In the last decade, savings accounts have developed quite a bad reputation for not giving us much of a return in interest. However, the formerly snail-paced interest rates are perking up. High-yield savings accounts are becoming a popular option for savers to tuck away money and have it accrue more interest than it would in a standard savings account.
Here, we'll explain some of the benefits of using a high-interest savings account, and how you can ensure that you are placing your money in the best location for your needs.
Higher Interest Rates
Let’s first start by breaking down how the interest rate on a high-yield savings account differs from the average standard savings account.
The interest rate on a standard savings account is roughly .02 percent. The interest rate on a high-interest savings account can range from 1 to 1.35 percent.
What impact does this make? Let’s say that at the start of the year you have $10,000 in savings. With the high-interest savings account, the balance will be $10,135.84 (assuming a 1.35 percent interest rate), but in a traditional savings account, the balance would be $10,001.00 (assuming a .01 percent interest rate).
With a high yield savings account, you just made a little over $130 without lifting a finger. That’s not even taking into account any additional funds you might add to the account over the course of that year.
When looking for a high-yield savings account with the best interest rate, you might want to check out online banks. These banks tend to offer more than a brick-and-mortar bank since they have lower overhead.
You also want to look at the frequency of compounding. In other words, how often interest is accrued. Some high-interest savings accounts compound daily, some monthly, some quarterly, some annually. You will receive a greater yield the more often compounding occurs. Ideally, you want to find an account that compounds daily.
Ease of Withdrawing or Transferring Money
Many high-yield savings accounts allow you to easily transfer the money between that account and, say, your checking account. With a CD, on the other hand, you are charged a penalty fee if you withdraw the money before it matures.
The ease of withdrawing money is why high-interest savings accounts are an ideal location for an emergency savings fund, that way you can easily access funds in a pinch.
No or Low Fees
High-interest savings accounts also tend to offer low or no fees. Some banks have a monthly maintenance fee, but you may find that it is waived if the account balance is over a certain amount.
If you cannot find a bank that is free of fees, do a little math to determine whether or not the amount you’d pay in fees exceeds the amount you’d earn in interest. If the fees are greater than the interest, then it’s not worth it.
Safe Investment
Another benefit of a high-yield savings account is it provides you with a safe place to invest your money. These accounts are required to be insured by the FDIC and the National Credit Union Association for up to $250,000.
What does this mean for you? This means that you have no risk of losing your money. All your money can do here is increase.
Key Takeaway
A high-yield savings account offers a higher interest rate than the standard savings account and works as an ideal place to stash money for an emergency savings fund or for saving up for a big purchase such as a home or vehicle. But do a little research: different banks offer different compound rates and fees. You’ll want to find the option that works best for your particular needs.
Resources:
1. https://www.creditkarma.com/advice/i/high-yield-savings-accounts/
2. https://www.investopedia.com/articles/pf/09/high-yield-savings-account.asp
4. https://www.oaken.com/5-benefits-of-a-high-interest-savings-account/
5. https://www.bankrate.com/banking/savings/best-high-yield-interests-savings-accounts/
6. https://www.gobankingrates.com/banking/savings-account/high-yield-savings-accounts/
7. https://www.fool.com/the-ascent/banks/blog/when-should-you-open-a-high-interest-savings-account/
