Do you have an emergency fund or savings for any short-term goals? While money should be invested in stocks if you won't need it for a while, cash that youmight need access to within five years or so should be kept in safe accounts, like a savings or money market account.
The problem is, while you know it's practical to keep youremergency savings, a vacation fund, or a home down payment in these safe accounts, it can be downright painful to look at your statements and see the paltry returns your money earns.
Savings account interest rates remain pretty anemic, but some accounts are much better than others. So finding the right one is key to maximizing returns on safe investments.
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Switching your savings account could make a big difference
Recently, finance websiteValue Penguin conducted a review of savings account interest rates for 2018 across major U.S. banks. Their research found vast discrepancies in interest rates, with some accounts with the highest rates paying as much as 145 times as much in interest than those at the bottom of the list.
Specifically, a dozen big banks had interest rates starting as low as 0.01%, including some of the biggest names in the nation. Yet one more generous bank offered an annualized percentage yield (APY) of 1.45%.
The difference can be surprising. If you had $10,000 invested and left the money in your account without adding anything to it, you'd end up with $10,002 after two years in an account at 0.01% interest, assuming accountinterest was compounded monthly. But, if you had $10,000 invested for two years at 1.45%, you'd end up with $10,294.07 if you added nothing, assuming again that interest compounds monthly.
That extra $292 may make it worth switching your account over.
Should you switch your savings account to earn higher returns?
While some banks pay more interest than others, you shouldn't necessarily always pick the savings account offering the highest rate. There are other factors to consider. For example:
- What's the minimum balance required?If a high-yield savings account pays a more generous amount of interest but requires a $5,000 initial or ongoing balance, the account won't be very useful to you if you only have $2,000 saved.
- Are there fees?Fees of any sort can quickly eat up any interest you earn, especially since interest rates are low even on the most generous accounts. Find out all circ*mstances under which a savings account you're considering could charge you. If you can't avoid incurring new fees, you may be better off where you are.
- Will switching your savings account affect other banking relationships?Sometimes, it makes sense to keep all your accounts in one bank -- and not just for convenience, either. For example, you may have your savings account linked to your checking account to provide overdraft protection, or you may get your monthly account fees waived for direct deposits to savings or for maintaining a high combined balance in savings and checking accounts. If so, you don't want to switch and lose the perks you're currently receiving.
- How much hassle is involved in switching accounts?In most cases, it's easy to open a high-yield savings account online and to fund it with money transfers direct from your bank. However, if you have automated contributions to saving set up, it can be more trouble tomake a change because you'll need to alter any financial documents or automated transactions that had the old savings account information.
The amount of money you have invested in savings will also helpyou determine if it's worth moving money over.
If your savings total is small, the difference in annual interest won't be very substantial. So you may not want to go through the process of researching banks and finding the highest rates. But if you have a large amount of savings, moving to a bank paying a better rate of return will make a bigger impact.
Finding the best bank for you
When you're thinking about switching banks, research your options carefully to find a trusted financial institution offering a reasonable rate of return on your savings account.
You can find our picks for the best high-yield savings accounts for 2018 so you'll have a good list to look at.By comparing interest rates, fees, and account requirements, you can find the perfect bank for you.
FAQs
While high-yield savings accounts offer higher interest rates than traditional savings accounts, they may not outpace inflation, potentially eroding your purchasing power over time. As a result, they're not typically recommended for long-term wealth-building or retirement savings.
What's the catch with high-yield savings accounts? ›
Some disadvantages of a high-yield savings account include few withdrawal options, limitations on how many monthly withdrawals you can make, and no access to a branch network if you need it. But for most people, these aren't major issues.
Can I lose my money in a high-yield savings account? ›
You can't lose your money because, just like your regular checking and savings accounts, the money is insured by the Federal Deposit Insurance Corporation up to $250,000. Of course, the APY for any savings vehicle can go up or down, especially if the Federal Reserve changes its benchmark fund rate.
Is there a downside to a high-yield savings account? ›
As easy as it is to withdraw money from a high-yield savings account, there may be limits to the number of withdrawals allowed per month or year. Going over that limit can incur extra fees. Some banks may even close the account if the withdrawals become excessive and don't meet the terms set by the bank.
How much will $10,000 make in a high-yield savings account? ›
If you deposit $10,000 into one of these high-yield savings accounts, you'll earn $500 in interest in a year. If you continue to earn 5.00% APY for a second year, you would make another $500 on your original deposit, plus an extra $25 on the interest you earned in the first year.
Do millionaires use high-yield savings accounts? ›
Millionaires Like High-Yield Savings, but Not as Much as Other Accounts. Usually offering significantly more interest than a traditional savings account, high-yield savings accounts have blown up in popularity among everyone, including millionaires.
What happens if you put 50000 in a high-yield savings account? ›
5% APY: With a 5% CD or high-yield savings account, your $50,000 will accumulate $2,500 in interest in one year. 5.25% APY: A 5.25% CD or high-yield savings account will bring you $2,625 in interest within a year.
Do you pay taxes on high-yield savings? ›
The interest you earn on a high-yield savings account—or any other savings account, money market account or certificate of deposit, for that matter—is subject to state and federal income taxes.
Do you get penalized for withdrawing from a high-yield savings account? ›
Flexibility; you can deposit and withdraw as needed. Typically, no monthly fees. No penalties for withdrawals.
Should I transfer my savings to a high-yield savings account? ›
Not the best choice for long-term savings – High-yield savings accounts offer much better interest rates than traditional savings accounts, but often, you won't earn enough over the long-term to account for inflation. Investments may be a better option for a longer-term, greater yield.
So, regardless of any other factors, you generally shouldn't keep more than $250,000 in any insured deposit account. After all, if you have money in the account that's over this limit, it's typically uninsured. Take advantage of what a high-yield savings account can offer you now.
What happens if you put 10000 in a high-yield savings account? ›
Higher rates: Rates on high-yield savings accounts are approaching 5% right now. That's equivalent to an extra $500 earned on a $10,000 deposit over one year, simply made by transferring funds from a regular account into a high-yield one.
Should I put all my money in a high-yield savings account? ›
Although each financial situation is unique, it doesn't typically make sense for you to keep all of your money in a high-yield savings account. After all, most high-yield savings accounts limit withdrawals to only six per month, so a checking account is typically a better place to store your spending cash.
What is a good amount to put in a high-yield savings account? ›
Calculate the right savings threshold
Many personal finance experts recommend saving at least three to six months' worth of expenses. But this could also vary based on if you experience income fluctuations and other personal factors.
Should I put my money in a high-yield savings account or money market? ›
A money market account gives you more access to your money in the form of direct checking and ATM withdrawals, but it will generally provide a lower interest rate. A high-yield savings account pays a much higher interest rate, but you have transfer limits and few, if any, accounts let you directly spend money.
Is it better to invest or have a high-yield savings account? ›
With a high-yield savings account, you can save for short-term goals and emergency expenses, both of which can benefit from the lack of risk associated with bank accounts. But if you want to build wealth for the future, investing has the potential to give you better returns in the long run.
How long should you keep money in high-yield savings account? ›
A high-yield savings account can be a great place to store your emergency savings. Most experts suggest that you should keep between three and six months' worth of expenses in your emergency account at all times.
Are high-yield savings accounts safe in a recession? ›
Even if interest rates dip during a recession, a high-yield savings account will typically earn several times the national average for savings accounts. The national average is 0.35% annual percentage yield, and some high-yield accounts are currently offering 4% APY or more.
