High-Yield Savings Accounts: Everything You Need To Know

What is a savings account | Are savings accounts safe | Benefits of a savings account

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Let's talk about high-yield savings accounts: what they are, why you should have one, and other various pieces of information, including what to look for in a savings account's interest rate (APY). I hope I will convince you to open a savings account if you don't have one already.

What is a High-Yield Savings Account?

A high-yield savings account is a savings account, a type of bank account where you can store money, such as an emergency fund, that generally earns better interest than your checking account and other brick-and-mortar savings accounts. However, it does not provide the potential growth, or the potential risk, of an investment account.

A high-yield savings account is usually stored in an online bank, with an interest rate being the biggest draw-in because it typically offers 15 to 20 times the rate of brick-and-mortar banks.

Related Post: Your Emergency Fund: Are You Saving Enough?

Savings accounts are insured up to $250,000 by the Federal Deposit Insurance Corporation (FDIC) at banks and credit unions by the National Credit Union Administration (NCUA). This means if you have a balance up to $250,000 in your savings account, and something happens to the bank, your money is safe.

I use CIT Bank's Online Savings Builder Account for my emergency fund for their competitive interest rates and ease of access to my money.

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How Does a High-Yield Savings Account Work?

Unlike Certificates of Deposit (CDs), savings accounts are liquid, allowing you to access your money at any time. This makes savings accounts an excellent place to stash money you're saving for a rainy day.

That said, some savings accounts will limit how many transfers or withdrawals you can do in a month to six times. This limit excludes ATM withdrawals if your bank offers you an ATM card for your savings account.

Why Have a High-Yield Savings Account?

A high-yield savings account generally has a higher interest rate than a checking account and other savings accounts. In fact, online high-yield savings accounts typically have up to 20 times, or more, interest earned than a traditional savings account. They are competitive with money market accounts as well and generally have a very small, if no, minimum balance requirement.

By earning interest, you're getting extra money, without the risk of an investment account, for storing into savings. This can be handy, for example, for saving for a dream vacation, a car, or a down payment on a new home.

Online savings accounts also tend to have lower fees. The reason for this is because online banks have fewer overhead costs.

Do High-Yield Savings Accounts Have Fees?

Some savings accounts will have a monthly maintenance fee if you don't maintain a minimum balance. My personal recommendation is never to use a savings account that has a maintenance fee. One key reason I use CIT Bank for my online savings account is that they have zero maintenance fees and zero bank transfer fees.

If you're paying to use a savings account, you're earning a less effective interest rate – or you may be losing money each month.

Other fees include ATM fees. Some banks will charge you a fee to use their ATM at ATMs outside of your bank's network. Others will refund any ATM fees that you incur.

Some banks might charge for wire transfers. When shopping for a savings account, look for minimal to no fees.

Are High-Yield Savings Accounts Worth It?

Absolutely! A fundamental reason for having a savings account is saving for an emergency. And by maximizing the interest you're earning, your savings grows faster over time.

Oftentimes when making financial goals, a high-yield savings account is the first place to start storing money. This is partly because online savings account interest rates are high enough that you can earn noticeable money each month on even smaller balances.

Are High-Yield Savings Accounts Safe?

The majority of financial institutions are insured, keeping your money safe up until a limit. Most banks are FDIC-insured, and most credit unions are NCUA-insured, up to $250,000 per depositor, per bank.

That means if you have less than $250,000 in your savings account, in an insured bank or credit union, your money is safe.

How Do You Set Up A High-Yield Savings Account?

To set up a high-yield savings account, you'll first want to research banks. Online high-yield savings accounts are generally the best to have, and I look for benefits such as an easy website to use outstanding customer service, the ability to get my money in and out of the account, and high interest rates.

Savings Builder

I also prefer the ability to set up automatic transfers so that I can save regularly while on autopilot.

My personal bank of choice for a high-yield online savings account is CIT Bank. They provide a competitive interest rate, great customer service, easy-to-use website, and easy access to my money.

You'll create an account and provide all necessary information such as:

  • Driver's license or government ID
  • Social Security number
  • Recent residential addresses
  • Email address
  • Date of birth
  • The bank account number and its routing number of the bank you'll use to fund your savings account

Once you provide that information, you may be asked some additional information and/or agree to the bank's terms. Then if everything is approved, you'll set up a user ID and password to the online bank and start the process of funding your new account.

How Much Should I Have In My High-Yield Savings Account?

An emergency can take a toll on you and your family. It's recommended that you have between 3 and 6 months of living expenses in savings in your emergency fund. If your household has one income, it's wise to lean towards six months of expenses saved.

If your household has two or more steady incomes, it's generally safe to lean closer to 3 months, though up to 6 months is still not a bad idea. Either way, put your money in a high interest savings account.

Related Post: 8 Amazing Ways How To Save $10,000 In A Year

What Is A Good High-Yield Savings Account Interest Rate?

In July 2020, the national average for an online savings account is just over 1%. Brick-and-mortar banks average only 0.09% APY. This is a reason why online savings accounts are so popular.

Higher savings accounts interest rates compound your money much quicker, and an online bank generally offers interest rates 15 to 20 times higher than a brick-and-mortar bank.

CIT Bank offers competitive rates for those that save regularly. As of this writing, CIT Bank, an online bank, offers its top APY whenever you deposit $100 or more each month or maintain a $25,000 or more balance. Open an account and start creating savings goals!

There are no monthly fees, regardless of your balance. CIT Bank's savings builder account is my current bank of choice for ease of use, competitive rates, and the encouragement for me to save each month via their high APY incentive.

