Thursday, July 20, 2017

How to earn 5% on your savings

One of my favorite personal finance blogs is written by Jonathan Ping over at My Money Blog. Jonathan writes on a broad topic of finance items of interest to me, and has had great recommendations on products, books and services that I have benefited from. I wanted to share this resource with you, and also share that savings account that can generate 5% yields for readers. (which I learned from him)

Perhaps a couple of years ago, I read about several accounts that offered 5% yields on your cash. I was extremely skeptical at first, because the highest yields I could get on my cash was the 1% I could get at Ally Bank.

I did some research, and figured out that these are legitimate ways to earn a good yield on any spare cash I have. I found the company Insight Visa, in my research. The company Insight Visa offers a prepaid debit card, which comes with an FDIC insured savings account that yields 5% on your first $5,000. The interest is paid out quarterly. I will detail below the steps I took to earn that interest rate.

In order to earn the interest, I signed up for an Insight Visa prepaid debit card online. This step includes the usual things like address, Social Security Number etc.

The next step was to activate my card after receiving it through the mail. I set up an online profile, where I linked my checking account with the debit card. The verification only took a couple of business days.

I was able to transfer several thousand dollars from my checking account to my Insight Visa prepaid debit card through ACH. I was able to get an Insight Visa Savings Account after my balance in the Prepaid Debit Card exceeded $500. After that, I moved the money from my Insight Visa prepaid debit card into my Insight Visa savings account.

Every quarter, I am paid interest to the savings account. Remember that only the first $5,000 earn 5% annual interest income. Anything over that amount does not earn much in interest. This is why I simply move the amount of the interest income earned every quarter into the prepaid debit account. The next step involves logging onto my personal checking account, and moving money from the Insight Visa prepaid debit card into my checking account.

When I signed up for the prepaid debit card I made sure that I sign up for pay as you go for debit card transactions. I pay a fee if I want to withdraw money from the debit card, when I use an ATM. Since I will not use this debit card for anything other than the savings account feature, I decided on the pay as you go service. Otherwise, they try to get you into signing up for their $5 monthly fee, which in my opinion is not worth it.

The other thing you need to keep in mind is that in order to avoid paying a monthly inactivity fee on the Insight Visa prepaid card, I set up a recurring transfer from my regular checking account. I transfer $3 from my Ally Checking Account into the Insight Visa Prepaid Debit card every sixty days. This is something that I set up once, so it goes up on autopilot.

I know that this sounds like a lot of work, but in reality it is not. Once I set this up, it takes a minute per quarter.

The best thing about this savings account is that it is FDIC insured. The savings money is kept at Republic Bank in Chicago.

The other risk to consider is avoiding fees. As I discussed in the article, you have to make sure you schedule a small recurring deposit every 60 days or so to avoid fees. In addition, make sure you don’t end up paying a monthly fee of $5.

The company offering the prepaid debit card is most probably serving individuals who may not have an existing banking relationship. These individuals are likely to end up racking up a decent amount of fees, which makes this a profitable relationship for Insight Visa. The savings account is a nice money loss feature to incentivize people to save, and make them loyal to the card. In reality, I doubt that a large portion of the users for these prepaid debit cards leverage the savings account feature.

If a large portion of savers end up chasing these prepaid savings accounts simply for the high yield feature of the savings account, it would be discontinued or the terms and conditions will change. Other changes could include a requirement for a set number of debit card transactions, or for a larger direct deposit.

For example, I had opened several accounts at a few other prepaid debit cards such as Netspend, where I could also earn an additional 5% APY on a $5,000 balance. However, they changed the terms where only the first $1,000 is earning me 5%. I still keep it for the $1,000 ( along with a few others such as ACE Elite, WU Net Spend and Brinks Prepaid), and I find that it is worth it to earn an excess yield of $40/year per account without any effort on my part. These accounts also require the steps discussed above.

For some readers, following those steps may not be worth it. In my situation, it was worth it because I earn a risk free return of 5% on $5,000. In addition, I also opened an account for my spouse, who also earns 5% on $5,000. This is $500 in annual interest income on $10,000 balance. In order for us to generate $500 from another savings account, such as out Ally Bank that yields 1%/year, we would have had to save $50,000. So you can see that this account is definitely worth it for us. I will keep it open for as long as the deal is available.

Disclosure: This post was written by me, but it may include affiliate links to products for which I may receive compensation.

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