There are many ways to accumulate savings. Some come with risks, including things like stock market investments. ETFs and mutual funds, while less volatile than other investment options, do not guarantee that your money will grow. One risk-free option that’s useful if you want to keep your savings liquid is a high-yield savings account or HYSA.
Here at Addition Financial, we believe in making financial decisions as easy as possible. High-yield savings accounts offer many benefits that can help you accrue savings while eliminating the risk that comes with other investments. With that in mind, here are five benefits of a high-yield savings account.
A high-yield savings account has a lot in common with a traditional savings account with a few notable differences. The term “high-yield” points to the most important difference between these accounts. The average annual percentage yield (APY) for a traditional savings account is just .35%, which means that if you had a $2,000 balance, you would earn just $7 over the course of a year.
By contrast, the APY for a high-yield account may be 3% or more. If we use that rate and the same $2,000 balance, you’d earn $60 in the same one-year period. That’s eight and a half times as much!
High-yield savings accounts are similar to a regular savings account in that they provide a place to keep your money and earn a return on your deposit. If you choose a credit union for your high-yield account, you’ll earn dividends as a member and part-owner of your financial institution. If you choose a bank, you’ll earn interest.
High-yield accounts earn a higher interest rate or higher dividends than a standard savings account. Our example above shows that in some cases, you may earn a much higher rate than you would with a regular savings account, making a high-yield savings account a good option if you want to boost your savings.
It’s common for high-yield savings accounts to come with some restrictions related to how you can access your money and when you can earn the highest rate of return. Here are a few examples:
You’ll also need to keep in mind that with a HYSA, you can’t write checks and you won’t have a debit card to access your money or transfer funds at an ATM. You may be able to get both of these things if you opt for a money market account, which typically offers higher interest rates or dividends than a traditional savings account but has more flexibility than a HYSA.
There are many ways in which saving money in a high-yield savings account can be beneficial. Here are five advantages to consider.
The first and arguably biggest benefit of choosing a high-yield savings account is that you’ll earn a significantly higher interest rate or dividend yield than you would with a standard savings account. It’s not unusual for a HYSA to offer a return rate of 3% or more, which means you could earn eight to 10 times as much as you would with a regular savings account.
Of course, not all HYSAs are created equal and there are other options that can help you increase your savings, including a money market account.
On a related note, the interest in a high-yield savings account is compounding interest, which means that you’ll earn interest on the interest you earn. In most cases, the interest or dividends on a HYSA are compounded daily and credited to your account monthly. That means your balance will increase consistently, and you’ll be earning more money.
Keep in mind that compounding interest is also a feature of traditional savings accounts and money market accounts. The main difference is that with a higher interest rate, you’ll increase your savings faster with a HYSA or money market account than you will with a regular savings account.
When you put your money into a Certificate of Deposit (CD) or an investment account, it isn’t liquid. That means it won’t be accessible to you if you need money quickly. That’s not the case with a high-yield savings account.
As we noted above, the money in a HYSA is as accessible as the money in any traditional bank account. You can withdraw funds as needed. While there may be limitations on the number of withdrawals you can make in a month, you won’t need to wait to get your money if and when you need it.
It’s often the case that high-yield savings accounts either have no monthly fee or a low fee. In some cases, the financial institution may waive fees for accounts with balances over a certain threshold.
You should always look at the fine print and ask about fees before you choose an account. While reputable financial institutions will disclose all fees with full transparency, some banks may not be as diligent about doing so as others.
Most financial institutions in the United States are insured by either the National Credit Union Association (NCUA) or the Federal Deposit Insurance Corporation (FDIC). In both cases, the balances in your high-yield savings account are insured up to $250,000.
The one piece of advice we’d give here is to make sure you check that your financial institution is insured, particularly if you’re looking at one or more online banks. You can check for FDIC insurance here and NCUA insurance here. Deposits at Addition Financial are insured by the NCUA.
Here are a few potential disadvantages to consider before you open a high-yield savings account:
Here are some of the best ways to use a high-yield savings account or a money market account:
It’s important to note here that while a high-yield savings account may be referred to as an investment, it’s not in the same category as a stock market portfolio or even a CD. While your money will earn compounding interest or dividends, it’s not enough to help you save for retirement. However, because HYSAs are insured, they do qualify as risk-free investments.
Opening a high-yield savings account or a money market account is a risk-free way to increase your savings and makes it easy to create an emergency fund or save for big purchases like a house or a car. The five benefits we’ve listed here illustrate why you don’t need to settle for the comparatively low interest rate of a standard savings account.
Are you looking for a risk-free way to grow your money? Addition Financial is here to help! Click here to learn about our insured money market account and start earning dividends right away.