renew the two-year CD into a five-year CD
  • 2021: renew the three-year CD into a five-year CD
  • 2022: renew the four-year CD into a five-year CD
  • 2023: renew the five-year CD into another five-year CD

The reason we do this is because the five-year CDs pay out vastly higher rates of interest than the shorter-term CDs. If you can keep all of your money in the highest-earning CDs, you’ll get the maximum amount of cash possible.

Step 3: Decide whether you need to pull the money out or not

The other reason we do this strategy is because if we need to withdraw the money, we get free access to one new CD per year on our CD maturity date. In our example, that means you can withdraw $1,000 (plus whatever interest the CD earned) once per year without paying an early-withdrawal penalty.

Each time a CD becomes due, you should ask yourself: Do I need to withdraw this cash for any reason? If the answer is no, then keep your money in a CD ladder. If it’s not already invested into a five-year CD, then go ahead and renew it into a five-year CD. If it already is invested into a five-year CD, then just let it auto-rollover into another five-year CD. As long as you don’t want to withdraw the cash, your CD ladder will be fully on autopilot from this point forward.

Mini CD ladders: Explained

The five-year CD ladder sounds great, but if you’re like a lot of other people, you might need more frequent access to your money than once per year. That’s where a mini CD ladder might come in handy.

Rather than setting it up so that a new CD becomes due once per year, you can choose shorter term CDs and stagger them so that they mature every few months instead.

Let’s look at another example—the three-month, four-CD ladder.

You would divide your cash into four equal pools and open up four new CDs with these terms:

  • Three-month CD
  • Six-month CD
  • Nine-month CD
  • Twelve-month CD

One new CD will become due every three months. When it does, you would renew it as a 12-month CD with a higher rate. That way, you can access your money once every three months instead of once every year.

If you want even more frequent access to your money, it might be possible to restructure this in a different way. Some banks have one-month CDs, although they’re not as common as three-month CDs. If you open 12 one-month CDs and renew each of them into 12-month CDs, then you could even get access to your cash every single month instead of every three months. The downside of the mini CD ladder is that you won’t earn as much, because five-year CDs carry better rates than a twelve-month CD.

What is the best CD ladder strategy for me?

CD ladders are already pretty straightforward. Open CDs of different lengths, and renew them to longer-term CDs when they come due.

But, it might surprise you to know that there are a lot of different CD ladder strategies. Whichever strategy works best for you depends on your individual situation, and what financial possibilities keep you up at night.

For example, do you worry that you’ll make a mistake by locking your money away in low-rate, long-term CDs if interest rates start to rise (a fair concern, given recent decisions by the Federal Reserve)? Or are you the type of micro-manager who optimizes every little decision so that they can maximize their monetary returns?

If so, good news. These are some of the best CD ladder strategies for different people.

Best if you don’t need frequent access to cash:

The five-year, five-CD ladder

This is the baseline CD ladder strategy we outlined above. You open up five CDs with staggered term lengths so that one new CD comes due each year, and then renew it into a five-year CD. After four years, all of your CDs will be in five-year CDs earning the maximum amount of interest.

This type of CD ladder strategy works best for folks who know they won’t need very frequent access to their money. If you choose this strategy, it’s a good idea to keep a separate emergency fund of three to six months’ worth of expenses tucked away in a high yield savings account. You definitely don’t want to find yourself in a situation where you can’t access money for a year when you really need it.

Best if you need frequent access to your cash:

The five-year CD ladder with low early withdrawal penalties

One of the main reasons to invest in CD ladders is so that you don’t have to pay steep early withdrawal penalties. These penalties are typically tallied up as a certain number of months of interest depending on the term of the CD. For example, TD Bank will charge you 24 months’ worth of interest if you take your money out early from a five-year CD

These early withdrawal penalties are pesky enough, but high fees like this could actually eat into the principal you’ve deposited into the account, especially if you haven’t earned enough interest to at least cover the early withdrawal penalty. This means you might actually end up with less money than you deposited into the account at the end of the day—not to mention how it’ll hurt your returns even if you have earned enough interest to cover the penalty.

