Choosing a high-yield savings account to hold your extra cash is a big step in your journey to financial stability. This account is where you’ll store your nest egg, keeping it mostly untouched unless needed for an emergency.
High-yield savings accounts are a strong place to start your portfolio. Depending on your situation, your financial advisor might suggest establishing this account to store your emergency fund before you begin making investments outside of traditional routes like 401(k) and other retirement accounts (see this article by OJM Group for a starter guide to key benefits).
But how do you compare the high-yield savings accounts on the market to know which terms are best for your goals? In this blog, we’ll share examples of these accounts and how to read the fine print to ensure you get what you need without hidden restrictions.
1. APY Matters
The annual percentage yield, or APY, offered by banks usually doesn’t differ much. It can be easy to look at a 4.5% rate and a 4.35% rate and assume the small gap won’t impact your finances much. But let’s look at the results of an example deposit in ten years.
Assuming a general deposit of six months’ worth of expenses totals $10,000, and the depositor never makes any more debits or credits over the ten-year period, here are the final numbers by competitive APYs:
- 4.5% APY on $10,000.00 gains $5,682.60 for a final balance of $15,682.60
- 4.35% APY on $10,000 gains $5,449.15 for a final balance of $15,449.15
- 3.5% APY on $10,000 gains $4,190.42 for a final balance of $14,190.42
At first glance, the deficit between these numbers doesn’t appear to be too significant. But one percentage point lower, from 4.5% to 3.5%, is a loss of $1,500! Keep in mind that these numbers are based on no further contributions made, either. If you plan on making more deposits, the discrepancy is even more substantial.
When it comes to choosing a high-yield savings account, APY matters. However, it’s not the only way to determine which institution and account to use.
2. The Fine Print is Important
Before you open an account based on the APY alone, be sure to check the fine print for terms regarding minimum balances, added fees, withdrawals, and closing the account.
Some institutions take fees out of your account for the privilege of banking with them. If your account goes below a minimum threshold, they’ll also take out fees. Unlike CDs, if you choose to close your account, you won’t encounter an early withdrawal penalty, but you may be fined for too many withdrawals.
Consider convenience, too. If you need to deposit or withdraw cash, is there a bank near you with an available ATM? Is your checking account linked to the savings account to make it simple to transfer funds? Is there a mobile app, and if so, is it user-friendly? These factors can make or break how you manage your savings account.
3. Banks Versus Online Savings
Finding someplace to open a high-yield savings account is fairly simple today. In addition to the traditional big banks, you can also find online institutions ready to pay you to bank with them.
However, there are many reasons why people still prefer to use the traditional banking savings account over online fintech companies. The one-on-one, in-person service is personalized, making it easy to solve problems or get questions answered. While online services are valued, studies show that 83% of people aren’t willing to give up the individualized care that comes from a traditional bank.
Banking through larger institutions also gives you the convenience of ATM options and access to banking products like mortgages, personal loans, CDs, and auto loans. Perks such as overdraft protection and electronic bill pay round out the top reasons people still use banks.
On the downside, having your savings account in a traditional institution may mean accepting lower interest rates over an online bank. You could also deal with the disadvantage of having to deposit a minimum amount and keep it there to avoid fees.
If you’re unsure where to begin, using trusted platforms to compare savings rates can make the decision easier. These tools give you a clear overview of the top-performing accounts based on interest rates, access, and flexibility.
Conclusion
With so many financial institutions happy to invest your money in a high-yield savings account, the ball is firmly in your court as to which one to choose. Look for features like top customer service ratings, APY rates, fees, and the fine print. If you’re still not sure that you’re making the best choice, connect with your financial advisor for more information.