A savings account is an extremely common type of bank account, and it’s a great place to keep cash you need easy access to (such as your emergency fund). You can add or withdraw money from a savings account any time, which isn’t the case for every type of bank account. But you have options when it comes to choosing one. Let’s take a look at high-yield savings accounts and learn what differentiates them from a standard savings account.
What is APY?
APY stands for annual percentage yield, and this is how banks and financial institutions describe how much return you’ll get on your savings account balance over the course of a year. “Yield” is just another word for interest.
For a very simple example, if you have $10,000 in a savings account with an APY of 1% (and both your balance and the APY remain the same), you’ll earn $100 in a year. If your balance grows, you’ll earn more interest. If the APY increases (and these do fluctuate), you’ll earn more interest. And if you leave the interest you earn in the account, it will compound; this is when you earn interest on top of your interest, growing your balance.
If you have a regular savings account, it likely pays a very low rate APY. As of this writing, the average rate on savings accounts is just 0.23% APY. But you can find high-yield savings accounts paying upwards of 4% (or more) APY. That’s what makes these accounts an even better place for your money. And many of them are offered by online-only banks.
Online-Only Banks
Traditional brick-and-mortar banks have big names and physical branch locations, where you can go in person and do business with a bank teller. Online-only banks offer the same products (bank accounts, mortgage loans, and so on), but without a physical presence. These banks exist only on the internet, and they can offer higher APYs on accounts because they don’t have physical buildings to maintain – less overhead. You can still get help from a bank employee, you’ll just have to do so via the phone or an online portal. These banks also have robust mobile apps to help you manage your money. You can find the best ones by turning to the internet and personal finance review websites.
You might wonder if these banks are a safe place for your money. They are, provided they have FDIC insurance. The Federal Deposit Insurance Corporation was founded during the Great Depression, and it insures consumer deposit bank accounts for up to $250,000 per account and per depositor. This means that if your bank fails and you have less than $250,000 in a checking, savings, CD, or money market account, all of that money will be returned to you. It’s crucial to check that any bank you’re considering doing business with is part of the FDIC. You can search for your bank using the FDIC’s BankFind tool.
Savings Accounts vs. Investing
A savings account is a good place for your emergency fund (or other money you need to keep in cash for the near term). It’s also ideal for money you’re saving for a specific purpose, such as buying a home. You won’t be exposed to any risk this way, meaning you won’t lose that money the way you might if you invested it. If you put your home down payment fund into a brokerage account, the value will fluctuate, and you could end up in the position of needing to withdraw it when the market is down.
Be Sure You Can Access Your Money
One potential problem with online-only savings accounts is that it may be more difficult to physically take money out. Remember, these banks don’t have branches you can visit to withdraw your money. Some have ATM networks, but you’re limited in how much you can withdraw from an ATM on any given day, and if it’s time to buy a home and you need that down payment, you may need to find a workaround to get your money. This could involve transferring it to a brick-and-mortar bank account and then withdrawing it. If you have questions or concerns about how to access your cash, contact the bank for guidance.
A high-yield savings account can be a great addition to your personal finance toolbox. Take the time to read reviews of different accounts available, ensure the one you’re interested in is FDIC-insured, and plan ahead when it’s time to take money out, so you can do so when you need to.