So you’ve set a budget, cut unnecessary expenses, and found ways to earn extra income. You finally have some money to save. Good work!
Now the question is, where are you going to put that money?
If you just let it accumulate in your current account – or worse, put it under your mattress – your money won’t work to its full potential. You want to grow your savings!
Depending on your goals, you can save in different ways. You will put your money in a 401(k) or an IRA if you are saving for retirement. If you’re looking to help towards your child’s future tuition bill, you might want to stash your money in a 529 savings plan.
But if you’re saving money for a rainy day or trying to boost that emergency fund, a high-yield savings account is the perfect place to store your coins.
What is a High Yield Savings Account?
An interest rate of 0.6% may not seem like much, but let’s look at a concrete example.
If you put $10,000 in a savings account that pays 0.06% interest, you’ll earn $6 in interest by the end of the year.
If you had the same amount of money in a high-yield savings account paying 0.6% interest, you would earn $60 in interest by the end of the year. That’s $54 more to inflate your savings.
Over the past two years, interest rates have been historically low. This means it is cheaper to borrow money, but the interest rates attached to savings accounts and CDs are also depressed.
During times of higher interest rates, a high-yield savings account can earn 2% or even 3% interest.
How to Use a High Yield Savings Account
Typically, you’ll put money into a high-interest savings account for the same reasons you would use a traditional savings account. High Interest Savings Accounts are stable savings vehicles for the money you’ll want to access over the next five years.
Open a High Yield Savings Account for purposes such as:
- An emergency fund
- A down payment on a new car
- A down payment on a house
- great vacation
- Future wedding expenses
- Business start-up costs
Benefits of High Yield Savings Accounts
High yield savings accounts are often a better choice than traditional savings accounts because you earn more interest on your money.
Your money won’t grow as fast as it could if you invested it, but there’s no risk of losing your savings if your account is with an FDIC-insured bank or credit union. provided by the NCUA.
Also, if you open your high-yield savings account at an online bank or at a bank separate from your main checking account, it may take up to a day or two to transfer money from your account to to spend it. This extra waiting period can help you avoid dipping into your savings on a whim when you see a sale at your favorite store.
Disadvantages of High Yield Savings Accounts
Some high yield savings accounts have minimum deposit requirements or minimum balance requirements, which means you will need a certain amount of money to open your account and you cannot drop your balance below a certain amount without encountering any charges. Your account may also charge a monthly maintenance fee.
Just like regular savings accounts, the financial institution may have restrictions on how often you can withdraw or transfer money from your high interest savings account.
If you’re transferring money from your high-yield savings account to your checking account, you may have to wait a few days for the transfer to complete, which can be inconvenient if you need to access your money immediately.
How to Choose the Best High Yield Savings Account
With so many options available for high yield savings accounts, it can be difficult to decide where to open a new account.
Ensuring you get the highest return on your savings is a smart money move, but you’ll want to consider other factors when opening a high-yield savings account. Here are four things to think about.
1. Online banking vs traditional banking
One of the first things to decide is whether you want to save your money in a traditional bank or in an online bank only. In the past, online banks offered better interest rates, but traditional banks have become more competitive.
You may prefer to be able to go to a physical location to speak with a banker in person. Or maybe you prefer the 24/7 convenience offered by online banks.
If you opt for an online savings account, find out online bank belongs to an ATM network that allows you to use another bank’s ATM to deposit or withdraw funds for free. If not, you need to figure out how you can deposit or withdraw your money. If you plan to make wire transfers from your checking account, make sure that the two accounts will be linked.
2. Are your savings insured?
No matter where you open your account, make sure the money you keep in that account is insured.
If you open your account at an FDIC-insured bank, the federal government will insure your money up to $250,000. If your account is with an NCUA-insured credit union, the National Credit Union Share Insurance Fund will insure your money – also up to $250,000.
3. Minimum balance and account fees
Before you open your account, you need to know if your account requires a minimum balance. Some accounts only charge interest as long as you hold a certain balance, and others may charge a fee if you drop below that minimum amount. You will also want to check if the account issues monthly maintenance fees.
And while the whole point of putting your money in a high-yield savings account is, well, to save, there will come a day when you will have to tap into these funds. Find out if your account has rules about how often you can withdraw or transfer money out of the account.
4. How much interest you will earn
The APY is the number you really want to know when opening a savings account. It takes into account how often interest is compounded in a year – whether daily, monthly, semi-annually or annually – and therefore indicates the total amount of interest you will earn in a year. . The more frequently the interest is compounded, the more returns you will earn.
Nicole Dow is a senior writer at The Penny Hoarder.
This was originally posted on The Penny Hoardera personal finance website that empowers millions of readers across the country to make smart decisions with their money with practical, inspirational advice and resources on how to earn, save and manage the money.