Rewards Checking Account Math

Back in July, I debated whether or not to use my credit union’s rewards checking account. I’ve been using it for a few months now for my emergency fund and some other small savings accounts.

So how exactly do these accounts work? Mine works as follows:

  • I earn Q% on the first $M in the account.
  • I earn H% on any funds above $M in the account.
  • I need at least one ACH transaction in the qualifying period and D debit card transactions to get the qualify Q% and H% rates. In my calculations, I will assume that this happens.

At first I thought it only made sense to keep $M of savings in this account, but then I started looking at the math.

These calculations assume that the alternative to placing your savings in the rewards checking account is in an online savings account earning 1.00% or S%.

The base formula for calculating how much you should keep in the rewards checking account beyond $M is:

(i) $M x Q% + $X x H% = ($M + $X) x S%

If we solve for $X, we get:

(ii) $X = $M x (Q% – S%) / (S% – H%)

So to maximize the interest on your savings, you should keep $M + $X of savings in your rewards checking account.

I was surprised when I ran the numbers on my account – $X actually turned out to be more than double $M. But I did the math for both sides of (i) and it was correct.

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