The Superiority of High Interest Savings Accounts for Holding Your Money
If you want to keep your cash secure and watch it grow, placing it in a savings account is a smart move. However, with the average interest rate on savings accounts at a lowly 0.23% as of March 1, 2023, you won't see much of an increase in your funds. Whether you've set some cash aside for a luxurious vacation in Rio or for your retirement, there are ways to earn more on your savings while keeping it in a low-risk place. One such way is by opening a high-yield savings account.
High-yield, also known as high-interest, savings accounts differ from standard savings accounts as they typically offer considerably higher annual percentage yields (APYs). As of March 2023, some high-yield savings accounts offered APYs of up to 4.55%. Whether you opt for a traditional bank, online bank, or credit union, these accounts offer liquidity, accessibility, and low investment-related risks. However, you may need to meet a sizable initial deposit requirement or maintain a significant balance to enjoy these tempting rates.
To help you decide where to keep your funds, this guide covers crucial information, including what high-yield savings accounts are, how they work, the benefits and drawbacks to consider, and what to look for when selecting a high-yield savings account. You'll also learn how to open one, how it compares to a certificate of deposit (CD), and answers to frequently asked questions.
In essence, high-yield savings accounts are savings vehicles that function like traditional savings accounts but offer higher interest rates and better returns than traditional checking accounts. They're worth considering because even a difference of 1-2% can add up, thanks to compounding interest, which means the interest you earn starts earning interest and helps your funds grow substantially. The highest rates are often offered by online banks or credit unions, and depending on the financial institution, your high-yield savings account will typically be insured by the FDIC or NCUA for up to $250,000 per depositor.
Similar to regular savings accounts, high-yield savings accounts have withdrawal limitations of up to six times per month. However, withdrawing beyond this limit may result in fees being charged. It's worth noting that due to the coronavirus pandemic, the federal regulation enforcing this limit has been lifted. Therefore, institutions can now establish their own restrictions, so it's best to check with your institution to be sure.
If you're tired of the minimal interest rates provided by savings accounts, consider a high-yield savings account. The average interest rate for standard savings accounts is currently at a mere 0.23%, with some of the largest banks paying only around 0.01%. If you deposit $5000 in such an account, you'd only earn 50 cents yearly, which is unsurprisingly disappointing.
High-yield savings accounts, also known as growth savings accounts, can provide larger-than-average returns on money while still providing easy access to the funds. These accounts work in the same way as traditional savings accounts, with you making an initial deposit, sharing personal information, and then adding or withdrawing funds as you need up to a capped limit.
These accounts may come with minimum balances and monthly fees, although they can be found at online banks, which have lower overhead costs and may pass the savings on to you. Funds in high-yield savings accounts may also be protected by FDIC or NCUA.
Utilizing a high-yield savings account can provide higher returns for short-term financial goals while still maintaining easy access to the deposited funds. Financial institutions use the money deposited into these accounts for a variety of other purposes, such as loans, hence the interest paid compensates for the ability to do so.
Overall, high-yield savings accounts can be utilized for a range of savings objectives, similarly to other savings accounts.
Establishing an Emergency Reserve
Creating an emergency fund is an excellent place to start to provide a safety net for any unforeseen automobile or household repairs. It is recommended to have three to six months’ worth of living expenses saved, but it is possible to begin with less and accumulate more over time.
Saving for a Valuable Item
You may be saving money for a significant purchase such as a car, cruise, or down payment for a house. A high-yield savings account can be a secure place to store the funds while accruing interest.
Saving Unneeded Funds
A high-yield savings account can also be a valuable place to deposit any extra cash lying around. Whether you have acquired a tax refund or sold goods on eBay, instead of leaving the money in your checking account with zero interest, consider depositing it into a high-yield savings account.
Setting up additional savings accounts can aid in organizing your money. It may be useful to have separate accounts for reaching different goals, such as future educational expenses and paying estimated taxes on any side hustle. A high-yield savings account will help you save towards each goal and accrue interest in the process.