One way to get around this is to search for CDs with low early withdrawal penalties. What exactly is a low early withdrawal penalty? According to Ken Tumin, founder and editor of DepositAccounts.com (also a LendingTree-owned company), a below-average early withdrawal penalty for a five-year CD is six months or less.

Searching for CDs with low early withdrawal penalties is the best strategy if you want to earn the most money possible but also think that there’s a high likelihood you might need to break into one of your five-year CDs outside of the once-yearly maturation date. With this strategy, you will minimize your loss if and when you need to withdraw the money early.

Maximum work for higher yields:

Juggling CDs at multiple banks

It’s very possible that the top prize for highest CD rate for each term length in your CD ladder is held by a different bank. For example, Bank A might have the highest rate for one and two-year CDs, while Bank B might have the highest five-year CD rate.

If you’re an intrepid optimizer, it’s possible to earn the most money by splitting up your CDs among different banks, according to Tumin.

If it sounds a bit complicated, it is. “Each year, you’ll have to worry about transferring the money to the [bank with the] best five-year rate,” says Tumin. It also requires a lot of organization to remember the details of your many accounts. But, there is a way to limit the chaos.

Tumin’s recommendation is easy. “Choose at least two or three internet banks, but no more than three to keep things simple,” he says. “If one bank no longer becomes competitive, you can easily keep the CD ladder going with the other banks.”

It’s also a good idea to maintain a savings or money market account at the same bank for each of your CDs — as long as the account has no minimums and no monthly fees, since it will probably be empty much of the time. This bank account is strictly meant to be a temporary holding account for the CD money you hold within the same bank.

“If you need to access the money before maturity, it’s much easier to have the CD funds (minus the early withdrawal penalty) transferred to a savings or money market account that is at the same bank,” Tumin advises. “Once it’s in the savings/money market account, it’s easy to open a new five-year CD at another bank.”

Hedging your bets against rising interest rates:

The barbell CD ladder

The barbell CD ladder is the best CD strategy if you’re worried about rising interest rates while most of your money is locked away into lower-rate CDs. With this strategy, you divide your money yet again: half into a high yield savings account (a separate savings account from your emergency fund), and half into a five-year CD ladder.

The advantage of keeping your money in a high yield savings account is that if interest rates rise, you can immediately withdraw that cash when you see fit and invest it into CDs.

Of course, the trick is knowing when to pull the trigger and move your money from the savings account into a CD. If you do it too soon, interest rates may rise again, and if you’re too slow, you may lose out on potential gains. It’s a balancing act and since it’s impossible to predict the future, there’s no way you can really know when the right time is for sure. You just have to do it and hope for the best.

How do CD ladders hold up to other investments?

CD ladders are just one of many investment choices you can make. To see how they stack up compared to other common options, we’ll show you what you can theoretically earn in 10 years with a $10,000 deposit using each of the following choices: a five-year, five-CD ladder, the stock market, a high yield savings account, and just keeping the cash stuffed under your mattress.

Five-year, five-CD ladder

For this scenario, let’s assume that you start out with the standard five-year, five-CD approach. You will start by putting $2,000 each into five CDs of the following term lengths: one year, two years, three years, four years, and five years. Each year when a CD comes up for renewal, you renew it into a five-year CD.

After the fifth year, we’ll assume that you continue keeping all of the CDs in five-year terms for another five years. According to Ken Tumin, the average yield on a 5-year CD ladder is about 2%, so we are using that as the hypothetical return on investment. Of course, rates ebb and flow all the time, so this is merely an estimation.

Risk:

One of the safest options. The FDIC and NCUA insures your money up to $250,000 at each bank or credit union, respectively.

