Over the past 10 years, there’s been a growth in personal savings in the United States. In just the five years between 2004 and 2019, the percentage of households in the U.S. with savings accounts rose from 47.1% to 52.1% and the median balance of those accounts rose from $3,000 to $5,000.
Most people are using their accounts as an emergency fund, but some are saving up for a big purchase, while others use it as a way to store and grow surplus cash from their monthly budgets. Regardless of the reasons, more people are saving and with the help of high yield savings or money market accounts, they’re saving more. Here’s how you can (and why you should) jump on the high yield savings bandwagon.
What a high yield savings account is and how it works
High yield savings accounts are similar to regular savings accounts: you deposit money, and the bank or institution pays you an interest rate for the privilege of holding that money for you. The reason you earn an interest rate on your savings deposits (and why you typically don’t earn one on checking deposits) is because the intention of this account is to hold your money over a longer period of time. The primary function of checking accounts is to facilitate the spending of money.
Since the intention of savings accounts is to grow your savings over time, the federal government limits the number of withdrawals from savings accounts to six per monthly cycle. Some institutions may also require a minimum deposit to open an account and maintain a minimum balance. There may also be fees associated with a savings account.
High yield savings accounts typically earn higher interest rates than standard savings accounts. How much higher? Rates vary between institutions but the national averages are: 0.4% (high yield) vs. 0.06% (standard). This might not seem like a big difference at first, but remember that your money is meant to stay in the account for a long period of time. And it compounds either daily or monthly, which means you’re earning interest on your previous earnings.
Take this example:
- Deposit: $1,000
- Time: 1 year
- Compounding rate: monthly
- Interest rate: 0.06%
- Money earned: $7.22
High Yield Savings
- Deposit: $1,000
- Time: 1 year
- Compounding rate: monthly
- Interest rate: 0.40%
- Money earned: $49.07 Note: This example assumes you make no additional deposit to your account.
As you can see, by putting your money in a high yield savings account you can grow your money almost 6 times faster (sometimes 20 times faster) without doing anything differently. And because of the nature of compounding, the more money you add to your account, the faster it grows.
How opening a high yield savings account benefits you
Keeping money in a checking account is important so you have access to fast cash and investing some of your money in the market is important to help your savings grow. But it’s also important to have a reservoir of cash saved in the case of an emergency or a place to save money for a large purchase. And by placing your money in a high yield savings account, you’ll be able to reach your savings goals faster without any additional effort on your part.
How to choose where you open your high yield savings account
There are many places that offer high yield savings accounts, from traditional banks to online banks, and even some Health Savings Account (HSA) providers. So cast a wide net when searching for options and make a spreadsheet because every institution is going to offer something different. Across the top, put the names of the companies you’re considering and along the left margin put the following:
- Initial deposit requirement
- Interest rate
- Annual percentage yield (APY)
- Minimum balance
- Service fees
- Compounding schedule (the more often your money compounds, the more you’ll earn)
Some other points to consider:
- Is there a waiting period during which you can’t withdraw your money?
- How do you withdraw your money? Is the process cumbersome?
- Is the interest rate you’re quoted a promo rate or is it the standard rate? Some companies will offer you a higher interest rate on higher balances and some will pay you a higher interest rate at first then drop you down to the standard interest rate after a period of time.
- Does the institution allow you to create links between your high yield savings account and your other accounts?
Once you’ve completed your spreadsheet, compare the accounts’ details to determine the right fit for your money.
The inherent risk in opening a high yield savings account
Some high yield savings accounts are FDIC-insured, and some are not. FDIC insured means that the Federal Deposit Insurance Corporation (FDIC), an independent government agency, protects your bank deposits and will reimburse any losses up to $250,000. High yield savings accounts that are considered “investment accounts” cannot be FDIC-insured by law because no one can guarantee earnings on an investment account. If you choose to open a high yield account that isn’t FDIC-insured, there is some inherent risk that you could lose your money if the company goes under. This is the same situation as with any brokerage account you would have.
However, as long as you choose a reputable institution, the likelihood that you lose your money is very low. In addition, compared to most traditional investment accounts, a high yield savings account is still a relatively low-risk way to grow your money faster than traditional savings accounts and with little-to-no maintenance on your part.
High yield savings accounts and Health Savings Accounts (HSAs)
If you have an HSA and you don’t want to invest your contributions in the market, you might want to consider rolling your current HSA into one that also functions as a high yield savings account. That way, you can grow your health savings more quickly, allowing you to save for a medical rainy day and even retirement.
If you’re interested in the many ways you can grow your health savings with Lively, reach out to us today.
Disclaimer: the content presented in this article are for informational purposes only, and is not, and must not be considered tax, investment, legal, accounting or financial planning advice, nor a recommendation as to a specific course of action. Investors should consult all available information, including fund prospectuses, and consult with appropriate tax, investment, accounting, legal, and accounting professionals, as appropriate, before making any investment or utilizing any financial planning strategy.