Invest Money

Invest in a savings account

Opening a savings account is probably the easiest way to put your savings to work for you and generate revenue year over year. It’s super easy to set up, it requires almost no financial knowledge and most of the times your earnings will be guaranteed.

However, there is a downside to all these otherwise wonderful news. Saving accounts will generate a considerably low return compared to other investment options out there. In the US you can expect an APY (Annual Percentage Yield) of 2% to 2,5% on average. In the Euro zone things look even worse with an average APY of 0,5%, although you can find rates of up to 7%-8% if you move out of the Euro zone to countries like Georgia, Ukraine or Belarus.

As a rule of thumb the more stable a country’s economy is the lower APY you’ll get on your money.

What exactly is the APY?

APY stands for Annual Percentage Yield and it indicated the percentage amount you’ll earn on your money over the period of 1 year if you make no withdraws or additional deposits during the year.

So if you put $1000 into a savings account with a 2% APY you’ll have $1020 by the end of the year.

That includes the annual interest rate plus the compound interest. The compound interest has to do with how often you are getting paid the promised annual interest rate on your money. If you start with $1000 and your savings account has an interest rate of 2% and pays out every 6 months you’ll have $1010 after the first 6 months and $1020,1 by the end of the year. Those extra 10c correspond to the fact that during the second half of the year the interest rate was applied to $1010 instead of $1000. Resulting in an APY of 2,01% (after a year you made 2,01% on your initial investment of $1000).

How much money you can make with a savings account?

How much money you can make investing in a savings account is a direct result of applying the APY rate that your account offers. However, let’s take a look at some quick numbers:

If you go for the higher paying options in the US with an APY of 2,5% here is how much you could make by the end of the first year based on your initial investment:

  • $5K          $125
  • $10K       $250
  • $25K       $625
  • $50K       $1250

Where to get the higher paying savings accounts

On-line Banks are usually able to offer higher paying savings accounts. The reason for this is their overhead is way lower than the overhead from traditional banks which need to pay rents in prime locations and salaries for the representatives in each of them. Since on-line banks don’t have all those expenses they can give you a higher interest rate even if they operate just as aggressively or conservatively as their brick and mortar equivalents.

Things to consider when looking for a savings account

There are a few things you want to look out for when looking for saving account options. The most important things come down to:

  • APY
  • Minimum deposit
  • Other terms such as withdraw limitations, etc. which might apply

The later basically means you should read the contract you are signing carefully, like you always should!

Minimum deposits are sometimes required by some banks in order to trigger higher APY or any APY at all in some cases. Make sure you are well informed on this since you might find a savings account that promises a 2,5% APY contingency to making a $10K deposit when you only have $5K to invest.

The APY might seem like an obvious thing to consider, but it’s worth stressing the importance of this number. When you start looking around you’ll find plenty of accounts offering apparently similar APYs, after all 2,3% and 2,5% might look like almost the same, but consider what that 0,2% means making  $625 instead of $575 by the end of the first year if you invest $25K.

Last but not least, if you are considering a certain amount of money and you are committed not to withdraw it for a long period (think at least 5 years) investing the stock market could also be a very attractive option, not guaranteed, but with the potential to yield you a much better return.