Reward:

$1,290

The stock market

For long-term investments (retirement, for example), the stock market remains the gold standard for investing. Over the last six decades, the S&P 500 (one of the most common measures of the stock market as a whole) has returned about 7% per year.

We can’t predict the market’s returns, obviously, but we’re going to assume that someone investing in a broad-based S&P 500 stock market index fund would earn 7% on their investments each year for 10 years. Here’s how they would fare.

Risk:

Very high. People can and do lose significant amounts of money in the short term while investing in the stock market.

Reward:

$9,671.51

High yield savings account

High yield savings accounts offer the maximum amount of liquidity. If you might need your cash at any moment, it’s a good idea to keep it in a high yield savings account. The tradeoff is that you’ll earn less interest than you might with the five-year, five-CD ladder.

We used the highest rate (1.50% APY; current as of 12/12/17) for personal savings accounts available nationwide that were listed on DepositAccounts.com. We assumed a $10,000 deposit saved up over a 10-year period.

Risk:

Very safe. Anything you keep in a bank (including CDs or savings accounts) is insured up to $250,000 by the FDIC or NCUA for banks and credit unions, respectively.

Reward:

$1,605.41

Under your mattress

Who hasn’t heard stories from their grandparents about saving up their extra cash in a hidden mason jar or under their mattress? Back in the days when banks failed in the Great Depression, losing your life savings was a real concern. Thankfully, these days the FDIC and NCUA programs make your deposits safe at each bank or credit union up to $250,000.

Now, the danger lies in not earning any interest on your money. Inflation eats away your money’s value at a rate of around 3% or more per year. That means if you’re not earning at least 3% interest, your money is probably losing value rather than gaining value.

If you started out with $10,000 in 2007 and kept it stuffed away in your home for ten years, here’s what would happen.

Risk:

Very unsafe. That money could easily be stolen or lost in a fire, not to mention what’ll happen as inflation erodes its value.

Reward:

$1,805.67

Is creating a CD ladder worth it?

Whether or not a CD ladder is worth it depends on your individual situation and what your goals are.

According to Tumin, there are four things you need to keep in mind when deciding if a CD ladder is worth it for you: liquidity (how easy it is to access your cash), simplicity (how much work do you want to put into pulling off a master-CD-ladder?), maximizing your yield, and your investment time frame (do you want to invest indefinitely, or complete the CD ladder at a certain point in time?).

We’ve outlined several CD ladder strategies above that you can use to meet your goals. Compare them to your other options: will keeping your money in a high interest savings account, the stock market, or some other investment option work better for you?

In general, CDs today are earning far below what they used to. In July 1981, for example, you could get a one-month CD on the secondary market (i.e., buying it from an individual who has a CD, rather than a bank or credit union) with a whopping interest rate of 17.68% APY. Today the rates for a similar three-month CD are averaging 0.240% APY—quite a difference!

That means that today, CDs are generally not going to be your highest-earning option. This is especially true if you hold a large number of short-term CDs, as the mini CD ladder strategy calls for.

“I don’t think other CD ladders with shorter-term CDs are worth it,” says Tumin. “They don’t really provide much more liquidity,” especially if you opt to invest in five-year CDs with low early withdrawal penalties.

In fact, almost all CDs except for five-year CDs earn even less than a high yield savings account. Currently, banks are offering as high as 1.50% APY on high yield savings accounts—just under the current average interest rate for five-year CDs (1.57% APY).

If your CD investing strategy involves anything other than holding long-term five-year CDs (not counting the start of the CD ladder strategy when you hold CDs of several term lengths), then CDs may not be worth it when compared to a high yield savings account.

