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While the current interest rate environment may be putting pressure on borrowers, consumers can take advantage of the most favorable savings rates they’ve seen in years. Traditional savings accounts continue to offer minimal returns, but some high-yield savings accounts are offering interest rates as high as 5% or more. There are several compelling reasons to consider making a high-yield savings account a priority in your short-term financial strategy this summer.
What Is a High-Yield Savings Account?
High-yield savings accounts are accounts that offer higher interest rates than traditional savings accounts, giving savers the opportunity to earn a significantly higher annual percentage yield (APY) than they can earn on standard deposit accounts at traditional banks.
The highest-yielding savings accounts tend to be offered by online banks, which don’t face the same overhead costs as brick-and-mortar firms
As with traditional savings accounts, funds in high-yield savings accounts are insured by the Federal Deposit Insurance Corporation (FDIC) or the National Credit Union Administration (NCUA) up to $250,000 per account.
Benefits of High-Yield Savings Accounts
There are many good reasons to open a high-yield savings account, including the following.
1. Attractive Rates
The average rate on traditional savings accounts is 0.45%, according to the Federal Deposit Insurance Corporation (FDIC). High-yield savings accounts, meanwhile, are offering rates as high as 5% or more for accounts that are just as safe as traditional deposit products.
2. Low Fees
The best high-yield accounts bear no monthly fees and low (or no) minimum deposit requirements. Since account providers are typically online, they have lower overhead and can afford to offer customers attractive terms.
3. Potential to Grow Emergency or Short-Term Funds
A high-yield savings account is a great place to stash your emergency fund or save for a short-term goal. Your money is secure and accessible while earning higher returns that could help grow your nest egg more quickly. Park your emergency fund in a high-yield savings account and your money will be easily accessible in the event of unanticipated expenses while still earning a competitive interest rate.
4. Flexibility
Some types of savings products, such as certificates of deposit (CDs), require you to lock up funds for a certain amount of time. With these savings vehicles, you may not be able to make withdrawals without penalties or waiting periods. But with a high-yield savings account, you can withdraw money when you need it.
5. Ability to Outpace Inflation
Inflation stands at 3.3% as June 24, according to the U.S. Department of Labor. Rising consumer prices can decrease your purchasing power over time. With high-yield savings rates as much as 5.3% for some accounts, your money can outpace inflation and preserve its purchasing power.
6. Low Risk
With every account insured up to $250,000 by the FDIC, you can save knowing that your funds are protected and there is no risk of loss.
7. Pursuit of Your Financial Goals
Whether you’re saving for a down payment on a house or a dream vacation, separating funds in a dedicated high-yield savings account can help you reach your goal faster. The higher rate can accelerate savings growth while the dedicated account will keep you focused on your goal.
A Few Caveats
While high-yield savings accounts offer significant benefits, there are a few drawbacks of which you should be mindful. First and foremost, interest rates can fluctuate. Interest rates on bank accounts are variable and if the Federal Reserve cuts rates, deposit rates are likely to also decline. And while high-yield savings accounts are great tools to meet short-term financial goals, they’re not suitable for long-term investing. Over the long term, they may not keep pace with inflation.
Most high-yield savings accounts may also limit the number of transactions allowed to six transactions per month. While some online banks that offer high-yield savings accounts offer ATM cards – and may even refund ATM fees – not all do. Finally, the lack of brick-and-mortar locations may be uncomfortable for customers who like to do business in person.
The Bottom Line
Bearing in mind the few caveats, a high-yield savings account can be a powerful tool in pursuing your short-term financial goals. In the current environment, these accounts are a safe way to maximize the return on short-term savings while keeping your funds readily accessible.
Sources
Federal Deposit Insurance Corporation (FDIC), National Rates and Rate Caps. Accessed June 17, 2024.
https://www.fdic.gov/resources/bankers/national-rates/index.html
US Bureau of Labor Statistics, Consumer Price Index. Accessed June 17, 2024.
https://www.bls.gov/cpi/
