How much money you could be missing out on with a low-APY savings account – Orange County Register

Matthew Goldberg | (TNS)

It’s comforting to know that your money is in the bank around the corner. But in an era of Federal Reserve rate hikes and brick-and-mortar banks offering yields far lower than many online banks, that convenience can cost you money. Typically, Federal Deposit Insurance Corp. online banks. (FDIC) offer savings accounts with much higher annual percentage yields (APY) than brick-and-mortar banks.

What does APY mean?

APY stands for “Annual Percentage Yield” and refers to the rate of return an account bank earns in a year. The APY includes the effects of compound interest, meaning that interest is earned on both your principal and any accrued interest.

APYs on checking and savings accounts are variable, meaning the bank can increase or decrease them at will. Typically, banks with high-yield accounts will increase APYs when the Federal Reserve raises rates, and decrease them when the Fed lowers rates.

How a Low APY Can Affect Your Savings

Let’s say you have $10,000 saved. That’s a great achievement, but if you’re getting a national average of 0.58% APY, you’re not going to get the best return on your savings. Some of the most popular big banks pay even less, at 0.01%.

There are plenty of opportunities to get a much better rate, around 5% APY or higher.

A $10,000 account that earns 0.58% APY earns about $58 in interest per year. In a high-yield savings account or money market account paying 5% APY, you would earn about a little over $500 per year. And if you continue to increase your balance, you’ll earn more through compound interest over time.

These calculations assume the APY will stay the same for a year – which is unlikely – and that you neither withdraw nor add any money.

Let’s say your balance doesn’t exceed $10,000. These days, banks offer high-yield savings accounts paying up to around 5.25% APY with minimum balance requirements as low as $0. And while earnings don’t differ as much on low balances, you can continue to increase your balance over time to maximize the higher return.

With Bankrate’s Compound Interest Calculator, you can see approximately how much interest you’re missing out on if you have a low APY account.

Where is the best place to put your savings?

Your high-yield savings account is a great place for your short-term savings goals and emergency fund. Unlike most certificates of deposit (CDs), savings accounts provide easy access to your money as you need it, with no fees. To find the best high interest rate for you, browse Bankrate’s list of the best high-yield savings accounts.

You can have multiple savings accounts if you want to have separate places to store money for different goals. Or consider tools like Ally Bank’s buckets feature that lets you allocate money from your savings account to specific goals, such as a wedding fund and a house down payment fund .

Should you leave your money in savings?

Experts recommend keeping your emergency fund in a high-yield savings account along with money for short-term goals such as a down payment on a house or a vacation. Short-term financial goals should be things you plan to achieve within three years. Beyond that, money may be better placed in an account where it may have the opportunity to earn a higher return, such as a brokerage account.

High-yield savings accounts are perfect for emergency funds and short-term savings goals because the money is FDIC insured – as long as you follow FDIC rules and guidelines – and you can still get a decent return on investment. Before choosing a savings account, confirm that it is FDIC insured so you know your money is safe.

(Bankrate senior editor Karen Bennett contributed an update to this story.)

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