FAQ: CD ladders

If you really are terrible at saving money, CD ladders can be a great way to keep you disciplined. The extra sting with the early withdrawal penalty might be enough to help you overcome the urge to pull the money out before its term has ended.
Yes. CD ladders work well as a savings strategy for large purchases. You will need to do a lot of planning, however, to start the CD ladder and make sure all of your cash is outside of the CDs by the time you need it.
Yes. The money you earn in interest from your CD ladders is taxable. Your bank or credit union will issue you a Form 1099-INT at the end of the year for you to report on your tax return.

A grace period is the amount of time you have to withdraw, add funds, or change the CD to a different term length after it has matured. You typically have a one to two-week grace period after your CD matures.

It’s called a “grace” period because usually your CD will automatically roll over into another CD of the exact same term length. Normally this means you would then owe early withdrawal penalties if you take the money out early. Instead, banks offer you a “grace” period where you can withdraw the money without paying any early withdrawal penalties.

There are several other types of CDs:

  • Callable CDs offer higher interest rates, but the banks may cash them out for you at any time if they desire.
  • Bump-rate CDs offer staggered, increasing interest rates over time.
  • No-penalty CDs have lower interest rates, but no early withdrawal penalties.

It is possible to use them in your CD ladder, however you need to choose these CDs carefully. For example, what kind of monkey wrench would be thrown into your plan if you invest in a callable CD and it is indeed cashed out by the bank early? Or, would a no-penalty CD really offer rates that beat out a high yield savings account?

A jumbo CD is just a regular CD, but for a very large amount of money. Each bank or credit union has their own definition of what a “jumbo” CD is. For example, to invest in a USAA jumbo CD, you’ll need to bring at least $95,000 to the table. CIT Bank, on the other hand, requires a slightly larger minimum deposit of $100,000 to qualify for a jumbo CD.

Jumbo CDs typically offer much higher rates than regular CDs and can help you earn even more money in a CD ladder if you’re able to take advantage of them.

It depends on the type of CD ladder you use, and the savings account you’re comparing it with. In general, though, the five-year, five-CD ladder strategy will beat out even a high yield savings account in the long run.

For most people, no. We compared the outcomes from a five-year, five-CD ladder above with the typical returns you could expect from a stock market. A hypothetical $10,000 investment in a CD ladder earns $1,531.11 in interest over a 10-year period.

Compare that to typical stock market returns for the same amount of time and money: $9,781.51. The stock market far, far outperforms the CD ladder. If you’re saving for a very long-term goal like retirement, it makes more sense to grow your money in a high-yielding investment like the stock market, even if it is riskier.

This post has been updated. It was originally published Dec. 19, 2016.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Lindsay VanSomeren
Lindsay VanSomeren |

Lindsay VanSomeren is a writer at MagnifyMoney. You can email Lindsay here

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Strategies to Save

Review: The Aspiration Account

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

The 1.00% APY has one of the highest rates in the country. If you move both your checking account and savings account into an Aspiration Account, you would be able to earn a high interest rate on your money while avoiding the risk of overdraft and enjoying the convenience of only having one account.

Aspiration is a fairly new financial services company that aims to be “the investment firm for the middle class.” In this video (that could pass for a parody if you didn’t realize they were serious), the company proclaims that it is possible to be a “capitalist with a conscience.” Lofty goals are behind the company and the products they have designed. The CEO (Andrei Cherny) was a former Clinton White House aide, and with Aspiration he is trying to take action and create a new type of financial services firm that lives up to his ideals.

All products offered by Aspiration (which includes two investment funds and a cash management account) have the same pricing model. You decide how much to pay. Yes, the fee is set entirely by you, the customer. You can set it to $0 or you can set it to any amount below $10. You can change the fee whenever you want. They provide a service and you decide what it is worth.

Aspiration is making a big bet.

With traditional banking, people are nickel and dimed every month. Make an out of network ATM withdrawal, and you could end up spending $10 in fees. Put your money into a savings account, and earn only 0.01%. By using Aspiration, you could be much better off financially than banking with your traditional bank. And you can do your own calculation and decide how much of that savings you share with Aspiration. They are hoping that you will share enough for the business to continue.

