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You worked hard for your money, and we’re committed to making it work for you.
First things first: When you start saving, it’s important to understand changes to the economic market and interest rates work. That’s why we put together this guide—to help you understand:
How changes in the Federal Reserve’s interest rate policy can impact your financial plan
How we’ll always have your back, even if interest rates and the market fluctuate
Understanding why rates change
The Federal Reserve is the central bank of the U.S. and its purpose is to maintain safer, more flexible, and more stable monetary and financial system. The Federal Reserve can try to reduce changes to the economy by changing the Effective Federal Funds Rate, or what is sometimes just called the Federal Funds Rate, when it thinks it is necessary to protect the economy. This is a benchmark rate that measures how much interest banks can charge to lend each other money.
Even though rate changes are out of our control, we’re always looking out for you. If a change to the Federal Funds Rate effects any of the products Chime provides you, we’ll let you know!
How can a rate change impact loans and savings?
Remember how we said the Federal Funds Rate is a benchmark for how banks lend money to each other? This also helps the Federal Reserve determine how much to charge in interest for loans to individual borrowers. When banks charge less to borrow, they may also lower the amount of interest they pay out, to keep the business balanced.
Impact on loans: From a borrowing perspective, a rate cut can actually be helpful. When rates drop, it usually becomes less expensive to borrow money.
So, if you’re interested in opening a new credit card account or getting a personal loan, you may be able to get a better deal on the rate. A rate cut can also be good news if you’re planning to consolidate or refinance some debt you already have.
Impact on savings: The flip side of the lower interest rate coin is that you may get a little less traction in your savings account.
When the Federal Reserve cuts the Federal Funds Rate, banks can cut the rates they charge on loans, which sometimes causes them to lower interest rates they offer to savers. As a result, the annual percentage yield (APY) on savings accounts go down.
Here’s another way to look at it:
A 0.10% decrease in annual percentage yield (APY) translates to a difference of just $1 less earned in interest over the course of a year for every $1,000 in savings.
What does Chime do to get you the best possible rate?
We work with FDIC-insured Banks to get you the best rate we possibly can. We offer a variable rate savings account, which means the rate may change depending on a few factors, including things like changes in market rates and conditions. We do not take rate changes lightly, so we will always do what we can to provide you with the best rate.
Small or not, interest rate changes can be frustrating. But if, and when the Federal Reserve fluctuates, we always have your back—by making sure you are benefiting from the best rate we can offer, no matter what. It’s part of our mission to try to bring you financial peace of mind.
3 Reasons Why You Should Open a High Yield Savings Account
By Kat Tetrina
February 25, 2020
Have you heard about high-yield savings accounts? They probably sound appealing, but you may have put off opening one because you don’t understand how they work, or you may think there’s some sort of catch.
However, there are very few downsides to high-yield savings accounts, and they have big advantages.
High-yield savings accounts are very similar to traditional savings accounts. They are separate bank accounts from your checking accounts. You would generally use a high-yield savings account to save up for certain goal or a rainy day.
Yet, high-yield savings accounts offer a much higher annual percentage yield (APY) than regular checking and savings accounts. This helps your money grow over time.
According to Brandon Renfro, a fee-only financial planner, opening a high-yield savings account makes your money work harder for you.
“As the name suggests, high-yield savings accounts will pay you a much higher rate of interest than your checking account,” he said.
Most high-yield savings accounts are only offered by online financial institutions, so you won’t have access to a physical branch. But that tradeoff can be worth it since they have a higher return and fewer fees.
Why open a savings account?
If you already have a checking account or a savings account with a brick-and-mortar bank, you may not think that opening a high-yield savings account is worth the trouble. But opening a new account can pay off in three big ways:
1. You’ll earn much more interest
When you stash your money in a savings account, you expect your money to grow over time. Unfortunately, you might be in for a depressing surprise if you use a regular savings account. According to the Federal Deposit Insurance Corporation (FDIC), the national average annual percentage yield (APY) is just 0.09%.
To put that in perspective, let’s say you saved $1,000 in a savings account with that measly interest rate. After five years, your account would have increased to $1,004.51; you’d get less than $5 in interest growth.
