What is a high yield savings account? Is it right for me?
A key part of sound financial management is putting your spare cash and savings to good use — to do that, most financial advisors suggest you open a high-yield savings account. But what is a high-yield savings account, and are they a good idea?
You’ve probably heard your bank gives you interest on money in your savings account. But did you know that not all savings accounts are created equal?
Many financial advisors suggest that if you really want returns on your savings while maintaining a high level of protection, you should move your funds to a high-yield savings account.
Today we’re going to look at what a high-yield savings account is, how they work, and if they are your best option for safe investment today.
How do high-yield savings accounts work?
A high-yield savings account is an account you open with a bank or other financial institution that pays a higher interest rate than a standard savings account would.
Whereas most accounts pay a nominal interest rate or none at all, a high-yield savings account could give you anything between 1% and 5% APR. They can do this because they come with some extra rules.
The history of high-yield savings accounts
In 1933, following the Great Depression, the US government introduced the Federal Deposit Insurance Corp (FDIC), covering $5,000 of savings in the event of a bank failure (worth a lot more in today’s money). This heavily encouraged the growth of banks in the US.
As competition between banks and savings institutions grew throughout the twentieth century, they offered increasingly high-interest rates as an incentive to account holders.
But sadly, the meaning of a high-yield savings account has shifted slightly over time. Nobody expects a 5% interest rate anymore. Now you’re lucky to get anything over 1%.
What happens when you put money into a savings account?
Savings accounts are a mutually beneficial relationship. Account-holders have the peace of mind that their money is safe from thieves and robbers. Meanwhile, banks can profit by lending out stored savings to borrowers for interest. Banks keep a certain percentage of cash as reserves for when people made withdrawals, lending out everything else.
This might sound dodgy to you. However, institutions like the FDIC in the US cover deposits up to $250,000. That means that even if your bank fails, the government will return your money up to that amount.
How long do I have to keep my money in a high-yield account?
You should now have a basic idea of what a high-yield savings account is. Let’s discuss what a normal investment with one looks like.
Standard savings accounts usually have more flexible terms. They usually don’t require a minimum balance and let you keep your money in the account for as much or as little time as you like. But there’s a tradeoff: the interest rate is usually low.
In contrast, many high-yield accounts pay more interest but have stricter requirements. They might limit withdrawals, or even require you to leave your money inside for a set period. These limits vary drastically between accounts so you’ll have to do your research, but you might need to keep your money in for one to five years.
Make sure to check out a variety of account providers. Many of the most popular high-yield savings accounts are operated by commercial banks, like Bank of America or Goldman Sachs. However, savings and loan institutions (S&Ls) and credit unions may also offer these accounts.
The problems with high-yield savings accounts
Although you should do something with your money to get a return higher than 0%, there are some drawbacks to using a high-yield savings account.
The days where you could stick your money into a high-yield account and get a return of 5% are long gone. Central banks around the world lowered interest rates to stimulate their national economies after the financial crisis. Since then, rates have never really recovered.
The savings accounts with the best rates today are currently PNC bank, which offers 1% APY, and Citibank, offering 0.91% APY. Most banks are offering even less.
Does that sound low? That’s because it is.
A Citibank account also has a $4.50 monthly fee for anyone who doesn’t have a checking account with the bank; even those with checking accounts are subject to minimum deposit requirements.
Should I open a high-yield savings account?
So is a high-yield savings account worth it? As with all investing, choosing where to place your savings is all about your priorities.
If your primary goal is to keep your money safely, then yes, these accounts are a great option. Thanks to the FDIC, as long as your balance remains below $250,000 you have the financial backing of the government.
But just because the risk is minimal, it doesn’t mean that opening a high-yield savings account is a good idea.
The typical inflation rate is 2% each year. It doesn’t take a genius to work out that if your money is “growing” at a rate of 1% but worth 2% less at the end of the year, you haven’t got a very good deal.
Investment options like index funds and stocks offer much higher returns — sometimes 10% or more — but they also carry much greater risk. If you invest $10,000 in stock and the company goes bust, there’s no way you can recuperate your money.
Luckily, there are a growing number of options today that offer healthy returns above inflation without the bang or bust risks of stocks.
Get 4% APY, unlimited anytime withdrawals, and no fees with a Constant Flex account.
We created the Constant Flex account to solve some of the issues traditional high-yield savings accounts pose. After all, why invest in a savings account when it can’t even beat inflation?
Our Flex investment account offers a 4% return on investment, which is higher than all high-yield savings accounts currently available. There are also:
- no fees
- no minimum balance requirements
- no restrictions on withdrawals.
Although there’s no FDIC cover to protect your savings, you’ll have more safety than you would in a typical investment account. All investment done with your money through our Flex lending pool is protected by collateral. That means that even if borrowers default, there’s still a very low chance you will lose principal.
Keeping your savings outside of a bank isn’t the right option for everyone. However, if you’re prepared to take on a little risk to see real returns again, you should start investing with Constant today.
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