What Is A High-yield Savings Account?

Are you missing out on making money on your savings? By storing money in a traditional savings account, you are lucky to earn more than .05% APY. With the evolution of online banks and modern technology, there has been increased competition in high-yield savings accounts, which offer a higher interest rate than traditional savings accounts.

What Is It?

While we try to find a low interest rate for our auto loan and mortgage, it is the opposite for savings. High-yield savings accounts offer a higher annual percentage yield (APY) than traditional savings. Every .01% is more money in your pocket. In this savings category, you will see interest rates start around 1% and range up to 5-7%. The higher the rate, the more you earn by depositing any sum of money and letting it sit.

If you deposit $5,000 into a traditional savings account, you may earn around $20 in a year. With a high-yield savings account, that same amount could grow an additional $200. That’s easy money! Note: Interest earnings are subject to taxes.

Pros

Flexible Access

Even though the words “high-yield” are in front, it still acts and operates like a savings account. In contrast, other saving opportunities (like a certificate of deposit) require a locked-in term. If you decide to pull the money before that term is up, you are subject to penalties. With a high-yield savings account, you are welcome to pull out the money whenever you need it.

Insured!

Depositing money into a high-yield savings account with a covered institution means it is insured by the NCUA or FDIC up to $250,000. If your financial institution goes under, this money will be returned to you. Any other means of investments, like a brokerage account, is at the whims of the economy. If you invest in a certain stock, there is a chance you retain less than what you invested or lose all of your money. Securing your money in a high-yield savings account is a safe investment option.

Cons

Rates May Change

If you deposit your money into a savings certificate, you choose a term and lock in the interest rate being offered. No matter what happens during the term, the money is locked in at the guaranteed rate you agreed to on day one. When you choose a high-yield savings account, the rate may change at any point. It is up to the discretion of the financial institution.

No Debit Card Access

High-yield savings accounts usually aren’t linked to a checking account. Because of this, you don’t get a debit card to pay for purchases or make withdrawals. To access your money, you need to link the account to another account, either a traditional savings account or a checking account. Some financial institutions will provide an ATM card for your high-yield savings account, so you can access your funds via an ATM.

How To Choose

  1. Decide why you are saving money. Which financial goal are you trying to reach? Are you building an emergency savings? Do you want to make a vehicle purchase or save for a house down payment? Once you make this determination, you can choose a high-yield savings account and financial institution that aligns with your goals.
  2. Compare interest rates. High-yield savings accounts have competitive rates that are constantly fluctuating.
  3. Review the account agreement. There may be a minimum required for certain accounts or limited withdrawals.
  4. Pick the best one for you and open one!