Application Process for the Aspiration Account

Opening an account used to be a bit challenging as you needed to be invited. However, Aspiration has made it as simple as ever to open an account. Simply click on the “Get Started” button on their website and enter your email address.

 

At that point, you should be directed to a page that allows you to open your account online and apply for the account.

 

Create your password, check the box to let Aspiration know you’ve read the Terms and Conditions, and click “Let’s Go!”. Since this is an online account, there will be extensive KYC (know-your-customer) and compliance questions. I was required to provide:

  • Answers to identity verification questions. These are questions generated by a credit bureau. So, you will be asked to provide your social security number, but they ensure that they won’t “run the kind of credit check that will ding your score”. You might also be asked to answer questions about your mortgage payments, car loans, and other credit bureau items to identify yourself.
  • A link to an existing bank account. This is used to provide the initial funds in the account. I put $10 into the account for a test drive. (By doing this, Aspiration also reduces its risk, because you will have gone through the compliance checks of your existing bank).

Once you finish the account opening process, it may take a few days for the account to be open and for you to receive your debit card in the mail. Aspiration has partnered with Coastal Community Bank in a way that is similar to how Simple operated. (Simple, for those who remember, was not a bank. It created the front-end user interface, but partnered with an FDIC-regulated bank).

Aspiration Mobile App

In 2016, Aspiration joined the rest of the financial industry with the launch of their mobile app. Their app allows you to view your Aspiration Account balance and transaction history, remote deposit checks using your phone’s camera, schedule transfers between the Aspiration Account and other bank accounts, pay bills, and track the impact of your spending habits. The mobile app also allows you to use fingerprint authentication to secure the data.
There are two features that stand out:

  1. Their Payments feature
  2. Their Aspiration Impact Measurement (AIM) feature

Payments

Payments is Aspiration’s bill pay feature. Not only does this feature allow you to pay your bills, but it also allows you to pay your friends. However, unlike other bill pay and money transfer features (like Zelle), Aspiration’s Payments feature sends payees a paper check with your name, address, and optional memo if you choose to include one. This feature is available at no charge to the account holder.

Since this feature is sending a paper check, you can expect the payee to receive the check within 5-7 business days from the send date. Fortunately, Aspiration doesn’t limit the number of payments that can be scheduled and they don’t limit the amount of money you can send.

Aspiration Impact Measurement (AIM)

AIM is a pretty unique feature as it allows you to see the impact you’re making on the planet and people based on your spending habits. This feature will provide you with a score that is determined by the types of businesses you frequent. The score is calculated by how the businesses treat their employees, customers, community, and environment. So, businesses are given a score and you’re given a score based on where you do your shopping.

Aspiration shares that they created AIM “so that we can all think about how our everyday spending can make the world a better place.” This may sound very “kumbaya”, but there’s no denying that they’ve created an innovative feature.

What We Like

  • Unlimited, global ATM fee reimbursement: With this account, you can use any ATM in the world and it won’t cost you a dime. Not only won’t Aspiration charge you a fee, but you will be reimbursed any fee charged by the other bank whether they are located in the U.S. or in another country.
  • Zero overdraft and stop payment fees: This is a huge perk as these are some of the “gotcha” fees that you’ll encounter at big banks.
  • Other fees are also fairly lower than big banks: Outgoing wire transfers and receiving an incoming wire transfer will only cost you 82 cents.
  • One of the best interest rates in the market: At a traditional bricks-and mortar bank, you would receive no interest on your checking account, and you would earn only 0.01% on your savings account. With this account, you earn 1.00% on your entire balance. The best online checking account in the market is currently paying 2.02%, but you need to maintain a balance to earn this APY.
  • You no longer need to have a separate savings account and checking account. With that, you no longer need to worry about overdrafts. At a traditional bank, you could end up paying $10 just to have money automatically transferred from your savings account to your checking account if you make a mistake. Because you can keep all of your money in one account, you will not need to worry about overdraft transfers.
  • All deposits are FDIC-insured, up to $250,000 per depositor.

