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What Is A Tiered Savings Account?

Putting your money in a savings account is just about the safest thing you can do with your money. You don’t have to worry about it getting stolen, you can’t lose it, and you even earn a little bit of interest for keeping it in the bank.

But sometimes it feels like “a little” interest is really, really little. What gives? It may be that your bank is using a tiered interest rate when calculating what to pay you.

 

What is a tiered savings account?

Let’s take a step back for a second. Why does the bank pay you at all to keep your money with them?

Banks make their money by taking the deposits of hundreds or thousands of people and then lending that money out to others. The interest that you make represents a small percentage of their total profits, and they give it to you to encourage you to save your money, giving them money to use for lending.

Since banks can only lend money that you give them, it’s in their best interest to give you incentives to keep your money. The more money you put in, and the longer you keep it there, the better for the bank since they can keep using it.

The tier system is a natural evolution of that idea. Banks want to encourage you to put in as much money as possible, so they increase the interest rate as you put in more. Now you’re making more money because your interest rate is higher and your balance is larger.

A very simple tier structure would look like this:

With a balance of less than $5,000, earn 0.5%

With a balance of $5,000 or more, earn 1.0%

At first glance it may seem like you would earn 0.5% if your balance is below $5,000, and 1.0% if your balance was over $5,000 - meaning a balance of $5,001 would earn 1.0% interest. Unfortunately, that’s not always the case. It depends on whether the bank uses a whole or partial balance tier system.

 

Partial Balance

A partial balance system means you only get paid the interest of each tier, not the highest tier you reached. So with a balance of $5,001, you would earn 0.5% on $5,000 and 1.0% on $1. That works out to be just 1 cent more.

Interest Earned on $5,001 Balance

Tier

Interest Rate

Interest Earned per Year

0 - $4,999

0.50%

$25.00

$5,000 +

1.00%

$0.01

Total Interest Earned

$25.01

 

Interest Earned on $15,000 Balance

Tier

Interest Rate

Interest Earned per Year

0 - $4,999

0.50%

$25

$5,000 +

1.00%

$100

Total Interest Earned

$125

 

This is the worse system for you, since you don’t get the higher interest applied to the whole balance. If you’re only just able to reach the next tier, you basically won’t see any change.

 

Whole Balance

A whole balance system means you get paid the highest interest rate as soon as you reach that tier.

Balance

Interest Rate

Interest Earned

$4,999

0.50%

$25

$5,000

1%

$50

 

Not many banks offer this structure as it heavily favours the client, but it can still be found.


Chris Chris 01/26/2019
Canadian personal finance buff and all-around writing enthusiast, Chris loves breaking down complicated money ideas to show that they're really not so complex. 
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