Savings comparison: Money market, CD, checking or savings account?

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It’s hard to imagine living without a checking account these days. Online purchases? No problem. Automatic bill pay? Yes please.

A savings account doesn’t have quite as much impact on our daily lives, which may be why one in five people don’t bother to use one. After all, more than half of Americans have less than $1,000 saved up. Why open a separate account when you can just leave it in checking until you need it?

Actually, there’s excellent reason. It’s called compound interest—and if you use it strategically, it can accelerate your savings.

How compound interest works

Compound interest is the phenomenon that allows investors to get rich and everyday people to retire. Einstein called it the “greatest mathematical discovery of all time.” But what is it?

When you store your money in a savings account, the credit union pays you interest for keeping it there. Interest is calculated as a percentage of your savings that gets added to your balance at regular intervals. For example, if you earn 1 percent monthly interest on a $10,000 balance, your credit union will pay you an extra $10 each month.

You could pull out that $10 and go to the movies. But what if you leave it alone?

With compound interest, you’ll earn interest on your initial balance plus the interest you’ve already earned. So in another month, your credit union will pay you 1 percent of $10,010, which comes to $10.01. Then your next interest payment will be $10.02—and so on.

Each month, as your earnings pile up, your credit union will pay you more and more interest. The extra might amount to just pennies at first, but those pennies will turn into dollars over time.

“The wonder of compound interest transforms your working money into a state-of-the-art, highly powerful income-generating tool,” says Investopedia. “To work, it requires two things: the re-investment of earnings, and time.”

Choosing the right savings account

To maximize your savings potential with compound interest, you want to get the highest interest rate possible.

Since checking accounts are meant to be transactional accounts you withdraw from frequently, most banks don’t pay any interest on them—no matter how high your balance is. It’s wiser to put your money into a savings account, where it will continue to grow on its own whether you add to it or not. There are exceptions, such as OCCU’s Remarkable Checking account, which pays up to 1.35% APY on balances up to $20,000 if certain qualifications are met each month.**

There are several different types of accounts you can use to build your savings, and they each pay different interest rates. The best one for you will depend on how much you can deposit and how often you’ll need to withdraw from it. Here’s a comparison of the most common options:

Type

Minimum Deposit

Interest Rate

(APY)*

Compounded

Accessibility

Checking

Non-interest Checking

Remarkable Checking

 

$0

None

 

0%

1.35%**

 

N/A

Monthly

Savings are easily accessible but difficult to control.

Savings

Primary

Secondary

Holiday or Tax Savings

 

$5

$0

$25

 

0.10%

0.10%

0.25%

Monthly

Can withdraw funds anytime, as long as you maintain a $5.01 balance.

Money market

$500 – $9,999.99

$10,000 – $49,999.99

$50,000 – $99,999.99

$100,000 – $249,999.99

$250,000+

$500

 

0.20%

0.25%

0.35%

0.45%

0.60%

Monthly

Can make in-person withdrawals anytime, as long as you maintain a $500 balance.

CD

6 months

12-17 months

18-23 months

24-35 months

36-47 months

48-59 months

60 months

$500

 

0.30%

0.40%

1.0%

0.75%

1.49%

1.54%

1.98%

Daily

Can make limited withdrawals for a fee until the term is up. Terms last from 6 to 60 months.

 

 

How your money grows over time

Let’s say you’ve got $1,000 saved up. The rate at which your money grows will depend on which type of account you choose. Based on today’s interest rates, here’s what your money will look like in:

Type

1 month

6 months

1 year

18 months

Non-interest Checking

$1,000

$1,000

$1,000

$1,000

Remarkable Checking

$1,001.13

$1006.77

$1013.58

$1020.44

Savings

$1,000.08

$1,000.50

$1,001

$1,001.50

Money market

$1,000.17

$1,001

$1,002

$1,003

CD

$1,000.83

$1,005.01

$1,010.05

$1,015.11


Now let’s say you’ve budgeted $100 a month to add to your initial savings deposit. Since you can’t make deposits to a CD during its set term, we’ll just compare checking, savings and money market accounts. Here’s what your money will look like in:

Type

1 month

6 months

1 year

18 months

Non-interest Checking

$1,100

$1,600

$2,200

$2,800

Remarkable Checking

$1,101.24

$1,609.14

$2,222.40

$2,839.81

Savings

$1,100.09

$1,600.68

$2,201.65

$2,802.93

Money market

$1,100.18

$1,601.35

$2,203.30

$2,805.86


See the difference?

With the right savings account and enough time, you can use compound interest to accelerate your savings potential. The faster your nest egg grows, the more secure your future will be.

 

*APY = Annual Percentage Yield. Rates current as of 2/1/2017 and subject to change. Fees could reduce earnings. Early withdraw penalties may apply to CDs. 
**1.35% Annual Percentage Yield (APY) offered on Remarkable Checking applies to the first $20,000 and .30% APY on balances greater than $20,000 subject to the following qualifying factors (the “Qualifying Factors”) being met during each statement cycle: i) 12 debit card transactions must clear through your account during the cycle; ii) one direct deposit or other ACH credit or withdrawal must clear through your account during the cycle; iii) one login to Internet Banking or MyOCCU Mobile during the cycle; and iv) maintain active enrollment in eStatements during the cycle. If one or more of the Qualifying Factors are not met, you will receive default interest of .05% APY for that statement cycle. APYs effective 08/18/2014 and subject to change at any time. Fees could reduce earnings.