What We Find Lacking

  • Bill pay functionality. While Aspiration does mention that they will be making updates and improvements to their Payments feature, they don’t seem to mention going away from the paper check method. While sending paper checks may be a good solution for a feature that once didn’t exist at Aspiration, it’s still not as efficient as most online bill pay features that other banks offer.

Who Could Benefit From the Aspiration Account Now?

The perfect profile for an Aspiration Account customer today would be:

  • You travel a lot, and frequently need to use ATMs that are outside of your bank’s network
  • You have a lot of cash that you keep in your account and would like to earn interest on that money
  • You are about the impact you make on people and the environment.

LEARN MORE Secured

on Aspiration’s secure website

Alternatives if This Account is Not Right For You

This account is going to get better over time. It won’t come as a surprise if this account starts to become much more competitive.

Depending upon what feature is most important to you, there are excellent alternatives:

  • If you want the highest interest rate, you can earn up to 2.10% with an online savings account with a moderate deposit amount requirement. You can find the best savings account here.
  • If you want to avoid ATM fees globally, but need better bill pay capabilities, you should open a Charles Schwab checking account. You can find that account, and others, on our checking account page.

This Looks Great and Will Get Better. But is it Sustainable?

One of the biggest worries we have at MagnifyMoney is the following: when something looks too good to be true, it usually doesn’t last long. The offer can last for a few years, but eventually market forces will catch up with it.

Providing unlimited reimbursement of ATM fees globally is expensive. Ally originally offered the same perk and then capped that benefit at $10 per month ($120 per year), because it was impossible for them to make money on the checking accounts otherwise. Aspiration does not have a magic formula, and eventually the business will need to make money somewhere.

Often, banks do not make money on checking accounts. Instead, these accounts serve as the foundation account and the bank cross-sells other products. Perhaps this is Aspiration’s plan.

Regardless, the product is very consumer friendly and potentially lucrative. According to CrunchBase, the business has raised over $67 million. Clearly, the business will need to raise more capital as it scales, especially given the low level of customer profitability expected. There is certainly limited risk to taking advantage of the great offer available now. At MagnifyMoney, we just hope that they find a way to make money sustainably. As Ally customers know all too well, it can be frustrating to switch accounts based upon a strong feature (unlimited ATM reimbursement), only to have that benefit taken away when it is deemed too expensive.

promo-checking-wide-v2

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Nick Clements
Nick Clements |

Nick Clements is a writer at MagnifyMoney. You can email Nick at [email protected]

Advertiser Disclosure

Reviews, Strategies to Save

American Express® Personal Savings Account Review: A Solid Choice for Online Banking

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

American Express Personal Savings Account

This account is a great option for anyone who wants the flexibility of earning a high interest rate without the withdrawal restrictions that come with a CD.

APY (%)

1.90% Variable

Minimum Deposit Amount to Open Account

$0

Minimum Balance to Earn APY

$1

Permitted Monthly Withdrawals

6

Annual Fee

$0

FDIC Insured?

Yes

Mobile App?

No

Transfer Time

Deposits will be available within five business days.
Transfers from savings to a checking account
take one to three business days.

In an American Express® Personal Savings account, your money earns 1.90% variable APY. It’s currently one of the best rates you can earn from an online savings account. The account does not have a monthly fee and they don’t require a minimum deposit, which makes it an affordable account to open. You will have to fund your account within 60 days of applying, and the FDIC insures your deposits up to full legal limit.

How the American Express Personal Savings account works

The American Express savings account compounds daily at a variable 1.90% APY, and interest earned is credited to your account on your monthly cycle date. The rate is variable, so American Express can raise or lower the interest rate at any time without notice to you before or after the savings account is opened.

