Many savings accounts today pay less than one quarter of one percent annual percentage yield (APY). Some of the biggest name brand banks pay as little as one one-hundredth of a percent. On a hard-earned account balance of $30,000 the saver would be rewarded with just three dollars per year. There isn’t much motivating about those numbers. Could a small change make a difference?
Online high-yield saving accounts such as those offered by Marcus by Goldman Sachs, CIT, MySavingsDirect, Synchrony, Ally Bank and others currently offer rates around 4.5% APY. For the same saver with $30,000, they would receive approximately $112.50 per month! At the end of the year, they have an extra $1,347 in their account. They could leave it in the account to grow or use it for something else, like paying down their mortgage or student loans.
Recent mortgage rates have been hovering around 7%, nearly double the high-yield savings account rates. (Freddie Mac's Primary Mortgage Market Survey). If a $30,000 savings account balance is adequate, it could make sense to use the interest earned to pay down debt. How much difference would it make?
For a new borrower with an original mortgage balance of $450,000 and an interest rate of 7%, making an extra $1347 annual payment could shorten the mortgage payoff timeline by thirty-seven months and reduce the total interest paid by $78,465. One caveat is that if earnings are siphoned off the savings account, the savings will inadequately grow relative to inflation.
It's worth noting that that savings account earnings are taxable so it might be fairer to use the after-tax earnings. However, in many cases the taxes attributable to interest earnings are covered by withholding from the employee’s paycheck and simply reduce the tax refund received.
Let’s look at another scenario. Instead of paying down debt with annual interest earnings, the account compounds and grows. This calculation assumes a fixed APY, but in real life rates adjust in response to greater market conditions. For the lower returning .1% APY account, the $30,000 balance grows to just $30,150.30. When using a high yielding 4.5% APY account, the balance compounds to $37,385.46.
The payoff for moving funds from a nearly-nothing interest rate to a high-yield account is obvious and typically takes less than 15 minutes. Have questions about what account to choose, how much you should have, or what to do with the earnings? Comment or fill out the “Let’s Get Acquainted” form!