Even with maintenance fees and the costs of doing banking, keeping money in FDIC insured banks is clearly a better option than shoving it under your mattress. Banks earn money through fees paid by account holders, and by understanding how your deposit accounts work, you can keep more of your money for yourself and pay less in bank fees.
1)Understand how your interest is calculated.
You don't necessarily need an interest computation calculator and an advanced calculus degree to figure out compound interest, but if you understand the basics of how interest is calculated on different accounts you can choose the one that will pay you the most money. The shocker is the account that shows the highest interest rate may not be the one to pay you the most interest.
The method which is used to compound the interest is more important than the interest rate itself. Compounding interest is when interest is reinvested in the principle amount. The frequency which the interest is reinvested is important to understanding which account will pay you more interest. Let's say you invest $1,000 in a savings account with 3% interest for 3 years, and you don't make any more deposits. How much interest would you earn? Well, it depends on how often the interest is compounded:
- Interest compounded annually: $92.72
- Interest compounded semi-annually: $93.44
- Interest compounded quarterly: $93.80
- Interest compounded monthly: $94.05
The more frequently a bank compounds interest, the more money you will earn.
2)Don't keep money in a non-interest earning bank account.
Many people make the mistake of depositing their pay into a checking account so they can use the account to pay their bills, and then simply leaving any extra money in the account until it comes time to pay another bill. The time the money spends in this account is not earning you interest.
At the very least, use an interest-earning checking account to help the money you keep in a checking account earn a little interest. Just keep an eye on the fees paid and make sure you aren't paying more in fees than the account will earn you in interest.
Ideally though, you would only transfer enough money into your checking account to pay your bills, and keep the rest of your money in higher interest earning accounts to make the money go further.
3)Keep Your Certificate of Deposit Until it Matures.
If you save money in Certificates of Deposit (CDs), you are agreeing to keep your money with that bank for a specific period of time. If you pull the money out before your CD matures, you break your agreement and lose interest and typically have to pay a penalty for early withdrawal. You can even receive less money than you originally deposited into the CD if you withdraw the money before the certificate matures.
Understand the policy of the bank holding your CD before you open the account, or be certain you will have no reason to withdraw the money prior to the maturity date.