Account holders must fund the account within 60 days, which you can do by setting up a bank transfer or direct deposit to the savings account, as well as by sending a check.

What we like about the American Express Personal Savings account

  • High interest rate The 1.90% variable APY is better than what you would earn putting your money in the accounts most brick-and-mortar banks offer. While there are higher rates to be had, American Express has a good offer.
  • Automatic savings It’s easy to make saving automatic when you have an online savings account. With the American Express Personal Savings account, you can easily set up a recurring deposit to pull funds from an external savings or checking account. To make it even easier to resist touching your savings, you can even have a portion of your paycheck directly deposited to the account.
  • Discourages spending With your money in an online account like the American Express Personal Savings account, you can only get your cash after making a transfer to an external checking account to which you have debit card access. The inconvenience makes it that much more difficult to spend your savings.

What we don’t like about the American Express Personal Savings account

  • No ATM card Not having card access is great when you need to prevent yourself from spending your savings, but the hassle of setting up and making an ACH transfer from your online American Express Personal Savings account can be problematic in a pinch. (American Express says transfers will take one to three business days for funds to become available in your checking account.) If you’re worried about this, you can instead turn to an online bank like Synchrony Bank that makes it easier to access your savings by issuing an ATM card tied to your high yield savings account.
  • Variable interest rate The annual yield rate American Express is offering on this savings account is high at 1.90%, but the bank can change that rate at any time for any reason, as the rate is variable. If you’re looking for a more predictable rate of return, consider a certificate of deposit.
  • Limited withdrawals Because this is a high yield savings account, banks are limited by Federal Reserve Board Regulation D to a maximum of six withdrawals and/or transfers from your online savings account per statement cycle without penalty. With that in mind, before you decide how much you’ll put away each month, make sure it’s not more than you can afford to, so you aren’t repeatedly reaching into your savings.

How the American Express Personal Savings account compares

As indicated earlier, the American Express Personal Savings account offer is strong, but how does it compare to other savings accounts?

Institution
APY
Minimum Account Balance to Earn APY
American Express National Bank
High Yield Savings Account from American Express National Bank

1.90%

$1

LEARN MORE Secured

on American Express National Bank’s secure website

Partner Offer

Member FDIC

Synchrony Bank – 1.90% APY and no minimum balance

Institution
APY
Minimum Account Balance to Earn APY
Synchrony Bank
High Yield Savings from Synchrony Bank

1.90%

$0

LEARN MORE Secured

on Synchrony Bank’s secure website

Member FDIC

With $0 to open the account, you can earn an annual yield of 1.90% on savings account balances through Synchrony Bank and there are no monthly fees.

Savings accounts through Synchrony interest is compounded daily and is credited to the account monthly. An ATM card is offered through this account and you can still easily transfer or deposit funds through an ACH transaction or online.

Goldman Sachs Bank USA – 1.90% APY* and $0 minimum to open

Institution
APY
Minimum Account Balance to Earn APY
Goldman Sachs Bank USA
High-yield Online Savings Account from Goldman Sachs Bank USA

1.90%

$0

LEARN MORE Secured

on Goldman Sachs Bank USA’s secure website

Member FDIC


Goldman Sachs Bank USA currently offers an APY of 1.90% on their Marcus Online Savings Account. You don’t need to deposit a minimum amount to open the account, but you will need to have a minimum balance amount of $1* to earn the APY. Interest on the Marcus Savings Account starts accruing the business day you deposit funds into the account. Goldman Sachs Bank USA doesn’t apply any service charges to their savings accounts.

Barclays Bank – 1.90% APY and no minimum balance

Institution
APY
Minimum Account Balance to Earn APY
Barclays
Online Savings Account from Barclays

1.90%

$0

LEARN MORE Secured

on Barclays’s secure website

Member FDIC


With $0 to open the account, you can earn an annual yield of 1.90% on savings account balances through Barclays. While there are no monthly fees, an account that has a balance that is less than $1 for 180 days or more may be closed by Barclays. Savings accounts through Barlcays will start accruing interest the day your initial deposit posts to your account, and interest is compounded daily. While an ATM card is not offered through this account, you can easily transfer or deposit funds through an ACH transaction or online through your account.

