When you want to grow your savings, opening a high-yield savings account is wise. Typically, they offer interest rates far above the national average of 0.37% (as of April 2023), leading to more growth. However, you also want to make sure you leverage the account strategically. Here’s a look at high-yield savings accounts, including how to make the most of your high-yield savings account.
What Is a High-Yield Savings Account?
A high-yield savings account is a deposit account that comes with an annual percentage yield (APY) – commonly referred to as an interest rate – that exceeds what you find with many traditional savings accounts. Most are offered by online-only banks and credit unions, but they come with many of the benefits you’d expect from traditional savings accounts. For example, up to $250,000 deposit insurance, either through the FDIC or NCUA, is the norm.
Additionally, high-yield savings accounts usually come with similar restrictions when compared to traditional savings accounts, such as withdrawal limits based on Regulation D. Still, they’re versatile options with a significant amount of liquidity, often with interest rates far above what you’d find with other savings accounts.
What Are Some Smart Uses for a High-Yield Account, and Why?
Emergency Fund
One of the wisest uses for a high-yield savings account is to use one to hold your emergency fund. The higher interest rate allows the balance to grow faster, which is beneficial when you’re saving a significant sum.
High-yield savings accounts also offer a significant amount of liquidity. Generally, it only takes up to two days to transition funds to a checking account at another institution. If your checking account is at the same bank as your high-yield savings account, transfers are usually instantaneous. Plus, some high-yield savings accounts are connected to ATM cards. As a result, you can quickly access the money when the unexpected happens, all while getting better-than-average interest rates.
Large Purchases
Similar to the point above, using a high-yield savings account to stash money for an upcoming big purchase works well. You get to earn more while keeping the funds suitably accessible. Once it’s time to make the purchase, there aren’t long delays between making that decision and accessing the money, allowing you to move forward quickly.
Short-Term Financial Goals
High-yield savings accounts are worthwhile for any short-term financial goals. For example, if you’re planning home repairs during the next 12 months or want to get ready for a summer vacation later in the year, high-yield savings accounts are a solid option. You maintain liquidity while earning more interest than some alternatives.
Is It the Right Option for You?
Generally, high-yield savings accounts are an excellent choice when you need to maintain liquidity – such as for emergencies – or plan to use the money relatively soon. However, for long-term savings, they aren’t always the best choice, as the interest rates don’t typically beat inflation. As a result, it’s better to use an alternative for goals like saving for retirement.
Opening a High-Yield Savings Account
Opening a high-yield savings account is no more complex than getting a traditional one. Typically, you’ll need to select an institution, provide basic personal information, and make an initial deposit (if required). After that, your account is usually accessible within a few business days, at most, allowing you to work toward your goals.
