If I were to sit down and rank the best money moves I've made in the last few years, opening a high-yield savings account last year would definitely be near the top. Not only was the account incredibly easy to open, but I've made more than $1,000 on my savings this year so far, thanks to earning a generous APY.
Admittedly, I'm in the process of meeting a big savings goal, so you may not have as much saved cash as I currently do. But even if you have a smaller amount saved, say $5,000, it's still worth your time to move that money into a high-yield savings account. Here's why.
By the numbers: Regular savings account vs. high-yield savings account
Let's say you keep your hypothetical $5,000 in a traditional savings account -- perhaps one that's linked to your checking account. It only earns 0.10% APY, though. At least with a balance of $5,000, you likely aren't charged a monthly maintenance fee -- as I discovered last year, $300 is the minimum required balance on my own traditional savings account to avoid fees.
But even without a maintenance fee, your money is losing spending power in this account. The most recent Consumer Price Index Summary report noted that inflation is currently at 3.7%. But the average APY across all savings accounts is currently just 0.45%, according to the FDIC, and your traditional savings account earns far less than that.
What if you were to move your money to a high-yield savings account paying an APY of 4.5%? Here's what you can expect to earn, interest-wise, over the course of a year in each account (and assuming you don't add any money to your balance):
| Funds | Traditional Savings Account: 0.10% APY | High-Yield Savings Account: 4.5% APY |
|---|---|---|
| Starting balance | $5,000 | $5,000 |
| Interest earned | $5 | $224.90 |
| Balance after a year | $5,005 | $5,224.90 |
Data source: Author's calculations
As you can see, the difference in what you can earn is staggering -- surely an extra $220 could make a difference for your bottom line. And best of all, this money represents passive income, so you don't have to work extra hours to earn it.
Where can you find a high-yield savings account?
So you're not going to make this kind of money with a savings account at your trusty old brick-and-mortar bank. Instead, look to cyberspace for a 21st-century bank! Online banks have a few advantages over their brick-and-mortar counterparts, including offering higher APYs on savings accounts. This is because online banks have fewer overhead costs, since they don't have physical branches to maintain. These banks also have excellent remote customer service (including phone lines, email, and online chat features) and mobile apps.
One word of caution, though: If you need to deposit cash, you may have some difficulty with no physical branch to visit. If you've got an account with a brick-and-mortar bank, you can deposit cash there, then transfer it to your online bank account. Yes, this is an extra little song-and-dance to do, but I think the perks of an online bank are worth it.
Use these tips to make saving easier
It's not enough just to have the right savings account; you also need to put money into it. If you have $5,000 now, that's a great starting point, and your money could grow to become a full emergency fund, fund a dream vacation, or even buy you a home. Here's how to make saving money easier.
- Automate it: Here's where I give advice I don't follow myself. Automating my finances makes me nervous, but a lot of people have found success with it. If it's hard to set aside money to save every month, setting up an automatic transfer from checking to savings before you've spent the money you want to save can help.
- Set a goal: Give your money a job, and dream about that job. In my case, the big savings goal I have is to buy a home in 2024, so every time I add money to the account, I think about how wonderful it will be to wake up in a house I own. It makes it more fun to save.
- Get a side hustle: This is always my go-to advice, because it's easier to increase your income than to cut your spending in a big way. Money you earn from a side hustle isn't already earmarked for bills, so you can save all of it (less taxes, should you find yourself in a freelance situation where you receive a 1099 form).
Having cash savings is an excellent position to be in. Don't lose money to inflation -- move your cash to a high-yield savings account today.
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