Quick and easy guide to high-yield savings accounts

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In a Nutshell

If you want to earn more for every dollar stashed outside of stocks and bonds, a high-yield savings account can be a great place to start.

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Simply put, we Americans are not saving as much as we should.

The stats paint a stark picture. One 2017 survey found that 69% of Americans have less than $1,000 saved. Another, this one by the U.S. Government Accountability Office, revealed that 29% of Americans 55 and older have no retirement savings whatsoever.

But the good news is that you can catch up, no matter your age or stage. The best first step is to find the right high-yield savings account for your needs and start stashing away whatever you can afford. Don’t forget to keep adding to it. Many dedicated savers find that automating regular deposits into a savings account each payday (or month) eliminates the temptation to spend dollars that could be saved.

Here’s more to get you on a strong path to savings.

What are high-yield savings accounts?

High-yield savings accounts are bank accounts that earn you a higher interest rate for deposits than a traditional savings account. You might also see them referred to as high-interest rate savings accounts. When it comes to savings, a higher interest rate is the name of the game. It means a better return on your money. The interest rate is what the bank will pay you for the privilege of keeping your money.

For example, it’s not uncommon to get a .01% interest rate on a traditional savings or checking account, while interest rates on high-yield savings accounts can range anywhere from 1% to 1.35%. Here’s how that difference plays out in real life based on a balance of $10,000 after one year, assuming no additional deposits.

Type of savings account Interest rate Balance after one year (based on monthly compounding)
High-yield savings account 1.35% $10,135.84
Traditional savings account .01% $10,001

That’s a difference of about $135 a year — nothing to scoff at — but that gap starts to widen the minute you make monthly deposits to boost your savings.

For example, if you made $100 monthly deposits — the equivalent of $1,200 a year — your year-end monthly balance on the low-interest savings account would be $11,201.06, compared to $11,343.29 with a high-yield savings account. Over time, this adds up.

One caveat: High-yield savings accounts can come with monthly maintenance fees and/or requirements to maintain a minimum balance. But some accounts offered by banks don’t have these requirements or fees.

When you do see them, it’s important to make sure the fees don’t cancel out the interest you expect to earn. After all, the goal is to make your money work for you. You can check using the same compound interest calculator. Search the terms and conditions for how frequently they compound interest: it will be daily, weekly, monthly, semi-annually or annually.

Is my money safe?

Like traditional savings accounts, high-yield savings accounts are federally insured for up to $250,000 if you open an account at an FDIC-insured bank. Here’s more on the Federal Deposit Insurance Corp.

How do I choose the right bank?

Shopping around for the right high-yield savings account is key. Some have minimum monthly balance requirements depending on the account, and monthly maintenance or other associated fees can quickly add up. Make sure you read all the fine print. FDIC insurance is a must, which protects your money up to $250,000.

Some accounts, for example, require you to maintain a minimum balance that would earn you at least one cent each month based on the APY. Other accounts offer a competitive rate when you deposit at least $10,000 and maintain this balance for as long as the account is open.

You can generally expect to get at least a 1 percent annual percentage yield on a high-yield savings account.

With other banks, you may find that you don’t have to pay a monthly maintenance fee, but there may be other fees associated with the account, like fees for domestic wire transfers, overdrafts or returned deposit items.

When it comes to interest, you can generally expect to get at least a 1% annual percentage yield on a high-yield savings account, but it’s pretty easy to find online and brick-and-mortar banks that offer higher rates. CIT Bank, for example, is offering (as of April 23, 2018) a 1.55% APY when you make an initial opening deposit of $100 and maintain a balance of $250,000 or less.

How much should I be saving?

Your financial situation is unique, but the general rule of thumb is to have at least three to six months of your total monthly budget saved in cash. That means that in a time of crisis — job loss, major home repair — you’ll have a safety net.

Without this, many turn to credit cards to pay for day-to-day expenses, which is incredibly expensive if you can’t pay in full each month and can be damaging to your credit scores as your utilization rises.

Bottom line

If you want easy access to some of your money without opening a long-term certificate of deposit account with penalties when you want to quickly withdraw funds, opening a traditional savings account with a paltry interest rate or retirement or brokerage account for longer-term investments, a high-yield savings account may be a good middle ground. But before you sign up for one, do your research.

Find out the interest rate, fees, required initial deposit, monthly balance requirements and whether there’s a monthly withdrawal or transaction limit. Also consider a bank that’s FDIC insured so your money is protected, and one that offers convenient services like online and mobile banking and the ability to easily transfer funds.

Let compound interest put your money to work for you and keep a healthy amount in a high-yield savings account.

About the author: Satta Sarmah Hightower is a writer, editor and content marketing manager with a decade of experience in the media industry. Her writing focuses on healthcare, personal finance and techno… Read more.