Why Do Online Banks Pay More Interest?

Online banks don't have to maintain branches, saving them a lot on overhead costs. These savings are then passed on to customers in the form of interest, which is why online banks have savings accounts that offer high interest.

Why Have A Checking And Savings Account?

I firmly believe that you should have a separate checking and savings account. This is true even if your checking account offers attractive interest rates.

Why? By separating your money and having a checking and savings account, you can better discipline yourself with saving money. You can use your checking account to pay bills such as paying your credit card, and you can use your savings account to secure an emergency fund or save for a future investment such as a car or house.

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Why not simply have a savings account? Savings accounts often limit the number of transactions you can make per month (before paying a fee) to 6. This limits how often you can withdraw money, such as paying bills.

Use a checking account for everyday expenditures and a savings account to keep your money growing and safe.

When Should You Open Your First Savings Account?

You might be wondering when you should open your first savings account. The simple answer is, “As soon as possible.”

I was very lucky that I had a savings account when I was a kid. My parents opened it for me would occasionally fund it to use later when I graduated high school.

If you don't have a savings account now, there's no better time to open one. You can go with any financial institution or check out CIT Bank for my personal recommendation.

Automate Your Savings

To maximize your savings, set up an automated transfer from your checking account to your savings account every paycheck or once per month. That way, you save on autopilot and don't even have to think about it.

For more ways to learn how to automate your savings and save more money in the future, check out Ramit Sethi's best-selling book, I Will Teach You To Be Rich.

What Does APY Mean?

APY stands for annual percentage yield and indicates how much compound interest you earn on your money each year. Compound interest is calculated periodically, often monthly or daily, and is generally added to your balance at the end of each month.

If your bank offers a 1% APY on your high-yield savings account then that means you'll get approximately 1/12% of your balance paid to you monthly. If you have $10,000 in the bank, you could expect to earn $100 per year in interest.

High-Yield Savings or Money Market Account?

If you're wondering what the difference is between a high-yield savings account and a money market account then know that there's a few things. Money market accounts (MMAs) offer more access to your money and allow you to write checks. Savings accounts generally don't.

MMAs usually have a high minimum initial deposit required and a high monthly balance requirement to earn APY and to avoid fees. Many high-yield savings accounts don't require you to maintain a high balance; especially online high-yield savings accounts like the CIT Bank high yield savings account that I recommend.

Certificate of Deposit vs High-Yield Savings Account

A certificate of deposit can have a similar interest rate, if not a bit higher, than a high-yield savings account, however, with a certificate of deposit, your money is locked in place for the duration. If you withdraw money from a certificate of deposit, you may have to pay a penalty.

You can withdraw money from a high-yield savings account more easily, generally up to six times per month without paying a fee.

Generally speaking, a certificate of deposit is one of the safest forms of passive income, and is great if you don't need your capital for some time. A high-yield savings account is better if you need some level of access to your money.

When Should I Get a High-Yield Business Savings Account?

If you run a business, here are some reasons why you may want to get a high-yield business savings account.

  • Be prepared for emergencies: If clients start paying their invoices late or an unexpected expense comes up, having a business savings account acts like an emergency fund for your business. This cushion will keep your business afloat in times where money is tight.
  • Money for periodic expenses: You may have expenses that are annual or quarterly. This could include taxes or subscriptions that are paid less than monthly. When you have a high-yield business savings account, you can store money away from your month-to-month checking account to cover these less frequent expenses.
  • High-yield business savings accounts are FDIC-insured: You can store up to $250,000 in your high-yield business savings account and be protected if your bank goes under. This can be a life saver.

Pros and Cons

Savings accounts have benefits and drawbacks, though personally, I'd say the benefits far outweigh the drawbacks. Let's go over the benefits and drawbacks of savings accounts below.

Get Our Simple Family Savings Guide

Skyrocket your family’s savings with our FREE 7 step guide. Average Savings over $5000 per year!

I’ll also send you regular money-saving tips straight to your inbox.

Unsubscribe at any time. We will not sell your information.

Benefits of a High-Yield Savings Account

Benefits of a high-yield saving account includes:

  • Money in your savings account at an FDIC-insured bank, or NCUA-insured credit union is insured up to $250,000. Your money is safe up until that limit, so save away!
  • You can access your savings when you need to. The only exception is that you might only be able to withdraw or transfer six times per statement before paying penalty fees.
  • You'll earn interest, especially in an online savings account. The more interest you're earning, the faster your money will grow.

Many online savings accounts have low fees or even no fees at all.

Drawbacks of a High-Yield Savings Account

  • Interest rates vary. That means your interest rates may drop, and your money will grow slower.
  • (EDIT June 4th, 2020) Since writing this post in early February 2020, interest rates from average high-yield savings accounts at online banks have dropped by up to 0.5%. This is a very real drawback of savings accounts over-investing your money, however, this does not detract from the importance of having an emergency fund in a savings account for cushioning yourself from a financial hardship.
  • Interest rates are still not high when compared to investing your money into bonds or index funds. If you truly want to grow your money, consider investing in bonds (less risk) or index funds (more risk).

Wrapping It Up

If you don't currently have a savings account, or are earning a low interest rate in your current one, open a savings account today. Savings accounts are a safe place to store money for many occasions. By storing money in a high-yield savings account, you can safely save for an emergency or a big purchase, like a car, a downpayment for a home, or a dream vacation.

Do you have more than one savings accounts? What do you use them for?

Savings accounts have many benefits. Online savings accounts come with competitive interest rates, often 15-20 times higher than a traditional savings account.



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