APY almost pointless for new savers?

[odnamra]

Greetings,

I am in a position to start saving $5,000 per month for the next year (or longer). While doing research about where to put this money I came to discover that APY is really not going to make that big of a difference. I'm totally new to this stuff, so I was hoping that some of the experts on this forum can verify that my logic is sound.

I used an online calculator to compare the three different accounts (can't post the link here because I am too new):

.20 APY = yield of $55, taxes of $18, for a total of $37
.50 APY = yield of $137, taxes of $46, for a total of $91
.80 APY = yield of $220, taxes of $73, for a total of $147

Is it really true that going from an APY of .20 to .50 will only generate an additional $54?

At this point, is it even worth it to consider switching banks in order to open a "high yield" account? (Assuming fees are all the same...)

Thank you so much for any replies!

[Nika]

Except for some portion of the EF, it makes no sense to keep much in a savings account -- you are loosing money to real inflation (not "official" one that does not include food and fuel.

So unfortunately one has to expose savings to some risk in order to just keep it from eroding.
We moved part of our EF into vanguard sp500.

[odnamra]

Good point, however, returning to the subject at hand, is my evaluation of APY correct?

[disneysteve]

Originally Posted by odnamra

.20 APY = yield of $55, taxes of $18, for a total of $37
.50 APY = yield of $137, taxes of $46, for a total of $91
.80 APY = yield of $220, taxes of $73, for a total of $147

Is it really true that going from an APY of .20 to .50 will only generate an additional $54?

0.5 is 2.5 times 0.2 so yes, the interest earned will also be 2.5 times as much. $55 x 2.5 = $137.50.

Does it matter? Sure. If you can, why not earn the most you can get?

[kork13]

To start with, yes -- your numbers are correct. And as you're alluding to, the rates are abysmal and not worth it to keep alot of money there. With that said, however, finding a good online savings account can still be worth it. Some places you can expect to raise their offered APY's back up decently as rates start to rise again. So find one that has a history off offering good rates and still offers .8%-1%, and keep your EF and any other liquid savings there.

There is alot you can do with $5k/mo beyond sticking it in a savings account.
- Do you have a 6-month emergency fund in place? Do that first. Keep that in the pitiful savings account, simply because it's safe.
- Does your employer have a 401k and offer a match? If they do a match, contribute up to the maximum match.
- Do you have a Roth IRA? Max that out. You can either do $416.66/mo or simply front-load it in a single month.

Beyond that, the biggest question is this: What do you have planned for this money? You don't say how old you are, but are you saving for a house, a car, retirement, a trip to space, or just saving for the sake of saving? The advice will vary slightly based on your answer to that question... But generally, you should look at investing it. Develop a balanced investing plan, and stick to it. Consistency over time will help you. If you need this money soon (within the next 5 years), you need to be conservative with it... as your timeline gets longer, you can generally allow for higher risk. As far as WHAT to invest in... Look for low-cost investments, like <.5% expense ratios and free trades for mutual funds and ETF's, or stock trades for <$10/trade (~$6/trade is the best I've seen available).

[odnamra]

Kork13, thank you so much for such an in-depth reply. I really appreciate your time.

Here's my deal... I'm a 31yo self-employed independent contractor (I have an S-Corp). I have an IRA that I started about two years ago with about $10K in it (ETF Index fund with Vanguard, very low fee). I cover my own health and dental.

I also have waaaay too many bank accounts. Personal checking and savings at a local credit union. Business checking and savings at the credit union. Checking, savings, and stock market account (I've never even used it) at ING. Checking and credit card at Bank of America. It's a lot to keep track of!

In addition to my savings goals, I wanted to consolidate all of my accounts into as few institutions as possible. Thus, I have a range of APY's available to me: .20, .50, and .80

Regarding the goals... to be honest, I'm at a bit of a loss. Aside from my student loans, I am basically debt free, no credit card or car payment. Housing in Los Angeles is super expensive, so I'm not even thinking about buying real estate at this point. So really, the only thing I can do with this money is either pay off my student loans (which is a lot of money) or hold on to it unti I figure out where to invest. I guess I could invest in a mutual fund or ETF outside of what I'm doing with my IRA....

Thanks again for all of the input. This forum has been very helpful.

[97guns]

Short Term Investment Options In GE Capital | GE Interest Plus

1% and they remain liquid, not fdic insured though.

check out other online banks for better rates, credit card company's discover and capital one both have cd's

[Kooshiball]

This is depending on what you will do with your money. As someone said, it makes no sense to put the money in the CD if you want to keep the money in the long term since inflation rate is definitely much higher than 1%. If this money is some money that you want to park for a short period of time, then it is okay to put the money in the saving account. For me, except emergency fund and small portion of saving, my money is all tied to all sorts of investment because value of the paper is debased in every second...

[greenskeeper]

It is a joke what the APY is for simple savings accounts.

[snafu]

I agree, you have too many accounts. You do need to keep your business and personal accounts separate. The rates/fees at CU are likely best lowest available. Using Vanguard is brilliant, their Management Expense Ratio {MER} is very low for the industry. You are young enough for some level of risk, work out an investment plan for yourself [consider talking to an investment [salesman] with professional designation] and stick with it.

We review our holding quarterly and generally make adjustments twice a year to reflect market conditions and keep 60/40 balance of equities to bonds. Buy and hold philosophy has gone the way of the doodoo bird.