High-yield savings account offer a much higher rate of return. Chime, for example, offers a Savings Account with 1.60% APY — over 17X¹ the national average! If you opened a high-yield savings account with a 1.60% interest rate and deposited $1,000, your balance would grow to $1,082.60 over the course of five years. With the higher rate, you’d earn over $84 purely from interest!
High-Yield Savings Account
2. You’ll build a savings habit
Why open a savings account? Life has a habit of sneaking up on you at the worst times. Whether your car gets a flat tire on your way home from work or your dog gobbles your socks and needs surgery, emergencies happen. Unfortunately, we’re rarely prepared for them.
According to the Federal Reserve, 39 percent of Americans wouldn’t be able to pay for a $400 emergency with savings. Instead, they’d have to borrow money or use a credit card, or they wouldn’t be able to cover the cost at all.
If you don’t have money tucked away in a savings account, you’re in a vulnerable position. If something bad happens — and it inevitably will at some point — you’ll be left scrambling to pay the bill.
Opening a new savings account and setting up automatic contributions can help you prepare for the worst. Even if you only deposit a few dollars each week, you can start building a safety net that you can rely on when times are bad.
3. You’ll reach your goals faster
What’s the problem with checking accounts or stashing cash in an envelope under your mattress?
The money is too accessible. If a sale pops up or a new must-have phone launches, you can empty out your cash quickly, making it difficult to keep up your savings habit.
Having a separate savings account can help you stay focused on your goals. And, thanks to federal regulations, you can only make six withdrawals from a savings account per month.
“The advantage is that you’ll be less likely to dip into your savings for routine purchases since that will involve a different account,” said Renfro.
“If the money were all in the same account, the psychological barrier wouldn’t be as high.”
Because there’s a limit on how often you can move your money over, you’re less likely to spend it on something unnecessary. Whether you want to save into an emergency fund (go you!), splurge on a European vacation, or buy a car, a new high-yield savings account can help you reach your goals faster.
Managing your money
Opening a new savings account is a smart way to build your bank account and plan for future goals. By taking advantage of high-yield savings accounts, you can help your money grow at a faster rate. And with a higher APY, your new account will do a lot of the heavy lifting for you.
Want to build your savings even faster? Open a Chime savings account. Chime offers a high-yield Savings Account to help you make your money grow faster with a 17X¹ higher APY compared to traditional banks. Every time you make a purchase or pay a bill with your Chime Visa Debit Card, that transaction is automatically rounded up to the nearest dollar. The extra change is deposited right into your Automatic Savings Account app. Over time, that extra money can add up without you even noticing it.
¹The average national savings account interest rate of 0.09% is determined by the FDIC as of Feb 18th, 2020 based on a simple average of rates paid by all insured depository institutions and branches for which data are available. Visit https://www.fdic.gov/regulations/resources/rates/ to learn more.
What Is a High-Yield Savings Account? And How Do You Get One?
By Susan Shain
November 25, 2019
Have you ever checked how much interest you’re earning on the money in your bank account? If you did, you’d probably be shocked — and not in a good way.
That’s because, when it comes to traditional savings accounts, you’re hardly earning any interest at all. The national average annual percentage yield, according to the Federal Deposit Insurance Corporation (FDIC), is just 0.09%.
Translation:If you had $1,000 in savings, you’d earn a measly 90 cents in interest over the course of an entire year. (And you would still need a couch-cushion dime to order off the dollar menu!)
Lately, however, that’s changing. More and more banks have introduced “high-yield savings accounts” that feature exponentially better rates.
Here’s what you need to know about these newfangled accounts, plus how to find the right one for you.
What Is a High-Yield Savings Account?
High-yield savings accounts are similar to traditional savings accounts, with one major difference: They offer a much higher annual percentage yield (APY).
Your account’s APY differs from its interest rate because it also considers the frequency of compounding (when you earn interest on your interest). Most savings accounts compound daily or monthly.
Simply put, APY is what you’ll earn each year: A $100 account with 1% APY, for instance, would close out the year with $101. The higher the APY, the more money you’ll earn.
Whereas most traditional savings accounts have APYs of less than a tenth of a percent, the new cadre of high-yield savings accounts offer APYs of 2% or more — a 20-fold increase.
It’s important to note that APYs aren’t fixed. So even if you sign up for a savings account touting a 2.5% APY today, it could drop tomorrow. This is why you should monitor your statements carefully to stay on top of APY fluctuations.
