Have you heard about high-yield savings accounts? They probably sound appealing, but you may have put off opening one because you don’t understand how they work, or you may think there’s some sort of catch.
However, there are very few downsides to high-yield savings accounts, and they have big advantages.
Read on to learn more about high-yield savings accounts, and why you should open a new online savings account today.
What is a high-yield savings account?
High-yield savings accounts are very similar to traditional savings accounts. They are separate bank accounts from your checking accounts. You would generally use a high-yield savings account to save up for certain goal or a rainy day.
Yet, high-yield savings accounts offer a much higher annual percentage yield (APY) than regular checking and savings accounts. This helps your money grow over time.
According to Brandon Renfro, a fee-only financial planner, opening a high-yield savings account makes your money work harder for you.
“As the name suggests, high-yield savings accounts will pay you a much higher rate of interest than your checking account,” he said.
Most high-yield savings accounts are only offered by online financial institutions, so you won’t have access to a physical branch. But that tradeoff can be worth it since they have a higher return and fewer fees.
Why open a savings account?
If you already have a checking account or a savings account with a brick-and-mortar bank, you may not think that opening a high-yield savings account is worth the trouble. But opening a new account can pay off in three big ways:
1. You’ll earn much more interest
When you stash your money in a savings account, you expect your money to grow over time. Unfortunately, you might be in for a depressing surprise if you use a regular savings account. According to the Federal Deposit Insurance Corporation (FDIC), the national average annual percentage yield (APY) is just 0.06%.
To put that in perspective, let’s say you saved $1,000 in a savings account with that measly interest rate. After five years, your account would have increased to $1,004.51; you’d get less than $5 in interest growth.
High-yield savings account offer a much higher rate of return. For example, if you opened a high-yield savings account with a 1.60% interest rate and deposited $1,000, your balance would grow to $1,082.60 over the course of five years. With the higher rate, you’d earn over $84 purely from interest!
|Savings Account||High-Yield Savings Account|
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2. You’ll build a savings habit
Why open a savings account? Life has a habit of sneaking up on you at the worst times. Whether your car gets a flat tire on your way home from work or your dog gobbles your socks and needs surgery, emergencies happen. Unfortunately, we’re rarely prepared for them.
According to the Federal Reserve, 39 percent of Americans wouldn’t be able to pay for a $400 emergency with savings. Instead, they’d have to borrow money or use a credit card, or they wouldn’t be able to cover the cost at all.
If you don’t have money tucked away in a savings account, you’re in a vulnerable position. If something bad happens — and it inevitably will at some point — you’ll be left scrambling to pay the bill.
Opening a new savings account and setting up automatic contributions can help you prepare for the worst. Even if you only deposit a few dollars each week, you can start building a safety net that you can rely on when times are bad.
3. You’ll reach your goals faster
What’s the problem with checking accounts or stashing cash in an envelope under your mattress?
The money is too accessible. If a sale pops up or a new must-have phone launches, you can empty out your cash quickly, making it difficult to keep up your savings habit.
Having a separate savings account can help you stay focused on your goals. And, thanks to federal regulations, you can only make six withdrawals from a savings account per month.
“The advantage is that you’ll be less likely to dip into your savings for routine purchases since that will involve a different account,” said Renfro.
“If the money were all in the same account, the psychological barrier wouldn’t be as high.”
Because there’s a limit on how often you can move your money over, you’re less likely to spend it on something unnecessary. Whether you want to save into an emergency fund (go you!), splurge on a European vacation, or buy a car, a new high-yield savings account can help you reach your goals faster.
Managing your money
Opening a new savings account is a smart way to build your bank account and plan for future goals. By taking advantage of high-yield savings accounts, you can help your money grow at a faster rate. And with a higher APY, your new account will do a lot of the heavy lifting for you.
Want to build your savings even faster? Open a Chime savings account. Chime offers a high-yield Savings Account to help you make your money grow faster with a 17X¹ higher APY compared to traditional banks. Every time you make a purchase or pay a bill with your Chime Visa Debit Card, that transaction is automatically rounded up to the nearest dollar. The extra change is deposited right into your Automatic Savings Account app. Over time, that extra money can add up without you even noticing it.
Are you ready to switch to a new savings account? We thought so!
¹The average national savings account interest rate of 0.09% is determined by the FDIC as of Feb 18th, 2020 based on a simple average of rates paid by all insured depository institutions and branches for which data are available. Visit https://www.fdic.gov/regulations/resources/rates/ to learn more.