Finding High-Yield Savings Accounts
The annual percentage yield (APY) refers to the amount of interest that the money in your savings account can earn over a year. High-yield savings accounts typically offer a higher APY than traditional savings accounts because the money compounds, earning interest on the money you save and interest on interest, helping you reach your savings goals faster. A high-yield savings account is also a safe place to store your money as it is considered a compound under federal government protection.
When looking for the best APY and a high-yield savings account for you, look for accounts that offer high interest rates and low fees. Excessive fees can quickly eat away at your savings potential.
Online Banks vs. Urban Banks
Online banks tend to offer the best APY due to lower overhead costs. As there are no branches to maintain, there are fewer staff to pay. This means they can pass those savings on to you through higher interest rates. Online banks also typically charge fewer fees, allowing you to keep more of the interest your money earns.
Banks vs. Credit Unions
Banks and credit unions may differ in the amount of interest they pay on your deposits and the fees they charge. Credit unions are nonprofit institutions owned by members (customers). They typically offer the same products and services as large banks but impose eligibility requirements for joining. As a member, you will usually enjoy higher interest rates on savings accounts and lower loan rates and fees compared to large banks.
Large banks often have more branches and can offer specialized products like student loans and brokerage services. While some large banks may offer competitive interest rates higher than some credit unions, they typically impose higher minimum balance requirements. Your money is backed by the federal government with either a bank or a credit union as long as the institution is insured.
Fees and Other Costs That Affect APY
High yields are just one part of the equation when searching for an account to store your money. Here are some other things to consider before making your decision.
Fees
Fees are one way financial institutions make a profit. Paying excessive fees may impact the annual yield on your deposits, or you may even see your savings account balance decrease each month. The fees for high-yield savings accounts can range from none at all to $35. Identifying your banking needs and shopping around to compare terms and fees can help you find the best high-yield savings account for you.
Minimum Balance Requirements
Some high-yield savings accounts may require a minimum deposit to open. They may also require you to maintain a continuous minimum balance to benefit from the higher APY.
For example, an account may offer a 1.50% APY with a $2,500 minimum opening deposit and a $2,500 minimum balance requirement. So, if your balance falls below $2,499.99, the interest drops to a 0.05% APY. Being fully aware of the requirements will help ensure you make the most of your high-yield savings account.
Average Savings in the United States
A well-funded savings account can be beneficial when unexpected expenses arise that can strain your finances. Financial experts often recommend having at least three to six months’ worth of expenses saved for emergencies.
According to
A survey conducted by the Federal Reserve magazine in 2019 found that the average American household had a median balance of about $5,300 across their checking and savings accounts. The time it takes to reach the average amount depends on your savings rate. Some budgeting methods, like the 50/30/20 rule, recommend saving at least 10%-20% of your income.
If you reach the median amount of $5,300, this is the kind of return you can expect from a high-yield savings account with a 1.00% APY that compounds monthly.
Use this formula:
A = P(1+r/n)^nt
A = the total amount you are trying to determine
P = the initial principal of $5,300
r = convert the interest rate to decimal format 0.01 (divide 1 by 100)
n = number of months to compound (for example, 12 months = 12 times a year)
t = total interest earned in one year
Plug in the numbers:
A = 5300(1+0.01/12)(12 x 1), then calculate it.
Your total should be around $5,353. This means you could earn about $53 in one year on your money if you made no withdrawals or added additional funds.
How to Open a High-Yield Savings Account
Most high-yield savings accounts you’ll encounter will be online. Most financial institutions make opening an account simple, so here’s what you can expect:
Creating an account: Visit the institution’s website and set up an account. This process typically involves providing your name, email address, creating a password, and adding a phone number.
Filling out an online application: You’ll need to verify your identity. This usually means providing information such as your driver’s license or passport, date of birth, Social Security number, and address.
Adding money to the account: Some banks may require an initial deposit when opening a new account.
Frequently Asked Questions
What is a high-yield savings account?
A high-yield savings account allows you to store your money securely and pays a higher interest rate than traditional savings accounts at conventional banks. Although interest rates vary from bank to bank, the best high-yield savings accounts often pay about 18 times higher than the national average for savings accounts.
When should you use a high-yield savings account?
Placing money in a high-yield savings account should be just one part of your savings portfolio. Determining how much cash you need to access quickly can help you decide how much to keep in the high-yield savings account compared to other investment accounts such as certificates of deposit. When planning for the future, it’s also essential to consider long-term retirement account options like 401(k) or IRA.
Source: https://www.thebalancemoney.com/how-to-find-the-best-high-yield-savings-account-5524682
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