Whether you’re saving for retirement, building an emergency fund for unexpected bills, or simply trying to earn interest, you likely store at least some of your direct deposit into a savings account.
But as you accrue savings, you might wonder—is that bank account optimizing your savings and providing you the highest possible returns?
If you manage your money with a traditional financial institution, you could be earning savings account rates of 0.05% and lower on your savings. That’s just a drop in the bucket compared to the higher interest rate available from high-yield savings account providers.
Let’s explore why you should consider using a high-yield savings account in your personal financial plan and learn how to sign up.
7 Benefits of a High-Yield Savings Account
If you’re interested in a high-yield savings account, you might have some central questions on your mind—like, how much does a high yield savings account pay? And how much interest on a high yield savings account is normal?
We’ll answer these questions and more as we explore the seven benefits of opening a high-yield savings account. Here’s why you should get a high yield savings account.
#1 They Pay Higher Interest Rates Than Traditional Savings Accounts
While not all high-yield savings accounts offer the same interest rates, they all pay markedly more to savers than their counterparts at traditional banks. As you search for a high yield account provider, you’ll likely see advertised rates between 0.25% and 5.00% APY.
But why do high-yield savings accounts pay a higher interest rate than a traditional savings account? There are a few reasons:
They’re typically offered by smaller financial service providers that only offer one product—unlike a conventional bank, which likely offers a checking account, savings, credit, loans, and more (all services that cost money to administer).
Online-only or non-brick-and-mortar financial services providers can offer savings accounts with higher interest rates because they have significantly fewer overhead costs associated with running the business. Without any physical branches, they often have significantly fewer bills to pay using loan interest payments.
#2 They’re Low-Risk
If you’re new to the idea of a high-yield savings account, you might have questions about its risks. It’s not uncommon to ask questions like:
Are high yield savings accounts FDIC insured?
Will interest rates drop unexpectedly?
Are high-yield savings accounts financially stable investments?
Asking such questions is an important part of managing your money responsibly. But you’ll be happy to learn that high-yield savings accounts can be very low-risk investments.
This type of savings account is protected by the FDIC (or NCUA, the equivalent organization for credit unions). Because of this protection, you can expect to receive the interest you were promised when you opened the bank account.
In addition, while interest rates are variable for many high-yield savings accounts, the nature of these accounts makes them more profitable than traditional savings accounts, resulting in larger interest payments.
#3 You Can Withdraw Your Money at Any Time
It’s always smart to find out what restrictions may be placed on your money when you use a new type of savings account. But can you withdraw money from a high yield savings account whenever possible?
In fact, you can withdraw (or transfer) money from a high-yield savings account at any time. While there is a six-per-month transaction limit, you can still transfer the funds after you exceed that limit—you’ll just have to pay a fee.
In some ways, a high-yield savings account can offer more freedom than other investment products do. For example;
CDs incur a penalty for early withdrawal
IRAs increase tax liability if investors need an early withdrawal
401ks can also charge fees and incur high taxes for early withdrawals
On the other hand, you can operate your high-yield savings account the same way you would a traditional savings account. Deposit money when you have a surplus, and withdraw or transfer cash when needed.
#4 They’re Low-Maintenance
If you lead a busy lifestyle but want to experiment with investing, you may not always have the available time to fine-tune your portfolio, manage your risks, and optimize your investments.
A high-yield savings account is a set-it-and-forget-it solution to retirement savings, emergency fund building, financial goal setting, and more. Instead of checking your account each day for profits and losses, you can simply deposit your funds, wait for them to accrue interest, and earn money.
When you’re ready to save with a high-yield savings account, all you have to do is:
Open a deposit account
Deposit your initial funds
Make additional deposits when you can
Wait to earn interest on your savings
No checking stock prices, reading minutes from shareholder meetings, or stressing about the market’s volatility.
#5 You Can Expect Low Fees
Many high-yield savings account providers can offer accounts with low or no fees for the same reasons they can pay higher interest rates. These reasons include:
They’re smaller institutions selling fewer financial products, which can decrease their overhead costs.
They typically don’t operate brick-and-mortar facilities, decreasing their financial burden and increasing their ability to provide services at fair prices.
If you do sign up for a high-yield savings account that incurs fees, make sure you’re getting the best bang for your buck. If you open an account that costs more than a competing product, you should be receiving something in return, like:
Increased interest rates
Improved financial tools (like free ATM withdrawals or a debit card)
Customized financial advice
For instance, Aspiration’s Spend & Save accounts are available at two price points—paying what you think is fair or paying $7.99/month for Aspiration Plus. The premium subscription earns increased interest rates, increased cash back for Conscious Coalition purchases, and automatic carbon offsetting.
#6 They Require Low or No Minimum Deposits
High-yield savings accounts can offer high returns. But you don’t have to put a massive sum into your account to reap the benefits of a high APY.
High-yield savings accounts often feature no or very low minimum deposit requirements, whereas traditional financial institutions often require minimum deposit amounts. Doing so often gives the institution the capital to:
Administer your account
Pay employees at brick-and-mortar locations
Process transactions as you complete them
But because online and small financial institutions that usually offer high-yield savings accounts generally have lower overhead costs, they need less of your money to keep the lights on.
Thus, you’ll likely encounter lower minimum deposit requirements or none at all as you search for a high-yield savings account.
#7 Interest Is Only Subject to Ordinary Income Tax
As you consider your financial investments, you also want to understand what tax liabilities you’ll face, if any. So, how are high yield savings accounts taxed?
Savers will find another key benefit of high-yield savings accounts concerning taxation:
401ks, IRAs, and CDs are all subject to capital gains tax or the federal tax on your investment income.
High-yield savings account interest payments are only subject to traditional income tax. Because the funds you deposit into your account aren’t being invested in the stock market, you’re not liable for capital gains.
Depending on how much you plan to save, this could significantly impact your annual tax liability. While high-yield savings accounts aren’t tax-free, they can certainly be a more affordable alternative for savers who want to decrease their tax payments.
Where to Sign Up for a High-Yield Savings Account
If the benefits above have convinced you that a high interest savings account is the right method for you, it’s easy to start saving.
First, find an institution that offers a high-yield savings account, like:
Your financial institution
Your credit card company
Your sustainable financial services provider
But before signing on the dotted line, you also want to compare the different products available on the market. As you do so, review their:
Interest rates
Monthly fee
Physical locations (or lack thereof)
Financial planning tools
Deposit minimums
Once you choose the perfect high-yield savings account for you, consider setting up recurring deposits to help you meet your savings goals without hassle.
Money Management with the Planet In Mind
If you’re looking for an green banking option that goes the extra mile to protect the planet and offers a great APY, look no further than Aspiration.
With Aspiration, you can accomplish everyday money management tasks, reach your savings goals, invest in the stock market, and more—all while potentially reducing your carbon footprint.
Sources:
Business Insider. The Average Bank Interest Rates for Savings Accounts, CDs, Money Market Accounts, and Loans. https://www.businessinsider.com/personal-finance/average-bank-interest-rates
Investopedia. What Is a High-Yield Savings Account? https://www.investopedia.com/articles/pf/09/high-yield-savings-account.asp
Forbes. What Is a High-Yield Savings Account? https://www.forbes.com/advisor/banking/savings/what-is-a-high-yield-savings-account/