High-Yield Savings Accounts – An Overview
If one of your financial goals is to grow your savings, then it’s important to understand the tools that are available to help you do it. Even for those who are most disciplined about their saving habits, not all accounts are created equally. For individuals who are serious about saving, especially those who want to maximize a long-term savings plan, high-yield savings accounts are an excellent investment to consider.
The Basics of High-Yield Savings Accounts
Simply put, a high-yield savings account is any type of financial savings product that pays customers higher than average interest rates. This may include a standard savings account with a higher interest rate or a more complex savings system, such as high-yield individual retirement (IRA) savings accounts. Understanding the basics of these accounts is the first step toward choosing the right option to meet your savings goals.
How High-Yield Savings Accounts Work
The several different types of high-yield savings accounts range from a typical, static savings account that requires a minimum investment and offers a higher rate of return to more nuanced options, such as high-yield IRAs and money market accounts as well as Kasasa savings accounts. However, they all work in similar ways. High-yield savings accounts require customers to meet some basic requirements (e.g., owning another related account or keeping a minimum balance). In return, they offer those customers a higher interest rate or return on investment (ROI) than similar accounts.
During times when interest rates are low, investing in a high-yield savings account can help money grow at a much faster rate. In addition, at times when the investment landscape is volatile, high-yield savings accounts offer a way to grow money risk-free, thanks to the added protection of the Federal Deposit Insurance Corporation (FDIC), which insures these types of financial products. At Hudson River Community Credit Union (HRCCU), we offer our customers all these high-yield savings options and help them decide which accounts best suit their needs and financial goals.
Key Features and Benefits
Regardless of which type of high-yield savings account you invest in, these accounts come with some common features that are worth noting.
- Higher interest rates
- Free or low cost to open and maintain
- Secure, low risk
- Easier access to funds
Finding the Best High-Yield Savings Account
While the overall benefits of high-yield savings accounts are similar, different types of high-yield savings accounts provide varying levels of benefits. In addition, the benefits and requirements of each type of high-yield savings account will vary between institutions, as well. Potential customers need to make sure they carefully consider the types of high-yield savings accounts available as well as the benefit levels from bank to bank.
Factors to Consider Before Choosing a High-Yield Savings Account
When it comes to high-yield savings accounts, it’s important to consider a number of factors before deciding if a financial institution is the best choice for your financial goals and which type of high-yield savings account offered will best help meet those goals. Specifically, be sure to consider the following:
- Interest rates: While high-yield savings accounts offer higher interest rates than traditional savings accounts, the exact difference varies based on factors such as the type of account you choose and how much money you are able to invest in it.
- Minimum deposit requirements: Although most high-yield savings accounts are free, financial institutions often ask customers to commit a minimum amount of money to the account. Depending on the type of high-yield account, this minimum balance typically ranges from $1,000 to $25,000. On the plus side, any money above that minimum is often easy to access when you need to withdraw it.
- FDIC or NCUA (National Credit Union Administration) insurance coverage: One of the benefits of savings accounts over investment accounts is the free insurance protection customers get from agencies such as FDIC and NCUA. Make sure to check the protection available to determine if they protect all the money deposited.
- Online vs. brick-and-mortar banks: Just as checking and traditional savings accounts vary, the products and support available from online banks are usually different than from brick-and-mortar banks. Of course, online and mobile banking options often exist for brick-and-mortar banks. The difference comes down to whether a bank has a physical branch where customers can go to ask questions and seek advice about their accounts.
Strategies for Building Wealth with High-Yield Savings
Once you decide that a high-yield savings account is the right choice for your financial goals, it’s time to figure out how to optimize that choice and grow your money. You can take several steps to build wealth with a high-yield savings account.
Automating Your Savings
One of the easiest ways to maximize savings is to make saving money automatic. When you link your checking account to your high-yield savings account, it’s possible to set up regular, automatic withdrawals that coincide with the deposit of your paycheck. If your job offers it, you can also have a portion of your paycheck deposited directly into your high-yield savings account. This method of saving is one of the most effective because you never “see” the money as being available for spending.
Set Up an Emergency Fund
One of the only guarantees in life is its unpredictability, which is why smart savers are ready for the unexpected. Setting up or building an emergency fund that has enough money to cover between 6 to 12 months of expenses is ideal, which makes that amount an important savings goal. Once you have an emergency fund established, it also helps prevent any additional high-yield savings goals you have from being thrown off by a disaster.
Take Advantage of Compound Interest
The more you save, the more you earn from savings. This is the basic concept behind compound interest, or the interest you earn on interest. Think of it this way. If you save $100 at a 5% APY interest rate, by the end of the year, you will earn $5 in interest and have $105. The next year, your $105 at 5% will become $110.25, meaning you earned $5.25 that year, or $0.25 more because of the interest you earned on your interest.
Increase that investment by thousands, and you can see why savings accounts are so important. With their higher interest rates, high-yield savings accounts can make a big impact on your overall wealth over time.
Set Short-Term and Long-Term Savings Goals
Finally, whether your financial goals involve buying a home, retiring early, or going on a dream vacation, it’s important to understand what you want. It’s a lot easier to save when you know exactly what you want to do with your savings. Setting long-term financial goals provides a clear picture.
In addition, setting short-term goals also matters. Achieving small milestones, such as getting to a certain dollar amount or percentage of your final goal, can help you remain motivated to continue saving as you see the real, numerical results of your efforts.
Understand Other Savings Options
Choosing to invest your money into a high-yield savings account may mean not investing your money in other savings options or choosing to invest less money in other savings options. Therefore, before you commit to a high-yield savings account, make sure you discuss the benefits and drawbacks of other savings options with a financial professional. These options include traditional savings accounts, certificates of deposit (CDs), and specialized savings investment options, such as retirement accounts and educational savings accounts (529s).
At HRCCU, we understand that building wealth over time is essential, and we love it when we can help our customers make that happen. Whether it is opening a high-yield savings account or building an emergency fund or setting financial goals, our professional advisors and staff are here to help. Call or stop by one of our branches today to learn more.
