Having a savings account is an important step for anybody invested in their financial security and well-being. However, with the growing interest in stock trading and cryptocurrencies, some people may be asking whether savings accounts are still worth it. Indeed, findings from a survey reported by Time found only 21% of all respondents reported taking advantage of high-yield savings accounts — and Time is calling it a missed opportunity. A move to a high-yield savings account may be a move worth making now that there’s a recession caused by COVID-19; this has sent interest rates plummeting. A high-yield savings account may yet buffer your earnings from the dip.
What Are High-Yield Savings Accounts?
What exactly are high-yield savings accounts? While most people expect their money to grow in just any savings account due to interest rates, high-yield types offer a much higher return than others. In fact, the highest yielding accounts can earn you over 16 times more money than regular savings accounts in interest rates, noted as APY (annual percentage yield). As CNBC reports, it is important to note that the APY offered can change at any time you decide to sign up since they change according to the Federal Reserve’s benchmark.
High-yield savings accounts work by using compound interest, which allows your savings to grow quickly. Compared to simple interest rates, compound interest earns on both the principal balance and the very interest it earns. The type of savings account you choose will determine how often your interest rate is compounded. There are some that compound monthly, while others compound as often as daily. Remember that your return will be greater as your interest compounds.
Benefits of a High-Yield Savings Account
There are many benefits to consider when opening a high-yield savings account. Not only does it offer a secure place to keep your savings but you can also meet both short- and long-term financial goals such as funding your education, building emergency savings, planning a wedding, and securing money for medical expenses. The list goes on.
This type of savings account can also offer more flexibility when it comes to withdrawing money. As Marcus’ primer on high-yield savings accounts highlights, you’ll be able to open an account with next to no deposit. Just like any savings account, it is also easier to transfer funds in and out of your high-yield account more than other types of accounts, like a certificate of deposit which may hold your money for long periods. A high-yield savings account lets you grow your money while keeping you liquid, which is a key financial advantage during crises such as the pandemic.
How to Choose a High-Yield Savings Account
Choosing a high-yield savings account will depend on your needs. However, it’s best to start with one for an emergency fund since this money will be kept in the bank indefinitely. You can also keep money meant for other personal and bigger financial goals in this savings account.
Even if you are not set on a specific goal, saving in the right account is a valuable habit to build. It affords one the freedom to make decisions in life. When selecting a high-yield savings account, pay attention to the APY, the minimum balance requirement, fees (if any), and all the other factors. Make sure that it meets your needs and that you can sustain building your savings in such an account.
The Bottom Line
Opening a savings account is one thing, but committing to it is another. Our previous post on ‘10 Financial Wellness Hacks to Reduce Your Monthly Expenses’ details how you can reduce your spending and build a more secure financial safety net, and opening a high-yield savings account is a great way to strengthen your plan. A high-yield savings account will grow your money exponentially more than just a regular savings account and it doesn’t require you to lock your money up for years either. All in all, a high-yield savings account is a good deal.
About the Author
Ashley Burke is a part-time finance writer. She is also a full-time mom and is currently studying economics to further her financial knowledge. She advocates for financial literacy and choco-mint cookies.