Do you have an emergency fund or savings for any short-term goals? While money should be invested in stocks if you won't need it for a while, cash that youmight need access to within five years or so should be kept in safe accounts, like a savings or money market account.
The problem is, while you know it's practical to keep youremergency savings, a vacation fund, or a home down payment in these safe accounts, it can be downright painful to look at your statements and see the paltry returns your money earns.
Savings account interest rates remain pretty anemic, but some accounts are much better than others. So finding the right one is key to maximizing returns on safe investments.
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Switching your savings account could make a big difference
Recently, finance websiteValue Penguin conducted a review of savings account interest rates for 2018 across major U.S. banks. Their research found vast discrepancies in interest rates, with some accounts with the highest rates paying as much as 145 times as much in interest than those at the bottom of the list.
Specifically, a dozen big banks had interest rates starting as low as 0.01%, including some of the biggest names in the nation. Yet one more generous bank offered an annualized percentage yield (APY) of 1.45%.
The difference can be surprising. If you had $10,000 invested and left the money in your account without adding anything to it, you'd end up with $10,002 after two years in an account at 0.01% interest, assuming accountinterest was compounded monthly. But, if you had $10,000 invested for two years at 1.45%, you'd end up with $10,294.07 if you added nothing, assuming again that interest compounds monthly.
That extra $292 may make it worth switching your account over.
Should you switch your savings account to earn higher returns?
While some banks pay more interest than others, you shouldn't necessarily always pick the savings account offering the highest rate. There are other factors to consider. For example:
- What's the minimum balance required?If a high-yield savings account pays a more generous amount of interest but requires a $5,000 initial or ongoing balance, the account won't be very useful to you if you only have $2,000 saved.
- Are there fees?Fees of any sort can quickly eat up any interest you earn, especially since interest rates are low even on the most generous accounts. Find out all circ*mstances under which a savings account you're considering could charge you. If you can't avoid incurring new fees, you may be better off where you are.
- Will switching your savings account affect other banking relationships?Sometimes, it makes sense to keep all your accounts in one bank -- and not just for convenience, either. For example, you may have your savings account linked to your checking account to provide overdraft protection, or you may get your monthly account fees waived for direct deposits to savings or for maintaining a high combined balance in savings and checking accounts. If so, you don't want to switch and lose the perks you're currently receiving.
- How much hassle is involved in switching accounts?In most cases, it's easy to open a high-yield savings account online and to fund it with money transfers direct from your bank. However, if you have automated contributions to saving set up, it can be more trouble tomake a change because you'll need to alter any financial documents or automated transactions that had the old savings account information.
The amount of money you have invested in savings will also helpyou determine if it's worth moving money over.
If your savings total is small, the difference in annual interest won't be very substantial. So you may not want to go through the process of researching banks and finding the highest rates. But if you have a large amount of savings, moving to a bank paying a better rate of return will make a bigger impact.
Finding the best bank for you
When you're thinking about switching banks, research your options carefully to find a trusted financial institution offering a reasonable rate of return on your savings account.
You can find our picks for the best high-yield savings accounts for 2018 so you'll have a good list to look at.By comparing interest rates, fees, and account requirements, you can find the perfect bank for you.
FAQs
While high-yield savings accounts offer higher interest rates than traditional savings accounts, they may not outpace inflation, potentially eroding your purchasing power over time. As a result, they're not typically recommended for long-term wealth-building or retirement savings.
How much will $1,000 make in a high-yield savings account? ›
Earnings after one year on $1,000 in a high-yield savings account
| APY | Interest earned annually on $1,000 | Total ending balance |
|---|
| 4.25% | $43.34 | $1,043.34 |
| 4.50% | $45.94 | $1,045.94 |
| 5.00% | $51.16 | $1,051.16 |
| 5.25% | $53.78 | $1,053.78 |
2 more rowsJul 24, 2024
High-yield savings accounts earn you more money than brick-and-mortar bank accounts do. But often, you still won't earn enough to keep up with inflation. Even though your account balance rises, your buying power decreases.
Can I lose my money in a high-yield savings account? ›
As long as you're banking with an FDIC-protected bank, you're not risking losing your money when you deposit it into a high-yield savings account. However, the rate of inflation can be higher than your APY, resulting in a negative real return, or the return after taxes and inflation are taken into account.
Do millionaires use high-yield savings accounts? ›
Millionaires Like High-Yield Savings, but Not as Much as Other Accounts. Usually offering significantly more interest than a traditional savings account, high-yield savings accounts have blown up in popularity among everyone, including millionaires.
Should I transfer my savings to a high-yield savings account? ›
Should I put all my money in a high-yield savings account? Most HYSAs limit withdrawals to six per month, which could make it hard to access funds. And while the return is better than a traditional savings account, it won't provide the growth necessary for long-term wealth compared to stocks and bonds.
How much will $50,000 make in a high-yield savings account? ›
5% APY: With a 5% CD or high-yield savings account, your $50,000 will accumulate $2,500 in interest in one year. 5.25% APY: A 5.25% CD or high-yield savings account will bring you $2,625 in interest within a year.
Can you live off of a high-yield savings account? ›
It's possible, but it isn't realistic for everyone. Living off of interest relies on having a large enough balance invested that your regular interest earnings meet your salary needs. Rest assured that you don't need to earn a million dollar paycheck to reach your goal.
How much will 100k make in a savings account? ›
At a 4.25% annual interest rate, your $100,000 deposit would earn a total of $4,250 in interest over the course of a year if interest compounds annually. Annual total: $104,250.
What is the downside to a high-yield savings account? ›
As easy as it is to withdraw money from a high-yield savings account, there may be limits to the number of withdrawals allowed per month or year. Going over that limit can incur extra fees. Some banks may even close the account if the withdrawals become excessive and don't meet the terms set by the bank.
The Bottom Line. If you're wondering where to put your money in a recession, consider a high-yield savings account, money market account, CD or bonds. They can provide safe places to store some of your savings.
Do you pay tax on a high-yield savings account? ›
The interest you earn on a high-yield savings account—or any other savings account, money market account or certificate of deposit, for that matter—is subject to state and federal income taxes.
How much is too much cash in savings? ›
How much is too much? The general rule is to have three to six months' worth of living expenses (rent, utilities, food, car payments, etc.)
Should I put all my money in a high-yield savings account? ›
Although each financial situation is unique, it doesn't typically make sense for you to keep all of your money in a high-yield savings account. After all, most high-yield savings accounts limit withdrawals to only six per month, so a checking account is typically a better place to store your spending cash.
Can I withdraw all my money from a high-yield savings account? ›
However, the Federal Reserve Board currently allows consumers to make unlimited withdrawals. Most HYSAs are also FDIC-insured up to $250,000 per account, so your money will always be safe no matter what happens with the economy.
Is a $10,000 deposit into a high-yield savings account worth it? ›
According to data from the FDIC, the average savings account earns 0.45% APY. Currently, however, the best high-yield savings accounts offer APYs of around 5.00%. If you deposit $10,000 into one of these high-yield savings accounts, you'll earn $500 in interest in a year.
Is it better to invest or have a high-yield savings account? ›
With a high-yield savings account, you can save for short-term goals and emergency expenses, both of which can benefit from the lack of risk associated with bank accounts. But if you want to build wealth for the future, investing has the potential to give you better returns in the long run.
How much should you keep in a high-yield savings account? ›
For savings, aim to keep three to six months' worth of expenses in a high-yield savings account, but note that any amount can be beneficial in a financial emergency. For checking, an ideal amount is generally one to two months' worth of living expenses plus a 30% buffer.
