Buzz
There are numerous options for investing your money for long-term gains. But when it comes to short-term savings, shouldn’t you be able to earn a little extra on that as well?
You might be drawn to those "high-yield" accounts since they claim to offer up to 20 times the national average rate. That’s because the national average stands at just 0.10%. Not 10%, but 0.10%. If you’ve kept your money in a standard savings account, you may have noticed that your balance hasn't exactly been growing.
In recent years, newer banks—many of which are exclusively online—have attracted customers with interest rates that seem much higher compared to traditional banks with physical branches. We're talking about rates between 1.5% and 2.5%. Online banks don’t have to cover the costs of tellers or maintain branch locations, so they pass the savings onto you with better rates.
However, this interest rate isn’t going to revolutionize your finances. A high-yield account offering 2% APY would earn you $10 on a $500 deposit left for a year. If you kept that same $500 in a regular savings account, you’d get only $0.50 in interest over the same period.
Even so, that's still something. So, with all the high-yield savings accounts available, how do you decide which one to choose?
Key Features to Consider in a High-Yield Savings Account
Initial deposit or account balance requirement
While many accounts don’t require an initial deposit to open (after all, they want you to sign up), some may impose a monthly fee if your balance falls below a certain amount. For instance, Citi Accelerate Savings charges a $4.50 monthly fee if your balance is under $500.
Deposit and withdrawal limits
Since you’ll likely be keeping short-term savings in one of these accounts, it’s important to make sure you can access your funds when needed, whether it’s for that upcoming family vacation or replacing the car’s brakes this year.
In the U.S., savings accounts are typically restricted to six withdrawals per month, thanks to Regulation D, which ensures banks have enough funds on hand for requests. Since banks often use your funds for lending, exceeding this limit can lead to penalties. For example, Barclays will charge $5 for each withdrawal or transfer beyond six per month, and after three instances in 12 months, they may close your account.
Expect a limit of six withdrawals per month, but make sure to check for any additional restrictions on deposits or withdrawals. For instance, Marcus has an online transfer limit of $125,000. This might not be a big concern unless you’ve just hit the lottery.
Interest rate
For the past five years, the national average interest rate for regular savings accounts has hovered between 0.10% and 0.20%, with some increases in 2019. (The 0.10% APY mentioned earlier reflects the national average for the week preceding this article's publication.)
For high-yield accounts, aim for a variable APY around 2%. As of this writing, I found rates ranging from 2.1% to 2.3%.
Keep in mind, these APYs aren’t fixed. They’re likely to fluctuate if the Federal Reserve adjusts interest rates.
Ensure it's insured
Savings accounts offered by banks are insured by the Federal Deposit Insurance Corporation (FDIC), while credit unions' savings accounts are covered by the National Credit Union Administration (NCUA). Take a moment to confirm that the account you're considering is insured.
Most financial institutions clearly display their insurance information, often mentioning their FDIC status on the homepage or in the account details. Many banks will proudly show “Member FDIC” right next to their name. The standard insurance coverage is $250,000.
Ready to pick it and forget it?
Once you’ve settled on a high-yield savings account, don’t keep jumping from one to the next in search of slightly higher rates. It’s not worth swapping accounts just to move from a 2.1% APY to a 2.3% APY. The purpose of a savings account is to let your money grow without having to chase after fluctuating interest rates. Plus, since rates can change, you might find your rate increasing without having to lift a finger.
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