What is a high-yield savings account?

A high-yield savings account is a savings account that pays higher interest rates than those offered on traditional savings accounts. A high-yield savings account can be a good option if you want to save for a home, car, home improvement project, or another long-term goal. They are often offered by online banks that have lower operating costs, allowing them to pass those savings on to customers in the form of higher interest rates. However, traditional banks and credit unions may also offer high-yield savings accounts.

How does a high-yield savings account work?

The specific features of high-yield savings accounts vary from one financial institution to another. Depending on the account you open, you may see benefits such as no minimum balance requirements, free transfers, no monthly maintenance fees, or online account management and digital banking tools.

In addition to offering a better interest rate, high-yield savings accounts can function very similarly to traditional savings accounts. You deposit money and let it grow in the account, but you can access it and withdraw it without penalty, at least to a reasonable extent.

Advantages and Disadvantages of High-Yield Savings Accounts

Before opening a high-yield savings account, you should consider all the advantages and disadvantages.

Advantages:

• Earn more interest: The interest on a high-yield savings account is high, meaning you will receive a greater return on your money.
• Low risk: The Federal Deposit Insurance Corporation (FDIC) insures deposits up to $250,000, including those in high-yield savings accounts.
• No additional fees: Many high-yield savings accounts offer no monthly fees or minimum balance requirements. However, some accounts may impose fees, so it is important to read the terms and conditions carefully before committing.

Disadvantages:

• Fluctuating interest rates: Interest rates on high-yield savings accounts are variable. They can change at any time and depend on the economy.
• Not ideal for long-term wealth: While a high-yield savings account can help achieve short-term savings goals, it is not ideal for long-term investing. Other accounts, like 401(k) and IRA accounts, are usually better options for retirement savings because they come with tax advantages and offer the potential for greater gains.
• Withdrawal limits: You can access your money in a high-yield savings account, but you are usually limited to a certain number of withdrawals before you incur fees.

Can you lose money in a high-yield savings account?

There is no investment or savings option that is 100% risk-free, but high-yield savings accounts definitely fall on the safe side. High-yield savings accounts are insured by the Federal Deposit Insurance Corporation (FDIC) for deposits up to $250,000. Your money will be insured up to that limit regardless of what happens in the economy.

However, that does not mean that the economy cannot affect your money. The FDIC insures deposits against bank failures, not falling interest rates. Of course, you won’t lose the money you saved if rates drop, thanks to the FDIC. But you also won’t receive the interest rate you were expecting.

It’s good to remember that the interest you earn, whether small or large, is taxable income as stated by the Internal Revenue Service (IRS).

Key features to look for

Like any other financial product, it can be helpful to compare offers from various banks and financial institutions since not all high-yield savings accounts are the same in terms of terms and conditions. Of course, you will want to look for the best interest rate, but make sure you also have reasonable access to your money.

Alternatives

For High-Yield Savings Accounts

There are other investment options that have the potential to earn more than high-yield savings accounts. Consider these alternatives:

• Certificates of Deposit (CDs): A certificate of deposit requires you to lock your money for a specific period until maturity. This period can be one year or up to five years. You will receive a guaranteed higher interest rate in return.
• Individual Retirement Accounts (IRAs): IRAs are designed for retirement savings goals. They come with early withdrawal penalties, but they can help you save more than a high-yield savings account depending on how you invest. IRAs also have tax advantages.
• 401(k) Accounts: A 401(k) account is an employer-sponsored retirement plan. It allows you to save money for retirement with tax benefits, just like an IRA. Employers often match your contributions to a 401(k) account. You can open a 401(k) account individually if you are a business owner or self-employed.
• Money Market Accounts: A money market account is a high-yield savings account that offers some of the same features as a checking account. You can access the funds you save there using a debit card or check as much as you like.

Conclusion

Opening a high-yield savings account is straightforward and similar to opening a checking account or a traditional savings account. You will generally fill out an application online or via a mobile app. You will provide some basic personal information, including your name and Social Security number, along with information from your government-issued ID, such as a driver’s license or passport.

Most banks and credit unions that offer high-yield savings accounts will perform a soft credit inquiry instead of a hard inquiry when you open an account. Your credit score is not affected by the soft inquiry.

That’s it. Start depositing your money and saving toward the goal you have in mind.

Key Points

• A high-yield savings account typically has a higher interest rate than a traditional savings account, allowing your money to grow at a faster rate.
• Many high-yield savings accounts do not charge monthly fees or have minimum balance requirements.
• Alternatives to high-yield savings accounts include CDs, IRAs, 401(k) accounts, and money market accounts, but you may face early withdrawal penalties with some of these options.

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Source: https://www.thebalancemoney.com/what-is-a-high-yield-savings-account-5214823