A couple of weeks ago I received a reader question about high-interest savings accounts, so I thought I’d dedicate a blog post to talk about them. We’ll go over what they are, when to use them, and how to pick one!
What is a high-interest savings account?
Many folks keep their extra savings either just sitting in their checking account or in a savings account at the same bank as their checking. These accounts typically come with a low interest rate somewhere between 0.01 and 0.1%.
A high-interest (or high-yield) savings account is what it sounds like. It’s an account that will earn you a higher-than-average interest rate on your saved money. This means more money in your pocket. It could be a lot more.
Let’s say you have $5,000 hanging out in your bank’s savings account earning 0.1% interest (this is being extremely generous; my Chase savings account earns 0.01%). Over the course of the year, you would earn $5. Now let’s say instead you put that that same $5,000 into a high-interest savings account earning 1% interest. In this case, you’d earn $50 over the same time period—or 10 times as much.
How to compare high-interest savings accounts
Typically, high-interest savings accounts from brick-and-mortar have come with some restrictions such as high minimum balances or fees. However, given the competitiveness of online banking, it’s become increasingly easy to find a high-interest savings account that fits your needs and is super accessible!
When comparing high-yield savings accounts you’ll want to compare a few things:
- Interest Rate: The higher the better.
- Required Initial Deposit: This should be an amount that you feel comfortable with. It’s not uncommon to find accounts that require $1- $100.
- Minimum Balance: This will be the amount of money the bank will expect you to keep in the account. Make sure this is realistic for you, otherwise you could incur fees. Again, it’s not uncommon now to find accounts that only require a minimum balance of $0-$100
- Fees: Is there a fee for maintaining your account or for specific situations, such as dipping below the minimum balance?
- Accessibility: If you need to access funds from this account, how long can you expect for it to take?
Between me and Cassie we have had high-yield accounts with a few different banks over the past few years.
I currently have a Marcus high-yield online savings account which earns 0.60% APY (it started at 2.35% when I opened it 2 years ago, but the current economic situation has led to dropped interest rates on savings accounts). I like this account because the website is super easy to use and they have solid communication and customer service.
Cassie and I also keep our joint savings in an Ally online savings account which earns 0.80% APY (this has also dropped since we first opened it, but obviously far exceeds the 0.01% we would earn in our bank’s savings account). Ally’s website is also super easy to navigate and use and they have some neat features, like tracking accounts at outside institutions. Ally also uses Zelle, so transferring money in and out of the account is very fast.
We each previously also had an HSBC Direct Savings Account but found their user interface less than stellar and also had negative experiences with their customer service help (or lack thereof).
Each of these have no monthly fees and minimum deposits/balances of $1 or less.
When should I use a high-interest savings account?
Like any savings account, you can only make withdrawals from your high-yield account six times per month. Because of this (and the fact that it’s your savings account) you’ll want to only put money in this account that you don’t plan on using anytime soon.
It’s a good idea to keep your emergency fund and any sinking fund money that you don’t plan on using for a while in a high-yield savings account. This will let that money work for you and earn you more money.
Since many of these accounts may take 2-3 days to transfer to your checking account, there’s the added protection of it not being immediately accessible. This “out of sight, out of mind” approach to savings can be super effective if you find it hard to not dip into your savings when tempted to splurge.
Also, if you’re someone who has extra money each month but isn’t comfortable investing yet, a high-interest savings account is a good option. Your money is FDIC insured, plus you’ll be earning a bit of interest.
So, whether you’re saving for a down payment, a big vacation, or peace of mind – put that money to work in a high-yield account.
Now that you now the basics, I want you to open a high interest savings account this week and set up automatic deposits to it, even if it’s just a buck or two.