A savings account is a smart place to keep your emergency fund or any money you might want to use toward short-term financial goals, like an upcoming big purchase. The cash will be safe and somewhat accessible, but you won't earn much interest. If you want your money to grow over time without investing risk, then A High-yield savings account can help.
These types of accounts offer a much higher annual percentage yield (APY) than standard savings accounts, so they're a great option for those looking to earn a little more money to save for later use.
What is a high-yield savings account and how does it work?
A high-yield savings account is a type of savings instrument that you can open at many banks and credit unions. But it differs from a traditional savings account in that it offers an APY that is 10 to 20 times higher than the national average.
Currently, the average national savings rate is 0.43%, according to the Federal Deposit Insurance Corporation (FDIC), while some U.S. Best savings accounts Offer rates are at or above 5%.
Aside from the difference in interest rates, high-yield savings accounts operate like standard savings accounts. The bank may ask you to fill out an application and make a minimum cash deposit to open the account. The bank then pays you interest, in the form of APY, on the money you deposit.
While you can withdraw cash from any type of savings account, it's best to allow the money to remain in the account to grow over time.
“High-yield (savings) accounts are designed to encourage saving,” says Tara Alderete, director of corporate learning at Harvard University. International money management. “So there may be more restrictions on accessing your money, such as not having a debit card or a limited number of withdrawals for example.”
The power of a high-yield savings account
Let's say you open a standard savings account with an APY of 0.17%, and you make an initial deposit of $1,000. If you don't make any more deposits for a full year, you'll earn $1.70 of your money back.
Now let's assume another bank is offering an APY of 2% that accrues daily. With the same deposit, you earn $20.20 After one year. Although these profits are still relatively small, your money can grow faster simply by choosing a different savings account.
Best uses for a high-yield savings account
A high-yield account may be a good option for anyone Looking to save money “For a large purchase, a short-term or medium-term financial goal, or cash you want to keep safe,” says Alderete. For example, you can store money in a high-yield account to:
- Emergency savings fund: With your emergency funds in a high-yield savings account, you'll have access to money when you need it. And every extra dollar you earn with a higher APY can come in handy when paying for unexpected forecasts.
- Short-term financial goals: If you're planning a vacation in three to six months or need to save for repairs to your home, earning more from a high-yield savings account can be incredibly helpful in covering these costs. Also, keeping your savings in a dedicated account can make it easier to track your goal.
- Great purchase: Making a larger down payment when purchasing a car, for example, can help you get a more manageable interest rate. Any extra money you can earn in a high-yield savings account can help with this, or can even be put toward your monthly payments.
Other savings vehicle options
There are many advantages to having a savings account, but it is not a good idea to keep all your money there.
“It's probably not the best way to achieve a long-term savings goal like retirement,” says Alderete, because interest rates on savings accounts typically won't beat the rate of inflation. For a long-term nest egg, a tax-advantaged retirement account or regular brokerage account can provide more room to grow.
If you meet your short-term savings goal and have extra money to spare, you may want to consider putting the money in a fund Certificate of Deposit (CD). A CD is a type of savings account that holds your money for a specific period of time (known as a term), ranging from a few months to a few years. In return, the issuing bank pays a fixed interest rate throughout the term. This interest rate is usually higher than what high-yield savings accounts offer.
After opening the CD, you cannot deposit additional funds into it, nor can you make any withdrawals. but Take advantage of a CD on a high-yield savings account “With a CD, you can lock in a specific interest rate and revisit the account once the term is up,” says Liz Ewing, CFO of Goldman Sachs' Marcus. “(Although) if you withdraw your money before the CD term expires, you could pay a penalty.”
What to consider when looking for a high-yield savings account
When shopping for a high-yield savings account, here are some key factors to consider:
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APY is a number that represents how much interest you can earn in a year on any money you deposit into the account. APY too Compound interest. This means you'll earn interest on your existing balance, including any additional interest you earned previously that year.
A higher APY is generally better because you will earn more, but you must compare the APY to the requirements to earn a return.
“Some banks will require you to open a checking account in addition to a high-yield savings account,” Ewing says. Some banks also require that you have a certain balance to earn APY, which we'll cover later. You need to consider whether you can meet the minimum balance to get the best return.
Account fees
Some financial institutions charge fees such as monthly maintenance fees and minimum balance fees. “(Fees) can eat into any interest earned,” Ewing says. You may be able to avoid these additional costs if you maintain a certain balance, but your best bet is to look for an account that doesn't charge you any fees at all.
Initial deposit
Check how much you will need to deposit to open a high-yield savings account. Some financial institutions allow you to open the account with no money and fund it later, which can be useful if you're just starting to earn and save money for the first time.
Minimum balance
Some banks and credit unions tie your interest rate to the amount of money in your account, typically rewarding a higher balance with a higher APY. Sometimes, you will be charged a fee if you do not meet the minimum. Take the time to compare your bank's minimum balance requirements to ensure you can deposit enough money to get the best APY and avoid any fees.
Complex frequency
Your financial institution may compound interest daily, monthly, quarterly, or annually, depending on the bank and account. “Accounts that accumulate frequently will help you earn more,” Ewing says.
Deposit insurance
Wherever you decide to put your money, make sure it's either a bank Insured by the Federal Deposit Insurance Corporation (FDIC) Or a pre-insured credit union National Credit Union Association (NCUA). These institutions provide bank failure coverage of up to $250,000 per person per account.
Withdrawal options
Some banks limit the number of withdrawals you can make from your account each month. Although the Fed He withdrew With this rule during the pandemic, banks are allowed to continue enforcing those limits.
It's important to know your bank's rules on withdrawals when comparing high-yield savings accounts.
Other financial offers
Financial institutions that offer high-yield savings accounts may not offer many other services. For example, they may not make mortgages, credit cards, and personal loans. So, before opening an account, consider whether it is important for you to do all your banking in one place.
Pros and cons of a high-yield savings account
A high-yield savings account provides a higher rate of return on your money than standard savings accounts. But some of these accounts charge fees, require minimum balances, and offer variable interest rates that can rise and fall over time.
It's important to shop around and learn about these pros and cons before opening an account.
Pros
- High interest rates
- Returns unrelated to market fluctuations
- Insured against bank failure
- Compounds of interest
- Easy access to funds
cons
- Interest rates may change
- Withdrawal restrictions
- Possible fees
- Transfers between accounts may be delayed
- Inflation can erode profits over time
What is the difference between a high-yield savings account and a regular savings account?
The biggest difference between these accounts is that high-yield savings accounts offer rates that range from 10 to 20 times the average savings rate.
You'll typically find these high-yield accounts at… Online institutions Instead of traditional banks. To get the best rate, you may have to meet minimum balance requirements, make a minimum deposit, or deal with withdrawal limits. Regular savings accounts are readily available at both online and brick-and-mortar institutions, and are unlikely to require a minimum balance or minimum initial deposit.
The trade-off is that they offer lower interest rates.
Ready meals
Keeping your money in a high-yield savings account is a small but important way to ensure that your money is safe, accessible, and can earn a strong interest rate. With these extra earnings you can generate from your account APY, you can use them to help pay for everyday purchases or save for other short or long-term goals.
As you think about where Open your next accountYou should consider banks' offerings, limitations and whether they will support your financial goals.
