How does a high-yield savings account work?

savings account work

Everyone would love to earn more money from their savings with little effort, right? Well, a high-yield savings account is one way to do just that!

If you've always kept your money in a traditional savings account, you may have accepted that you earn almost nothing in interest. The good news is that you can earn much more on your savings by opening a high-yield savings account . In this article, we'll explain how a high-yield savings account works, the pros and cons of using one, and the best ways to make these accounts work for you.

What is a high yield savings account?

High-yield savings accounts are federally insured accounts that pay the account owner a higher rate of return on their balance. Currently, many of the best high-yield savings accounts pay between 1% and 2% interest, although in good economic times they can earn more than that. That's miles better than the national average for traditional savings accounts, which changes weekly but currently sits around 0.05% APY.

Also known as high-interest savings accounts, they are a great place to keep your money for an emergency fund or an upcoming purchase. You can access money easily and quickly and watch your savings grow at a decent rate in the meantime.

A high-yield savings account makes a lot of sense for short-term savings goals, for which you'll need funds within a year or so. You earn a high rate of return while maintaining the security of a basic savings account so you know you won't lose money.

Traditional banks and credit unions offer high-yield savings accounts, but you can find a broader selection through online banks .

How much can you earn?

Most accounts pay some type of interest, but traditional bank accounts typically only earn you a few cents a month.

Many high-interest savings accounts operate on a tiered system, with two or three different interest rates depending on your savings level. With some high-interest savings accounts, the bank requires a minimum balance to get the maximum APY.

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If that amount is not possible, don't worry! Many banks and online savings accounts, like the CIT Bank Savings Builder Account , offer their highest interest rate to account holders who set up automatic deposits for a minimum amount, often as little as $100 per month.

Read the terms of high-yield savings accounts at different traditional and online banks to determine which one is best for you and offers you the highest APY possible.

Examples of Traditional APYs vs High Yield APYs

Curious about how much you can earn with a high-yield savings account? Let's look at how a high-yield savings account works. Here's an example comparing the amount of interest you could earn on a $1,000 balance compounded monthly:

  • Traditional savings account with 0.06% APY for 12 months: about $6.00
  • High-yield savings account with 1.4% APY for 12 months: about $14.00

An extra $8 over a year won't make much of a difference on its own, but imagine you have a larger balance in your savings and you contribute to it each month. If you put in an initial $1,000 and add $150 a month for 24 months, here's how your money would grow with monthly compounding:

  • Traditional savings account with 0.06% APY: $4,603.45 ($3.45 earned in interest)
  • High Yield Savings Account with 1.4% APY: $4,681.35 total ($81.35 earned in interest)

The difference is clear! High-yield savings accounts will put more money in your pocket.

Saving money on a tight budget It's a challenge, but every penny you save will help you reach your financial goals. Why not get a little extra help from a high-yield savings account that will effortlessly boost your account balance?

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Build your savings quickly with CIT Bank – Build your savings quickly with CIT Bank's Savings Builder account. Earn 1.00% APY when you make a monthly deposit of just $100. Learn more here.

Best Ways to Use a High-Yield Savings Account

A high-yield savings account is just that: a savings account. Therefore, you should not use the account for your daily expenses. ( Try one of these checking accounts! ) If you'll need access to this money within a year or two, but not right away, you might consider storing your cash safely in a high-yield savings account.

Here are some good reasons to use a high-yield savings account :

  • Create or maintain your emergency fund, which you can use to cover unexpected expenses or job loss (start with $1,000 and eventually increase the amount to three to six months' expenses)
  • Saving for large purchases, like a new vehicle or a down payment on a house
  • Getting ready for the holidays by saving money all year round
  • Start a vacation fund for your next family trip

When you need a significant amount of money to achieve short-term goals and want to protect it and allow it to grow simultaneously, a high-yield savings account can help you get the job done.

However, if these are funds you won't touch for several years or more, it's usually best to investigate long-term investment accounts or a certificate of deposit (CD).

Benefits of high-yield savings accounts

There are many solid reasons to open a high-yield savings account today. These are some of the main benefits:

  • Painless automatic deposits so you can “set it and forget it”
  • Easy access to funds without penalties (often limited to six withdrawals per month)
  • FDIC insured up to $250,000 per account, per bank
  • Interest rates that are many times higher than the national average for traditional savings accounts
  • With some banks, both physical locations and online options
  • Relatively low barrier to entry to get the highest interest rates
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Disadvantages of high-yield savings accounts

As with any banking product, high-yield savings accounts have some drawbacks. Here are some negative aspects to consider before deciding where to keep your money:

  • Some banks or institutions charge monthly fees or service charges. Fortunately, you can avoid these fees by simply searching for the best free accounts.
  • Interest rates on high-yield savings accounts are variable, meaning they can drop at any time. These decreases in APY are often based on a national change, such as the Federal Reserve slashing interest rates.
  • In the past, you were typically limited to six withdrawals per month. However, the Federal Reserve recently lifted this rule in April 2020. Be sure to check the withdrawal rules for your specific account so you don't get penalized.

Final thoughts

When you need to set aside money to save for short-term goals and emergency funds, a high-yield savings account may be your best option. It's a great strategy to protect your money while ensuring it continues to grow.

You no longer have to choose between growing your savings and the peace of mind of knowing your balance won't decrease. A high-yield savings account balances these two needs so you get the best of both worlds.

Grow your savings faster – Earn up to 1.00% APY when you open a new Savings Builder account at CIT Bank. That's well above the national average and much higher than you'll find at many traditional competitors. Follow the link to get started.

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