American Express CD Rates

These CDs are great for those who don’t have a lot of money to deposit, but the rates are slightly lower than the best CD rates available.

Term

APY

6 months

0.40%

12 months

0.55%

18 months

1.90%

24 months

2.00%

36 months

2.05%

48 months

2.10%

60 months

2.15%

CDs from American Express do not come with a minimum deposit amount. You’re free to deposit as little or as much as you want to begin earning interest on any of its CD terms. This is great for individuals who don’t have a lot of money to deposit in CDs offered by other online banks. The downside is that you won’t be receiving as high of an APY as you could at other online banks. While the rates aren’t terribly low, they just don’t compare to most of the best CD rates currently available.

How CDs offered by American Express work

American Express offers terms spanning from 6 months to 5 years. Interested is credited on a monthly basis and compounds until it matures. You can choose to have the interest transferred out of the CD and into the American Express Personal Savings Account on a monthy basis, transferred into a linked account, or mailed to you monthly, quarterly, or annually via a check. If you touch the principal, however, you’ll incur an early withdrawal penalty. The penalty is based on your CDs term:

  • For CDs with a term of less than 12 months: 90 days worth of interest
  • For CDs with a term of 12 months, but less than 48 months: 270 days worth of interest
  • For CDs with a term of 48 months: 365 days worth of interest
  • For CDs with a term of 60 months: 540 days worth of interest

If you’re able to keep your principal and interest within the CD, you’ll receive notice, either by mail or email, that your CD is about to mature in ten days. If you don’t tell American Express that you do not wish to renew your CD, they’ll automatically renew the CD with the same term unless they no longer offer that term. You can call American Express any time before your maturity date to tell them that you do not wish to have your CD automatically renewed.

Online banks vs. brick-and-mortar banks

Online banks have been having a moment not only because of the rise in mobile banking among consumers, but also because they can simply offer consumers more benefits because they don’t have to worry about as many overhead expenses as brick-and-mortar banks. An August 2017 study by DepositAccounts.com, another subsidiary of LendingTree, shows the annual percentage yield internet banks offer on savings accounts is more than four times what brick-and-mortar banks or credit unions offer. The same analysis shows annual percentage yields on internet bank savings accounts have surged 29 percent since January 2016.

Simply put, the main benefit of putting your money in an online savings account is your money does more for you. To show this, DepositAccounts provided an example, based on the average APYs in those savings categories: If a saver were to put $100,000 in a savings account and leave it alone for 10 years, they would earn $8,338.79 at an online bank versus $1,747.04 in a brick-and-mortar bank and $1,895.28 in a credit union, assuming a fixed APY.

Overall Review of the American Express Personal Savings Account and CDs

Overall, the American Express Personal Savings Account is a solid online savings option. The interest rate they offer is high and the features of the account are comparable to other online banks’ savings accounts. While there are certain aspects of the Personal Savings account that could use improvement, other online banks present the same obstacles. As was mentioned earlier, the American Express Personal Savings account is one of the best options available.

The CDs American Express offers, on the other hand, aren’t quite as good. The 6 and 12-month CDs are nowhere near the best rates offered by other online banks and the 18 – 60-month CDs fall short of the other rates offered. The only feature that makes American Express stand out from most of the other online banks is that this bank doesn’t require a minimum deposit to open an account or start earning interest. If you’re not quite ready to deposit a huge chunk of money into a locked account, you may want to start out with on of the CDs offered by American Express.

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Brittney Laryea
Brittney Laryea |

Brittney Laryea is a writer at MagnifyMoney. You can email Brittney at [email protected]