What You Need to Know About High-Interest Savings Accounts

High interest (high yield) savings accounts are available to individuals of all incomes. Earning more interest for simply depositing money into a bank account may sound suspicious at first. After all, most big banks offer minuscule interest rates. They also charge a lot of annoying little fees and carry hefty requirements for their more rewarding interest rates. But that’s not always the case…

These accounts are a great tool for people who don’t want their savings to be eroded by inflation. They are also free of the risks that investments present.

Whether you want to open a new account or not, there are a few things you should know about high-interest savings accounts.

Benefits Of High-Interest Savings Accounts

There are several clear benefits high-interest savings accounts can have on your personal finances.

You Get More Money

First, the most obvious benefit is that you receive more money. Typical basic savings accounts (accounts with low or no monthly fees) will provide you around 0.1% annualized interest. That means if you leave $10,000 in the account for 5 years, you will have earned just $50.10. That’s not even nearly enough to fight the effects of inflation on your savings…

With a high-interest savings account that nets you just 0.5%, that figure rises to $255.05 over the same 5-year period. These figures both assume you just leave your money and don’t contribute any more during those 5 years.

What Rate Can I Expect?

This raises an important question: how much can I expect from a high-interest savings account?

This depends on when you’re using a high-interest savings account.

Unfortunately, if you’re reading this during (or just after) the Covid-19 pandemic that ravaged the global economy, you won’t have access to the best deals for high-interest savings. During 2020, interest rates for these accounts started falling across the board, and most continued to drop into 2021.

This isn’t good news, but the fact of the matter is that they still yield far more than typical savings accounts. Going forward, you can expect high-yield savings accounts’ interest rates to fluctuate but remain relatively high.

You Can Avoid Requirements & Fees

Despite the great rewards that come with high-yield savings accounts, there aren’t always too many requirements or fees that come with them. In fact, many of these accounts have no minimum balance requirements. Many also don’t carry service fees, except for when you treat them like a checking account and make too many transactions.

The thing is that both traditional and high-interest savings accounts can both come with silly fees and requirements. It all depends on the specific financial institution offering the account.

Finding the right bank isn’t always easy. But it’s not that hard to shop around and compare the benefits and costs associated with each account. Even in the dire economic conditions of 2020, you could find a 0.5% interest savings account with no minimum balance and no monthly fees. The main drawback is that when the bank isn’t charging any fees, they are likely to be lacking in customer service. But there are always exceptions.

Fighting Inflation

One opportunity that high-interest savings accounts offer is the ability to minimize the effect of inflation on your savings. 

Over time, your money will become less valuable as the value of the dollar continues to fall. Given that the Fed is printing multiple times as much cash, as usual, it’s a good time to think about what you can do about inflation.

The US inflation rate for 2020 was 1.25%, which was a large drop from 2019’s 1.81%. Inflation rates are normally not too far from this range. But that means that the higher your savings account’s interest rate, the more ability you have to withstand inflation without facing the risks associated with higher-yielding investments.

High-interest savings accounts won’t counter inflation; no bank would offer an annual rate that matches it. But these accounts give you a good start, with far less risk (read “Safety”), at potentially no cost to you. All things considered, that’s not a bad deal.

Saving For Long-Term Goals

High-interest savings accounts are a decent option if you’re saving for a long-term financial goal, such as buying a car. As you save your hard-earned money, you can keep it in a separate account where you can accrue interest simultaneously.

Safety

High-interest savings accounts are just as secure as any other everyday bank accounts. Most major banks, and most that offer high-interest savings, include one of two kinds of coverage:

• Federal Deposit Insurance Corporation
• National Credit Union Administration

What this means is that your money is protected. If the institution you go to goes out of business, either willingly or because of bankruptcy, you are guaranteed up to $250,000 of your money. If you open a joint account, it will be insured up to $500,000. So, you don’t stand to lose anything if your total balance is under the relevant amount.

Drawbacks Of High-Interest Savings Accounts

There are 2 significant drawbacks to high-interest savings accounts.

Unstable Rates

Interest rates are subject to change. High-interest savings account rates are often subject to even greater shifts, as their starting rates are higher.

As we’ve mentioned, this can have a fast and serious effect on your savings. 2020 has illustrated this fact.

Lost Opportunity

If you’re looking to invest in your future, there are far more rewarding investments. High-interest savings accounts offer great interest rates, but if you look at them from an investor’s standpoint, you’re sure to be disappointed.

There are plenty of low-risk investments that will net you annualized returns several times higher than what these accounts will. So, it’s important to understand what you gain, and what you lose, if you opt to put a lot of money into a high-interest savings account.