Many bank accounts are described as high interest savings account, which assists in increasing your money at a faster rate. It is similar to a normal savings account, except that it offers you a very high rate of interest. The money the bank is paying you to have your savings with them is referred to as interest.
The most important is the annual percentage yield (APY). This is the percentage in which you will make in a year. Even though the APY of a regular savings may be extremely low, as low as 0.33, a high interest savings account may have an APY ranging between 3.5 percent and 4.5 percent or higher. That will allow you to increase your savings 11-14 times more!
How Does a High Interest Savings Account Work?
The Magic of Compound Interest
The key ingredient to a high interest savings account is what is known as the compound interest. It is a very strong concept in that you make interest off of the money you had initially, and additionally the interest you had earned earlier.
Imagine it to be a snowball getting down a hill. It begins small but as it rolls, it picks more snow, becoming larger and larger. In case of compound interest, your money is the snowball. The bank charges interest on your bank account on a routine basis- either daily or monthly. Then the second time they work out interest they work out on your new bigger balance.
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Major Benefits of a High Interest Savings Account
A high yield savings account has a number of excellent benefits when it is opened.
- Greater Returns on Your Money: It is the greatest advantage. The money will increase significantly faster than in a normal savings account. An example is that at $1,000, a regular account will only earn you an average of 3.30 a year whereas a high-yield account can earn you 35 to 46 and above. That's a big difference!
- Safety and Security: Your money is quite safe. FDIC-insured banks guarantee your funds as much as 250,000 dollars per individual, per bank. It refers to the fact that your money would be guaranteed by the government even in case the bank had a problem. It is a lot more secure than storing money at home.
- Simple and Ready Access To Your Money: Unlike other savings products, your money is not confined. It is possible to get your money any time you require it, without any penalty. This is why it is an ideal location of an emergency fund or savings towards short-term objectives.
- Low or No Fees: The most desirable high interest savings accounts are those that do not charge any monthly maintenance fees and do not require a minimum amount of money to maintain. This will enable you to retain larger amounts of your hard-earned cash.
Potential Drawbacks to Consider
These are fabulous but there are some shortcomings one should consider.
- Varying Interest Rates: The APY is variable, and thus your income cannot be assured. When the interest rates in the economy fall then your account rate would also decrease.
- Withdrawal Limits: Certain banks will restrict the amount of withdrawals/transfers you can make within your savings account every month- in most cases, it is six. This is a savings account and not a day to day account.
- Online Banks: Internet Banks: The most profitable accounts tend to be in online banks, which do not always have physical operations. This could be a disadvantage to you in case you want to conduct your banking physically.
- Not as a Long-term Wealth: Although these accounts are very good when one is looking to achieve a short-term objective, the interest rate tends not to match the inflation rate in the long term. Other plans such as investments may be preferable to long-term objectives that are long term such as retirement.
High Interest Savings Account vs. Other Savings Options
What do these accounts compare with other areas you would invest in? Here is a quick comparison.
| Feature | High Interest Savings Account | Traditional Savings Account | Certificate of Deposit (CD) |
|---|---|---|---|
| Interest Rate | Higher, variable | Lower, variable | Higher, fixed for the term |
| Access to Money | Easy, with some limits | Easy, with some limits | Locked until the term ends |
| Risk | Very low, FDIC-insured | Very low, FDIC-insured | Very low, FDIC-insured |
| Best For | Emergency funds, short-term goals | Everyday savings | Goals with a set future date |
Key Differences Explained
- High Interest Savings Account vs. CD: A CD comes with a fixed interest rate provided you are ready to keep your money locked up so as not to touch it within a specific time, say 6 months or 5 years. Early withdrawal of the money attracts a penalty. The high interest savings account allows you to save or debit in a higher interest rate that provides you with more freedom to deposit and withdraw any amount.
- High Interest Savings Account vs. Investing: It can allow better growth in the long run because of investing in the stock market, but there is the threat of losing money. High interest savings account will give consistent regularized growth with practically no possibility of loss. It is a safe deposit box to store money one will require in the near future.
How to Choose the Best High Interest Savings Account?
Not all accounts are the same. The list below is a basic checklist to assist in selecting the correct one.
- Compare Annual Percentage Yield: Search a high Annual Percentage Yield. Compare and shop as there is a wide range of variation of rates among different banks.
- Find No Fees: Select an account which has no monthly maintenance fee. Fees have a tendency to cannibalize your savings and a high rate become less valuable.
- Check Minimums: There are minimums in the deposits required to open an account or minimum required in the balance to receive the highest APY. Numerous great ones do not have minimums at all.
- Understand Access: Learn how to get your money. Does the bank have ATM card? What is the time of day you take to transfer to your main checking account?
- Check FDIC Insurance: You should always ensure that you are dealing with a bank insured by FDIC. This insures your cash to the tune of 250 thousand dollars.
Common Myths About High Interest Savings Accounts
There are a lot of assumptions people make about such accounts, which are not true. Let's clear up some confusion.
Myth 1: It requires huge amount of money to start one.
Fact: This is false. A large number of accounts do not have any minimum deposit. You need not need a lot of money to begin with.
Myth 2: You cannot be sure that your money is not safe in an online bank.
Fact: Your money is as safe leaving it in a bank with several branches as it is in a bank with a small number of branches so long as the bank is FDIC-insured. The U.S. government guarded it.
Myth 3: The interest rate will never alter.
Fact: The interest rates charged on such accounts are floating. These may either rise or fall according to the economic climate.
Myth 4: My money is too difficult to get.
Fact: You can access your cash even though there may be a limit to the number of times that you can transfer money within a month. It is not locked up as in a CD.
Frequently Asked Questions
Are FDIC insured high interest savings accounts?
Yes. The vast majority of high interest savings accounts that are provided by banks are insured by FDIC. This will offer your deposits protection of up to 250,000 dollars per depositor, per bank. The NCUA is the same protection that is provided by credit unions.
What will be the interest saved on a high interest savings account?
Your earnings will be determined by the balance of your account and the rate of interest. Using the provided example, you may invest 5000 dollars in an account with a 4 percent annual interest rate and in one year, you will have a balance of approximately 200 dollars in interest. Calculate future online savings to see how your savings will increase with time.
Will I make negative returns in a high interest savings account?
No. In a savings account that is FDIC-insured you can not lose your original deposit. The balance is not reduced due to changes in the market. Your money is safe and will earn the interest that the bank is offering you.
Am I holding my money in a high interest savings account?
No. Your money is still in liquid form, and you can get it. Whereas federal regulations used to restrict some of the withdrawals once per month, you can also have withdrawals as and when required. It is a saving account however, your money is not stuck away forever.
