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How a different kind of savings account can help you jump-start your rainy day fund

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Most of us want to see a mountain of money in our savings, but for many of us, what we have socked away is more of a molehill. The typical household has, on average, less than $9,000 in liquid savings — and only around 40% of U.S. adults have enough to cover a $1,000 emergency. 

Some financial institutions are now offering a different type of savings account to try and get more people putting money in emergency or rainy day funds: The reverse-tier, or inverted, savings account. Here's how it works so you can decide whether it might be a good fit for you.

Reverse-tier savings accounts pay higher interest rates on lower balances

Most traditional savings accounts pay depositors a flat interest rate. Reverse-tier savings accounts, which are primarily available through credit unions, offer higher interest rates on lower balances. So, as the balance in a reverse-tier account grows, the effective interest rate decreases until the balance reaches a certain level, depending on the institution. For example, at Washington-based BECU, savers earn more than 6% interest on balances of up to $500.

The idea is to offer higher interest rates to savers who are putting away less money as an incentive to get people who might not be saving at all, or very much, to deposit their extra cash and watch it grow. 

For example, if you were to deposit $100 in a reverse-tier account, you might earn 5% interest to start. By the time you have $500 in savings, you may be in a new tier, where the effective rate might reduce to 3.5%. When you hit $1,000, it might drop to around 1.81%, the prevailing national average for a high-yield account, according to DepositAccounts.com.

"You start earning higher interest on lower balances — and as you grow your balance, the rate comes down. The reason we do it is because we want to inspire people to put money away," says Jacqui Kearns, the chief brand officer at New Jersey-based Affinity Federal Credit Union, which recently started offering reverse-tier accounts.

You start earning higher interest on lower balances — and as you grow your balance, the rate comes down.
Jacqui Kearns
Chief brand officer, Affinity Federal Credit Union

Is a reverse-tier savings account right for you?

It's not yet clear just how, or if, reverse-tier accounts are effective at getting people to save more money as they're a relatively new and uncommon product, and not all financial institutions offer themBut since Americans are having trouble putting money away for a rainy day, it appears that banks and credit unions are trying to find ways to attract new customers using inverted accounts

As you build up your savings, it may make sense to take advantage of high interest rates in a tiered account. But once you reach the threshold at which that applicable higher interest rate drops, it may be wise to look at other options for saving your money.

That's because interest rates are low, and may go lower. In fact, there's a possibility that interest rates could go negative — which could, in theory, mean that you're paying a bank to hold onto your money. 

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Because it's unlikely that you'll find savings accounts currently offering interest rates higher than 2%, you may see inflation offset your interest rate if your money remains in a savings account. For example, if you were to stick with a savings account earning 1.85% interest, which Bankrate.com says is the best available rate for online savings accounts as of March 2020, your money would lose value every year at the current inflation rate of 2.5%.

Some other options to consider include investing in stocks or bonds, usually through mutual funds or ETFs, which can carry less risk and offer investors a diversified product. Even products like short-term CDs, or certificates of deposit, which are low-risk alternatives to savings accounts that involve locking up your money for a predetermined period of time in exchange for a higher interest rate, may be a good fit. 

"If you have very little to save, even just a few dollars a month, the more you can lean in and let the interest help you over time, the more you'll see growth," Kearns says. "It may not be significant that first year, but down the road," she says, you'll see the payoff.

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