Advantages of a High-Yield Savings Account
Opening a high-yield savings account has several benefits such as:
- • A high-interest rate, usually many times that of a traditional savings account or CD.
- • The security of depositing funds for short- or medium-term goals such as building an emergency reserve or saving for a down payment, wedding, or another purpose.
- • No fees, a zero-cost option provided by online banks.
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Disadvantages of a High-Yield Savings Account
Despite its advantages, a high-yield savings account may not be suitable for long-term savings such as retirement. It might not be able to compete with other financial products such as stocks or mutual funds. Additionally, certain requirements such as a minimum deposit or direct deposit may be necessary.
What to Consider in a High-Yield Savings Account
When considering a high-yield savings account, look for these factors:
Annual Percentage Yield (APY)
APY is the most essential factor to look at in a savings account. It determines the interest you will earn in one year. Some accounts may advertise an introductory rate that is only available for a limited time, so be aware of these terms.
Minimum Deposit Required
You may need to make an initial deposit to open a high-yield savings account. Always ensure that you can comfortably afford the minimum deposit required before proceeding.
Minimum Balance Requirements
Many banks require you to maintain a minimum balance to keep your high-yield savings account open. Violating this rule can result in fees or lower interest rates. Ensure that you can consistently maintain the minimum balance.
Fund Deposits and Withdrawals
The procedures for depositing and withdrawing funds differ among financial institutions. ATM access, online transfers, wire transfers, and mobile check deposits are some of the options available. Some banks may limit withdrawals to six per month.
A balance cap sets a limit on the amount of money that can earn interest at the high-yield account rate. For instance, if an institution offers 3% interest and a balance cap of $2,000, you will only accrue interest on the first $2,000 and not on any additional deposits.
You should know the bank fees, if any, associated with your high-yield savings account. You can avoid paying these charges by keeping your balance above the minimum threshold or by reducing your monthly withdrawals.
Links to Other Accounts
Be aware of the limitations on linking your high-yield savings account with accounts held at other financial institutions. It is possible that there may be a waiting period or restrictions on account connections.
The process for withdrawing funds from your high-yield savings account can be complex or time-consuming. Ensure that you understand the withdrawal policies. For example, is it possible to withdraw funds from an ATM? Contact your financial institution for more information.
Interest Compounding Method
Banks have the discretion to compound interest daily, monthly, quarterly, annually, or at other intervals. Frequently compounding interest can increase your yield, so it is advisable to compare the APY to the annual interest rate.
Recommended Read: 52 Week Savings Challenge
Opening a High-Yield Savings Account
If you are interested in opening a high-yield savings account, find out if your current bank offers one. This option may be the simplest and quickest. If not, research different accounts and interest rates and prepare the required information such as your driver’s license, SSN, and bank account details. Most high-yield savings accounts can be opened online with this information.
CDs versus High-Yield Savings Accounts
A certificate of deposit (CD) is another way to grow your savings. CDs pay higher interest rates than standard savings accounts, but have a specific term during which access to funds is restricted. Interest rates are usually better for longer terms. Withdrawing money before the CD matures can result in a penalty. CD interest rates are guaranteed, whereas savings account interest rates fluctuate.
If you're looking for a savings option that will earn you higher interest rates than regular savings accounts, a Certificate of Deposit (CD) may be a good choice, provided you don't need access to your money for several months or years. To make the most of your hard-earned money, consider opening a SoFi Checking and Savings account for no account fees and a competitive APY on qualifying accounts, especially if you sign up for direct deposit. The SoFi Bank Debit Mastercard allows you to conveniently spend and save your money in one place, while Vaults and Roundups offer additional options to maximize your returns. While high-yield savings accounts are generally considered safe and FDIC-insured, a high rate of inflation may offset whatever interest you earn, and some financial institutions may impose restrictions on minimum balances and withdrawals. If you're willing to forego some convenience in exchange for higher potential earnings, a high-yield savings account can be a viable option for you. However, it is essential to always consider your specific goals, financial situation, and needs before making any investment decisions."
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