How do "high interest" bank accounts work?

I plan on winning this week’s $22 Million dollar Powerball Lottery (Australian), so I have begun making some plans for it.

I understand that If I put a certain amount of money in to a “high interest” account, and agree not to touch it for ‘x’ amount of time, I can get something like 5-6% interest on it per year.

Is this true? How does it work? What are the terms/conditions?

Maybe interest rates aren’t as lucrative in Oz as here in the USA.

My bank will pay 5.35% on a 6-month CD, with only $1000 to open. Their rates for longer terms:


 Term        Minimum Inter. APY
 9 Month CD  $1,000  6.30%  6.45%
12 Month CD  $1,000  5.90%  6.03%
18 Month CD  $1,000  5.95%  6.08%
24 Month CD  $1,000  6.00%  6.14%
30 Month CD  $1,000  6.00%  6.14%
36 Month CD  $1,000  6.05%  6.19%
42 Month CD  $1,000  6.05%  6.19%
48 Month CD  $1,000  6.10%  6.24%
60 Month CD  $1,000  6.15%  6.29%

The 9-month is probably an incentive one to get people who don’t usually invest to get started.

I think if you had $22 million, even higher rates would be available. Also, there are income accounts where you basically agree to leave a large sum for many years, but you get like 10-15% in interest to live off of.

The way I see it is that there’s a couple of ways they can achieve this.

Here in Canada I have 2 accounts that offer high rates of interest (4.85% - was 5% until about 2 weeks ago)

They can do this because they are both phone/internet only institutions. So they have a lot less staff, no rent on branches, etc… so this keeps there costs down.

Also, and far more importantly, the banks make SHIT LOADS of money… they can afford to take a little less profit to get people to bring their business. The banks here make so much money that they make history every quarter with the unheard of profit they are raking in. I don’t have any concrete figures handy, but it’s in the billions of dollars.

It’s only going to get worse also… they keep charging more and more fees…
I’m in the process of dumping my account with the biggest bank… they have started charging me service fess on things I used to get for free… so I’ve switched to another bank that’s service charge free.

There are several basic principles that govern investment interest rates.

  1. “Time is money.” The more time you commit, the more money you are offered.

  2. “Nothing ventured, nothing gained.” You must choose between safety and return. The higher the risk, the higher the interest rate.

  3. “Money talks.” The more you are willing to commit, the more you can earn.

If you did win the lottery (and did get a lump sum), your best bet would be a combination of investments – some low interest bank accounts, some certificates of deposit, some long-term investments and one or two high-risk investments that you don’t mind potentially losing everything.

Ablett - In the United States the account you describe is known as a “certificate of deposit” or “CD”. It offers a higher rate of interest because you are guaranteeing the bank the use of those funds for a fixed amount of time.

Generally banks make money by charging a higher interest rate on loans than they pay on deposits. This is complicated by the fact that a bank can only have a certain amount of loan money outstanding based on a percentage of funds on deposits. It is much better for the bank to lock in your funds for a particular time period instead of relying on checking account deposits which tend to flucuate wildly from day to day. Ergo, the interest hierarchy works like this:

-small checking account - no interest payed, you may have to pay the bank for the service.
-large checking account - has a minimum balance requirement but pays some interest
-savings account - low minimum balance but pays higher than checking
-Money Market account - has larger minimum balance requirement and more restrictions on withdrawals, pays even higher interest
-CD - fixed amount, fixed term. The higher the balance and/or longer the term, the more interest is payed.

At http://www.virtualbank.com
I get 6% interest on my checking and I don’t need millions of dollars to get that rate. Nor do I have the restrictions of a CD.

I would think if you had millions you could definitely negotiate for better interest rates with any financial institution. You might even consider tax advantages in bonds when deciding where to put your money.

" I can get something like 5-6% interest on it per year"

In the states, they just charge more interest on long loans.
So, might be 7% interest on loans & then they can pay 5% on savings. Keep 2%.

However, if you have an acct in the US, your acct is only insured to $100,000. So if you have 22M you would have to get 220 accounts to have them all insured. heh.

I don’t know the answer to the OP but Dr Jackson said that you can earn interest in large checking accounts, at least in the US, this is not legal. By law a bank can not pay interest on a checking account. Banks in an effort to fight savings and loan buisnesses were granted the right to set up what is called a W.O.W.(I don’t remember what that stand for) account which is basically a savings account that earns intrest which you can also write checks out of, kinda a hybrid account.

When I got my account here in Montana, USA, the bank offered me an account option that was called “interest checking”. Maybe it was really a WOW account in disguise, but they called it a checking account.

If you keep your money in your paypal acct you can get 5.5% interest…

LifeWillFall -
“Regular” checking accounts are known as DDA’s (Demand Deposit Accounts). Interest bearing checking accounts are known as NOW (Negotiable Order of Withdrawal) accounts. There is a difference in how these accounts are booked on the bank’s general ledger (DDA’s are booked on the checking side, NOW’s are usually booked on the savings side), so technically you are right. In practice, however, there is absolutely no difference between a DDA and a NOW account. Your point, while valid, is moot.

Dr. J is right about the function differences between a DDA and a NOW. But just so you will know that your are not crazy, LifeWillFall, the NOW accounts, way back when (70’s? early 80’s?) imposed a limit of something like three checks/other withdrawals per month.

Since this was in the olden days when everyone got their cash for the week with a big check written out to the grocery store, it didn’t make that big a difference.

Manny - Are you sure your not thinking of Money Market accounts instead? Here is Title III of the Depository Institution Deregulation and Monetary Control Act of 1980 which established NOW accounts:

There is no provision in the act for a limit on the number of withdrawals. In fact, the only exclusion mentioned in the act was for-profit entities. Money Market acounts, OTOH, have always had a limit on the number of withdrawals during a particular timeframe (as usual, the specific number and timeframe are not defined by the Feds leaving banks to figure out how to best comply. Industry standard is no more than 3 two-party checks and no more than 3 teller cashed checks per statement period). As a matter of fact, the penalty for writing too many checks from your Money Market is to have it converted to a NOW account. One of my responsibilities in the late '80’s was Money Market compliance. I don’t recall ever having withdrawal limits on NOW accounts, though.

That might be it, Doc. That’s the time line I was remembering, and NOW accounts may not have trickled down to the community banks that I was using (and still existed) back then.

I was just a little town back then, not the major metropolis that I am today!

Thanks for clearing that up.