Why You Should Care About High-Yield Savings Accounts
Although it might sound like just a few percentage points, a slightly higher APY can make a big difference over time.
Let’s say you’ve managed to set aside $10,000 for your emergency fund (#nailedit). Since you want the money to be easily accessible, you’ve decided to keep it in a savings account.
Here’s the problem: You’re not sure which type of savings account you should put your cash into. A traditional account at your old-school bank? Or a high-yield account at an online-only upstart?
Let’s take a look at the numbers.
If your interest compounded daily for 10 years, here’s how much you’d accrue:
Traditional Savings Account (0.09% APY) = $90
High-yield Savings Account (1.6% APY) = $11,720
How Do High-Yield Savings Accounts Work?
High-yield savings accounts work just like traditional savings accounts: You deposit money, earn interest, then withdraw the money when you need it.
Due to federal regulations, you can only withdraw money up to six times per month — but that’s true for all types of savings accounts.
When you sign up for a high-yield savings account, the only real differences in your experience will be A) a higher APY, and B) a lack of physical branches. You’ll find most high-yield savings accounts at online-only banks, which have less overhead and can pass along the savings to you.
High-Yield Savings vs. CDs
When you put money into a high-yield savings account, you can withdraw it whenever you’d like.
But when you put money into a certificate of deposit (CD), you’re committing to keeping it there for a certain amount of time — somewhere between several months and five years. If you need to withdraw the money early, you’ll likely have to pay a penalty.
In the past, CDs had exponentially higher APYs than savings accounts — which was what made them attractive. When compared to high-yield savings accounts, however, CDs aren’t all that impressive.
So, unless you’re positive you won’t need your money for a while (or are looking for a reason to lock it up), we’d recommend high-yield savings accounts instead.
High-Yield Savings vs. Money Market Funds & Accounts
Rather than simply earning interest from your bank, money market funds and accounts invest in highly-liquid, low-risk instruments such as CDs and U.S. Treasuries.
Money market accounts generally come with slightly higher returns than high-yield savings accounts, and, like most savings accounts, are insured by the FDIC for up to $250,000.
Money market funds are slightly riskier, with a potential for higher returns — and are not backed by the FDIC.
Though money market funds have historically generated higher returns (more risk = more reward), Lawrence Solomon, a certified financial planner with Mercer Advisors, says that’s not been the case of late.
“Ironically, right now you can actually get better yields on savings and money market accounts than you can with money market funds,” says Solomon.
How to Use High-Yield Savings Accounts
According to Peter M. Ferriello, a certified financial planner with Mollot & Hardy, Inc. Wealth Advisors, high-yield savings accounts are best “for those looking to keep funds in cash, possibly for use as their emergency fund, as they will receive a higher rate of return than they would in their checking account.”
To create your emergency fund, set up an automatic transfer from your checking account. Every week, two weeks, or month, transfer a set amount until you’ve amassed enough money to cover three to six months of expenses.
Then, start funneling any additional savings — for retirement, your children’s education, etc. — into investment accounts that earn a higher return. Don’t be like the average millennial, who holds 65% of their assets in cash (ie: savings accounts), and is missing out on significant returns in the long-run.
“The real rate of return on cash has not kept pace with the long-term rate of inflation,” says Solomon.
So, for long-term goals, he recommends investing in the market, where you can “grow your money faster than inflation is shrinking it.”
How to Choose a High-Yield Savings Account
Although choosing a high-yield savings account isn’t much different than choosing any other bank account, here are three things to keep an eye out for:
Balance or spend requirements: Some banks require you to open your account with a certain balance, maintain a minimum monthly balance, set up direct deposit, or spend a certain amount each month. Before signing up, make sure you can meet these requirements. Better yet, look for a bank account that doesn’t have any requirements – like Chime!
Fees: To help them account for their increased APYs, some banks with high-yield savings accounts charge monthly maintenance fees. Since fees of any kind are lame, we always recommend looking for a fee-free bank.
If you’re not sure which to choose, just listen to Riley Poppy, a certified financial planner with Ignite Financial Planning: “I tell my clients to follow four basic rules when choosing an account: safe, liquid, free, and competitive yield.”
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