For most Americans, opening a savings account is the first step in taking control of their personal finances. And while a savings account can be an important, safe way to keep cash available, a standard savings account is going to earn a scant amount of interest and, when factoring in inflation, could actually lose money for depositors over time.
Many high-yield or high-interest savings accounts offer the same Federal Deposit Insurance Corporation (FDIC) coverage as banks and thrifts (or National Credit Union Administration (NCUA) insurance for state-chartered credit unions) and pay a significantly higher rate of interest. In other words, they'll help you meet your goals faster. Read on to learn more about these types of accounts and how to choose one.
High-yield savings accounts are deposit accounts available through an online or brick-and-mortar banks that pay a higher interest rate (or an annual percentage yield (APY)) than a traditional deposit savings account. (To learn more about APYs read, APR vs. APY: Why Your Bank Hopes You Can't Tell The Difference.)
If the bank that you open the account with is an FDIC-insured bank then your funds are insured by the federal government for up to $250,000. If you open an account through a credit union that is insured by the NCUA, then your money is secured up to $250,000 through the National Credit Union Share Insurance Fund (NCUSIF). You can find a list of NCUA-insured credit unions through NCUA's website and a list of FDIC-insured banks through the FDIC's website.
Numerous financial institutions offer high-yield savings accounts. Start by asking the staff at your bank branch to see if it offers such an account or if, based on your banking history and current account status, it could offer a higher rate of interest for your current savings account. If neither is available, then consider inquiring at other bank branch offices in your area. Several online banks also offer high-yield savings accounts. (For related reading, see Choose To Beat The Bank.)
When evaluating high-yield savings accounts, make sure to gather information about critical aspects of the account. Some vital questions and areas of concern include:
A high-yield savings account should be just one portion of your overall financial portfolio. Consider how you could best use the account to complement your other saving and investment strategies. For example, determine how much cash you want to keep liquid through a high-yield savings account - is it a set dollar amount (i.e. $2,500, $5,000, or $10,000) or enough money to cover a specific amount (i.e. three-six month of expenses in case of emergency)?
Next, determine what you will do once you reach that financial threshold. What is your next best option? Will you move money out of the account and into another interest-bearing account or investment instrument (such as a money market fund, a certificate of deposit, or a mutual or bond fund?)
(For details of these investments, read Money Market: Certificate of Deposit and Money Market Mutual Funds: A Better Savings Accounts.)
At the same time, consider how you could use your account to hold money and earn interest while making investment transactions and decisions. For example, some high-yield savings accounts allow you to roll the principal and interest earned on a CD issued by the same institution upon the CD's maturity into your account without penalty.
High-yield savings accounts often represent a safe, insured way for individuals and families to earn more interest than is possible with a standard savings account. Consider opening an account that provides you with the flexibility and financial requirements you need to beat inflation and keep your savings secure.