Getty Images/iStockphoto
Problems with high inflation and interest rates have made it difficult for many Americans to make ends meet. However, one of the advantages of the current environment is the higher returns of high yield savings accounts (HYSA).
“Currently, high-yield savings account rates exceed 5% in some cases, while a standard savings account at a brick-and-mortar bank might be 0.1%,” says Jay Zigmont, Ph.D. , certified financial planner and founder. wealth without children. And high-yield savings accounts are a great place to keep your emergency savings and money for short-term goals, says Zigmont.
Additionally, these accounts offer deposit insurance security. “Your money is safe in a high-yield savings account because it is FDIC insured up to $250,000 for individual accounts and $500,000 for joint accounts,” says Erik Croak, certified financial planner , accredited wealth management advisor and president of Croak Capital. .
But does a high yield savings account The best choice for your situation?
Compare your best savings account options and start earning today.
Advantages of high-yield savings accounts over four popular alternatives
High-yield savings accounts offer a few unique advantages over other popular account types, including:
- Traditional savings account: While traditional savings accounts currently have a national average interest rate of 0.47%, the best high yield savings accounts have a yield rate it’s about 10 times higher.
- Certificate of Deposit (CD) Account: Traditional CD require you to make a deposit and leave it in the account for a specific period of time. If you need money sooner, you have to pay an early withdrawal penalty. With high-yield savings accounts, you can add money over time and withdraw it without penalties. “Liquidity is valuable because it allows you to withdraw your money if you’re in a tough situation,” says Daniel Masuda Lehrman, certified financial planner at Masuda Lehrman Wealth.
- A money market account: You can find money market accounts with rates that rival those of high-yield savings accounts, but they often come with additional requirements. For example, they may require a minimum deposit, a minimum ongoing balance and/or payment of monthly service fees.
- A high-yield current account: High yield checking accounts tend to offer Annual Percentage Yields (APY) than high-yield savings accounts. Offers with a higher APY exist, but they are harder to find and may have varying requirements. Checking accounts also allow easier access to your money, which may not be ideal for those looking to save.
Learn more about how the best high-yield savings accounts can benefit you now.
Other considerations
While high-yield savings accounts have many benefits, they also have some potential downsides to consider.
For one thing, some financial institutions limit the number of withdrawals you can make each month from your high-yield savings account. The Federal Reserve removed numerical limits on transfers or convenient withdrawals from “savings deposit” accounts in 2020, but some institutions still have them in place. Ally, for example, allows 10 withdrawals or transfers from a savings account per cycle. If you exceed the limit, the bank may close your account.
Next, the best rates on high-yield savings accounts often come from online banks, credit unions, and small banks. If your high-yield savings account ends up at a different bank than your checking account, transfers may take several business days.
Additionally, you can’t lock in a rate with a high-yield savings account like you can with a CD. Your rate is variable so it will fluctuate with the market. While this can be helpful when rates rise, it will reduce your income when rates fall.
“The Fed is shouting from the rooftops that interest rates will fall in the near future. For this reason, CDs are currently an attractive choice in place of or in addition to a high savings account,” says Lisa Whitley, Accredited Financial Advisor and Certified Retirement Planning Advisor at Money by Lisa.
Is a high-yield savings account right for you?
A high-yield savings account can be a useful place to park your short-term savings, especially when rates are higher than usual.
“I always like a high-yield savings account for money you plan to spend over the next couple of years, or for funds you simply can’t take a risk with. For example, the down payment on your home,” says Whitley.
It’s also a good account for retirees withdrawing their retirement funds, according to Whitley.
“Keep aside a year or two of living expenses to mitigate “streak of return” risk. That is, the risk that you will have to sell your shares just as a “black swan” event hits the market and prices fall. sank,” Whitley said.
But high-yield savings accounts shouldn’t be confused with wealth-building accounts, Whitley says.
“Let’s be clear: The purpose of your savings is not to make a lot of money. It’s a buffer against bad times and a safe place to accumulate funds for a future must-have expense.”
Grub5
