Interest rates are a funny thing. While interest is always a good thing to earn, predicting the exact rate you’ll get is far from an exact science.
When I first wrote 365 Ways to Live Cheap in 2007 and early 2008, many checking accounts – even entry-level ones – offered interest. I myself had a checking account that received something around 1.5% interest at the time.
As the book went to press, interest rates were dropping and checking accounts were the first to really see interest rate drops. I discussed the issue with my editor and we made the decision to suggest looking for a 1% interest rate, as it had been easy to find such accounts for years.
Today, a 1% interest rate on a checking account is a pretty good deal. They can be found, but they’re often available from local banks and are prone to change. In fact, I’d suggest that a 0.5% interest rate on a checking account, given the current state of interest rates, is something to be happy with.
Why is that so important?
Well, let’s say you maintain an average balance of $2,000 in your checking account throughout the year. Just for keeping that account open, the bank gives you $10 over the course of the year. You don’t have to do anything to get that ten dollars. Just keep your account open with that average balance and you’re good.
Now, that seems like a relatively small amount, but the key thing is that you don’t have to do anything to collect it. If you choose a bank that offers some form of interest checking, you’ll simply get the money slowly throughout the year simply for having the account open.
Interest on a checking account is a perfect example of what I think of as “effortless money.” It’s one of those things that, once you’ve made an initial decision or take an initial action, it continues to either earn you money or save you money in the future.
For example, if you air seal your home once, you’ll have a smaller energy bill thereafter. Set up your programmable thermostat to cause your furnace or air conditioning to shut off during your workday and at night and you’ll always spend less on energy.
The same is true for interest on an account you naturally use. It’s just money that you get without effort, and that’s the best kind of money.
That’s not to say, of course, that it’s the only factor to consider when choosing a bank. It’s one of many, like the ATM network (discussed yesterday) and other factors we’ll discuss in the next few days.
This post is part of a yearlong series called “365 Ways to Live Cheap (Revisited),” in which I’m revisiting the entries from my book “365 Ways to Live Cheap,” which is available at Amazon and at bookstores everywhere.