What Is A High Yield Savings Account?

Do you want to know how to get a better interest rate on the cash in your savings account?

Me too.

Interest rates are still ridiculously low across the board. This is in part due to the pandemic but in reality, we’ve been here for a while now. Ever since the Great Recession, rates have been low.

The Federal Reserve started raising rates in 2016 and continued into 2019 but they then leveled off. In 2020 rates plummeted to help the economy borrow money by keeping the cost of capital low for individuals and businesses.

Therefore, the low rates have not done any favors for people lending money or looking for yield in the savings accounts. That said, I do believe that high yield savings accounts still have their place in a portfolio.

High Yield Savings Accounts Benefits

A major benefit of a high yield savings account is that they usually pay a higher interest rate than a regular savings or checking account. They can have zero monthly maintenance fees or charges.

Unlike brokerage accounts, they are FDIC insured, which can provide peace of mind. Currently, they are paying roughly 10x the amount of interest compared to an average savings account.

Are High Yield Savings Accounts Safe?

These accounts are considered one of the safest accounts to store your money.

As I previously mentioned, this is because they are FDIC insured and you are receiving a fixed interest rate from a stable bank.

You are not investing in a risky asset class like stocks or real estate and your money is liquid and accessible.

They usually have variable interest rates which will reset periodically on a monthly, quarterly, or annual basis. Interest rates are at a historical low so they’re likely to go up in the future once the economy gets back on track after the pandemic.

High Yield Savings Accounts Cons

You can only make 6 withdrawals each statement cycle per the current regulations.

Variable interest rates could be seen as a negative since rates could adjust downward, earning you less money.

The interest rates are extremely low right now. They aren’t even keeping up with historical inflation rates, so your real rate of return will likely be negative once you factor in inflation.

The accounts are more cumbersome to use since they don’t provide access to check writing or debit cards. Some high yield savings accounts can lock your money up for a certain period of time like six months or a year. If money is withdrawn before you could be penalized.

How to Use a High Yield Savings Account

I would recommend using a high yield savings account for immediate or short-term goals such as paying for house maintenance items or a car repair.

This way the cash is accessible, but it is still earning some interest. You can budget savings goals like annual housing maintenance or vacations for example. Set up a monthly savings transfer to ensure the money will be available when needed.

Which Financial Institution Should You Use?

Always look to see if there are any minimums to open the account or maintain the account. Be sure to look at monthly and annual maintenance fees when choosing the best provider. Check to see if there is a minimum amount of time where you cannot withdraw the funds.

I always prefer an online provider. They offer competitive rates and zero fees a lot of the time. This is because they don’t have the overhead of physical branches which can help them pass on savings to the consumer. Popular online banks include Ally, CapitalOne, and Discover Bank.

Are High Yield Savings Accounts Worth It?

High yield savings accounts can be worth it if you plan to treat it like a savings account. It’s a great alternative and you will probably get a better interest rate. As rates increase they will become more attractive for cash options.

This is better than chasing yield in junk bonds or dividend paying stocks. This is a quick way to assume too much risk for the short term goal of cash. You could very much end up needing the cash and have to sell at a loss all because you wanted a few extra points of interest. Keep your goals front and center.

If you’d like an objective second opinion about your finances, please contact Michael Shea, a CERTIFIED FINANCIAL PLANNER™, at Applied Capital. Email him at [email protected] or fill out a contact form.

This blog is provided for informational purposes only. Such views are subject to change at any point without notice. The information in the blog should not be considered investment or tax advice or a recommendation to buy or sell any types of securities. Some of our blogs or information therein have been obtained from third party sources believed to be reliable but such information is not guaranteed. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will be profitable or suitable for a particular investor’s financial situation or risk tolerance. No reliance should be placed on, and no guarantee should be assumed from, any such statements or forecasts when making any investment decision.

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