High-Yield Savings Account

If you currently have cash sitting in a traditional savings account, or you recently increased your savings and want to know where you should keep your cash, consider a high-yield savings account. Traditional savings accounts offer very low interest rates. In contrast, a high-yield savings account may offer 15 to 25 times the interest rate offered by a normal savings account, so it is well worth considering and utilizing.

Interest Rate, Annual Percentage Yield (APY)

The interest rate offered by a high-yield savings account will vary depending on the economy. When the Federal Reserve increases the interest rate, then high-yield savings accounts typically follow. That being said, my high-yield savings account interest rate as fluctuated from as low as 0.4% to 3.3% over the last 10 years. That means for every $1,000 in the savings account you can expect to earn between $4 to $33 per year or $0.33 to $2.75 per month. That may not seem like much, but when you consider a traditional savings account, which probably would return $0.01 to $0.16 per month for every $1,000, then increase is significant. Additionally, keep in mind this is the return per every $1,000, so if you have $10,000 at 3.3%, then you are looking at $27.50 each month in interest. This interest will then begin to earn interest, so the second month will earn interest on $10,027.50, which means you will receive $27.57 the next month. Each month, you will have a larger principal amount earning interest. This concept is known as compound interest. The best financial advice I can give is exploit compound interest whenever possible.

When choosing a high-yield savings account, APY is a key consideration. It should weigh heavily into your selection criteria; however, there are other considerations. What other factors should you look at when choosing a bank at which to open a high-yield savings account?

Bank Fees

Choose a bank that has no monthly fees and no monthly minimum balances. Ideally, you will always maintain a healthy level of savings, but if you need to remove funds to cover a large expense, then you do not want to have to pay fees for the balance dropping below a set point. Most savings accounts will have a maximum number of withdrawal transactions per month that you can make without incurring a fee. For example, you may be limited to 6 withdrawals every month. If you exceed this number, you will be subject to a fee. Since you should not be consistently withdrawing funds from your savings account, this should not be a major issue, but it is something you should know.

Accessibility of Funds

Many high-yield savings accounts are offered by banks with minimal physical footprints. In other words, the banks deal primarily in online banking, which saves costs by eliminating the need for brick-and-mortar locations and leases. However, this means your money is less accessible. At the end of the day, you can conduct an electronic transfer to your checking account and have access to funds in around 1-3 days. If you want to be able to go to a physical location, then take into consideration the banking locations in your area. Because of the ease of online banking, I would weight the interest rate or APY above accessibility. One way to increase your accessibility is open a high-yield savings account at a bank that you already have a checking account with. Transfers between accounts at the same bank are typically processed much faster. Even if your checking account is at a bank with limited physical locations, you will be able to withdrawal funds transferred from your high-yield savings account to your checking account by going to an automated teller machine (ATM).

Bonus Offers

Many banks offer bonus offers periodically. These bonus offers may be in the form of a set amount that your receive after opening an account. For example, you may receive $150 simply for opening an account and keeping it open for a set period of time. Alternatively, the bonus offers may be tiered, meaning the bonus you receive is proportional to the amount of money you put in the account. The first tier may be $1-$5,000, and the second tier may be $5,001-$15,000. Finally, if you know someone who already has an account at the bank you are interested in, then see if there is a referral bonus. Your friend may be able to provide you with a referral link. When you use the link, one or both of you may be eligible to receive a cash bonus.

Conclusion

High-yield savings accounts offer immensely better return rates than traditional savings accounts. I recommend everyone utilize a high-yield savings account to store cash in a highly liquid and easily accessible form. The biggest consideration is the interest rate or APY, but you will also want to look at fees, accessibility, and bonus offers. The bottom line is do not let your money sit in a traditional savings or checking account earning essentially nothing. Inflation means the value of money is lessening over time; therefore, if your money is not earning more money, it is losing value and purchasing power.