Not all savings accounts are created equal. While your bank's basic savings account helps you stow away cash safely for a rainy day, it won't do much to grow your funds or achieve any larger financial goal.
If you're looking to boost your savings, a high-yield savings account may be an option. A high-yield savings account often pays 10 times or more than traditional savings accounts.
For example, in May 2022, the Federal Deposit Insurance Corporation (FDIC) reported the national average APY on a basic savings account was 0.07%, while some high-yield savings accounts were offering 0.85% APY - over 12 times more in interest.
Is a high-yield savings account right for you? Before you make any major financial decisions, make sure you shop around and compare high-yield savings accounts.
Here's what you need to know about high-yield savings accounts and how they can play a role in your financial wellbeing.
How a high-yield savings account works
A high-yield savings account works the same as traditional a savings account, only they typically have a higher interest rate and therefore accrue interest more quickly.
Here's what that process looks like:
You deposit money into the account. There may be a minimum balance you're required to keep.
The bank pays you interest. Interest compounds daily, monthly, quarterly or annually (depending on your bank) and is added to your account balance.
You make withdrawals from the savings account as needed. Many high-yield savings accounts limit the number of withdrawals you can make in a certain period.
There are also often fees associated with high-yield savings accounts. These might include maintenance fees, service fees, withdrawal fees and more.
Make sure you compare you take all of these rules and limitations into consideration before you commit to opening a high-yield savings account.
3 benefits of high-yield savings accounts
The biggest advantage of a high-yield savings account is the rate at which interest accrues. This can allow you to grow your savings and achieve financial goals quicker.
Here's a look at all the benefits a high-yield checking account has to offer:
The interest rate is higher than traditional accounts. High-yield savings accounts often have APRs 10 times higher (or more) than your typical savings account. Your balance grows faster, and you benefit even more from compounding interest.
You can withdraw your money easily. Though some high-yield savings accounts limit the number of withdrawals you can make within a given period, accessing your money is still fairly easy. Many accounts even offer debit cards. These can be helpful if you ever need funds in a pinch.
There's no risk. While other financial vehicles could generate bigger gains (investing in the S&P 500 earns about 10.5% annually, for example), they're also highly subject to market fluctuations and there's always the risk of loss. Growing your funds in an FDIC-insured savings account, on the other hand, is virtually risk-free. As long as your balance is under $250,000, your funds are protected - no matter what may happen in the markets, according to the FDIC.
There aren't many drawbacks to high-yield accounts other than the fees and withdrawal limits they sometimes come with. You also may be required to keep a minimum balance.
Where to find the best high-yield savings accounts
Rates on high-yield savings accounts are variable, meaning they change based on market conditions, Federal Reserve policy and the economy over time. Rates can also vary by financial institution, depending on their overhead costs and other factors.
To make sure you're getting an account with the best rate, you should:
- Check with your bank, credit union or brokerage first. Many financial institutions offer high-yield savings accounts. Start with the companies you already do business with and find out what they have to offer.
- Consider online banks. Online banks have fewer overhead expenses, which may allow them to offer lower fees and higher APYs than brick-and-mortar institutions. Popular online banks include SoFi, Ally, Varo, and Marcus.
- Compare more than just rate. You should also take into account any fees, withdrawal limitations and minimum required balances when choosing which bank to go with.
Just make sure you're choosing a financial institution that is FDIC-insured. This protects you (and your savings) in case the bank goes under.
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