What is the truth about high yield savings accounts?
High-yield savings accounts earn you more money than brick-and-mortar bank accounts do. But often, you still won't earn enough to keep up with inflation. Even though your account balance rises, your buying power decreases.
The cons of high-yield savings accounts
Here are some of the negatives: Interest rates on high-yield savings accounts are variable and can fluctuate at any time, so while a bank may advertise a high annual percentage yield (APY) when you apply, it likely won't last forever.
Unsteady earnings. High-yield savings accounts may have variable interest rates, which may impact earnings. While they aim to offer higher interest rates than traditional savings accounts, these rates may fluctuate over time due to changes in the financial market or the financial institution's policies.
However, it is still possible to lose money with a high-yield savings account, and it's important to be aware of that before transferring your savings into one of these accounts. There are two main ways you have the potential to lose money. The first is that you could lose out to inflation.
Key Takeaways. Earn a 4.00% APY or higher by moving your savings into a high-yield account. This can make at least $40 over 12 months on a $1,000 investment. When choosing a high-yield account, look for one that provides a competitive APY without fees, steep balance requirements or APY caps.
As of February 2024, no banks are offering 7% interest rates on savings accounts. Two credit unions have high-interest checking accounts. Eligibility for these credit unions is limited according to geographic location and other narrow criteria.
4.5% APY: A 4.5% CD or high-yield savings account will yield $2,250 in interest on your $50,000 investment in one year. 4.75% APY: Opting for a 4.75% CD or high-yield savings account will earn you $2,375 in interest over the course of a year.
Although each financial situation is unique, it doesn't typically make sense for you to keep all of your money in a high-yield savings account. After all, most high-yield savings accounts limit withdrawals to only six per month, so a checking account is typically a better place to store your spending cash.
Certificates of Deposit
Like high-yield savings accounts, CDs usually offer substantially higher annual percentage yields (APYs) than traditional savings accounts. As of October 2023, the average CD rates range from 4.60% to 5.55%, according to the Federal Deposit Insurance Corp. (FDIC).
Stampf recommends keeping six to 12 months' worth of expenses in a high-yield savings account for easy access to cash in case of an emergency and saving for larger expenses that are are coming in the short term, like buying a home.
Where do millionaires keep their money?
Cash equivalents are financial instruments that are almost as liquid as cash and are popular investments for millionaires. Examples of cash equivalents are money market mutual funds, certificates of deposit, commercial paper and Treasury bills. Some millionaires keep their cash in Treasury bills.
Earnings from high-yield savings accounts or CDs are subject to income tax. Here's how that works. This article was expert reviewed by Lisa Niser, EA, an enrolled agent and tax advisor.
For the most part, opening a checking, savings, or cash management account will not hurt your credit score. Banks, credit unions, and other providers typically do what is known as a soft pull, not a hard pull, when considering your application. This process should not lower your credit rating nor linger on your report.
Most high-yield savings accounts pay interest daily. That's more profitable than what most banks do; only deposit interest into your account once per month. Over the long run, daily compounding leads to more cash for you.
For savings, aim to keep three to six months' worth of expenses in a high-yield savings account, but note that any amount can be beneficial in a financial emergency.
0.46% APY | 5.30% APY | |
---|---|---|
After 1 Year | $46.00 | $530.00 |
After 5 Years | $232.13 | $2,946.19 |
After 10 Years | $469.64 | $6,760.37 |
A few local credit unions have CDs paying 6% APY or more. To open a 6% APY CD, you may need to meet certain eligibility requirements. There are also banks and credit unions with CDs paying over 5% APY, which are available nationwide.
Account | Forbes Advisor Rating | Annual Percentage Yield |
---|---|---|
Milli Savings Account | 4.6 | 5.50% |
M1 High-Yield Savings Account | 4.3 | Up to 5.00% |
Bask Interest Savings Account | 4.2 | 5.10% |
UFB Secure Savings | 4.1 | Up to 5.25% |
While there aren't any financial institutions paying 7% on a CD right now, there are other banks that pay high CD rates. These accounts all offer at least 5% APY on deposits.
- Leverage tax-advantaged accounts. Tax-advantaged accounts like the Roth IRA can provide an avenue for tax-free growth on qualified withdrawals. ...
- Optimize tax deductions. ...
- Focus on strategic timing of withdrawals. ...
- Consider diversifying with tax-efficient investments.
Is it wise to have multiple high-yield savings accounts?
If you've been stashing your savings deposits in the same account for at least a few years, it's worth checking that the current APY you're earning is competitive with today's top rates. Opening multiple accounts could be one way to ensure that you're maximizing the potential of your savings by earning the top yield.
Best uses for a high-yield savings account
Your money is parked in a safe place, and the APY boosts your savings balance. You can also use high-yield savings accounts to put money away for short-term goals, such as the down payment on a house, a big vacation or a rainy day fund to cover repair or maintenance expenses.
A savings account is the ideal spot for an emergency fund or cash you need within the next three to five years. Good for long-term goals. Investing can help you grow money over the long term, making it a strong option for funding expensive future goals, like retirement.
However, during periods of high interest rates, high-yield savings accounts can have returns from 4-5%. Conversely, when you invest in stocks, bonds and mutual funds through a Roth IRA, you have the potential for much higher asset growth over periods of several years or more.
Bank | APY* | Learn more |
---|---|---|
Milli | 5.50% | Learn more about Milli |
SoFi Checking & Savings | 4.60% | Learn more about SoFi |
UFB Direct | 5.25% | Learn more about UFB Direct |
FNBO Direct | 4.75% | Learn more about FNBO Direct |