A high-interest savings account is a type of savings vehicle often chosen for its higher rate of return. While some of its requirements may differ from a traditional savings account, high-yield savings accounts can help you grow your money quickly and safely.
What makes an account considered high-interest?
Typically, a savings account will be termed “high-interest” if it pays interest rates that are 20 to 25 times higher than the national average of a standard savings account. While most people have a standard savings account for emergencies, or to dip into when they need to put more money into their checking account, many don’t realize that they could be earning a higher interest rate with a nearly identical account. For example, if you kept $10,000 in Bank of America’s Advantage Savings account (which as of this writing had a standard annual percentage yield of 0.01%), then you would earn less than $1 in interest over the course of a year. If instead, you were to put that same $10,000 in a Bank5 Connect High-Interest Savings Account (which as of this writing had an annual percentage yield of 1.50%), you would earn roughly $151 over that same 12-month period – and that’s without making any additional deposits!
Here are some things to consider before starting your search for a high-interest savings account:
- What are the advantages of putting your money in a high-interest savings account?
Safety. When you put your money in a high-interest savings account at an FDIC-insured financial institution you will not only see it grow, but you’ll also have peace of mind that your money is safe. Unlike investment vehicles like stocks, bonds, and mutual funds, you can’t lose money in a high-interest savings account. With a high-interest savings account, you also know your rate of return. Additionally, most high-interest savings accounts are protected by FDIC insurance. The FDIC insures up to $250,000 per depositor, per bank. There are even banks that offer additional coverage on top of FDIC protection. Bank5 Connect for example, offers Depositors Insurance Fund protection to all of its deposit customers – free of charge – which protects funds in excess of the FDIC’s $250,000 coverage limit.
Accessibility. When you have money in an investment account, it can sometimes take days or weeks to convert those investments into cash. There may also be potential tax implications when making early withdrawals from a retirement investment account. With a high-interest savings account, withdrawing money is typically just as simple as it would be for a traditional savings account. It’s worth noting however, that some banks may limit the number of withdrawals you can make from a savings account each month. In general, though, high-interest savings accounts are viewed as very liquid savings vehicles. This makes them a popular choice for emergency funds or saving for any short-term goal. Your money stays protected and accessible, and you earn a decent amount of interest.
- Are there any drawbacks to opening a high-interest savings account?
Your current bank may not offer one. One thing to consider is that it can be tricky choosing a high-interest savings account. If your current bank doesn’t offer one, you’ll need to find one at a different bank. You’ll then need to decide whether you also want to move your main checking account to that institution as well. The good news is that switching banks can be easier than you think. And if you decide to keep your current checking account where it is, you can usually move money pretty easily between accounts at different banks. Just be sure to review the bank’s policies on external transfers before opening an account.
It's not a substitute for retirement savings. It is also important to note that while a high-interest savings account is a great alternative to a regular, traditional savings account, it isn’t a substitute for a retirement account or your long-term investment goals. An IRA or 401k will typically provide a much higher rate of return in the long run, as will most carefully managed investment portfolios. The trick with any kind of investment product is to work with a financial advisor you can trust, who will help you stay abreast of potential tax implications and guide you based on your risk tolerance and unique financial goals.
If you are thinking about putting some money into a high-interest savings account, Bank5 Connect can help. Contact us or open an account today to start working toward your savings goals.