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Interest rates on high-yield savings accounts are at historic highs, yet many people aren’t taking advantage. A recent Bankrate survey found only one in five savers has an account with a competitive rate.
High-yield savings accounts can grow your money without much effort. The average savings account interest rate on Aug. 7 was 0.53%. The best high-yield accounts can earn up to 4.5% or even 5%.
Here’s how high-yield accounts differ from regular savings accounts and why you should consider switching.
Different accounts, different rates
Banks and credit unions will offer traditional savings accounts as a safe place to store your money.
These accounts are reliable and accessible, but the typical returns aren’t very impressive. Some accounts require a minimum balance to maintain your account and limit the monthly withdrawals you can make.
On the other hand, you can only open a high-yield savings account at an online bank. Many online banks don’t have the same overhead costs as brick-and-mortar banks. They can then pass those savings on to accountholders through higher interest rates.
This means your savings have the potential to grow faster over time, allowing you to earn more money on your hard-earned cash.
High-yield account interest rates aren’t fixed and may fluctuate over time, but they still often beat out traditional accounts. But, like regular savings accounts, some high-yield accounts may limit withdrawals and require a minimum balance to earn the highest interest rate.
Why don’t more people open high-yield accounts?
If it’s not broken, don’t fix it: This seems to be the consensus among consumers who have stuck with a traditional savings account.
Opening an online bank account is easy, but many consumers don’t see it that way. Even the allure of better rates isn’t enough to make the switch.
There are a few reasons consumers are staying put:
- Prefer face-to-face interactions
- Concerns about the safety and security of online banks
- Have established relationships with their current bank
- Find the process of switching to be a hassle
Case in point: Almost half of Americans say they preferred access to a local branch. One in four said they were comfortable with their current financial institution.
How staying put costs you
Parking your savings in the same place for years may be easy and convenient, but it’s likely costing you, especially in times of higher inflation.
Over time, as inflation rises, the purchasing power of your money decreases. If your savings account interest is not keeping up with inflation, you’re essentially losing money.
High-yield accounts have outpaced inflation for the past five months, offering the potential to grow your money over time. Not taking advantage of these higher rates means you’re losing the opportunity to maximize your savings.
Let’s do some math. Imagine you have $10,000 in a traditional savings account, earning an average interest rate of 0.53%. After a year, you would earn just $53 in interest. If you had that same $10,000 in a high-yield savings account with an interest rate of 4.5%, you would earn $450 in interest over the same period. That’s a big difference!
Over the long term, the compounding effect of higher interest rates can substantially boost your savings.
“It’s important to remember that this is not the type of account in which you should be taking risks. That being said, it is also important that you are earning as much interest as you can,” says Corey Noyes, financial advisor and founder of Balanced Capital.
If you have a low-interest savings account, consider the potential earnings by switching. This could be in a high-yield account, but you could also consider a money market account or certificates of deposit, depending on your financial situation and goals.
How to switch savings accounts
When you’re ready to make the switch, here’s what to look for in a new account:
- High-interest rate: Look for a bank offering competitive interest rates on its savings accounts. Compare rates among different banks to ensure you get the best possible return on your money.
- Fees: Pay attention to any fees, such as monthly maintenance or overdraft fees.
- Minimum balance requirements: Some banks require a minimum balance to maintain the account or avoid fees.
- Accessibility: How easily can you access your savings? Being able to withdraw your money easily is crucial in an emergency.
- Security: Look for FDIC-insured banks, ensuring that even if the bank faces financial difficulties, your savings will be protected up to the insured limit.
- Account features: Some banks may provide automatic savings plans, goal-tracking tools, or the ability to link your savings account with other accounts for easier management.
Once you’ve found the right bank, apply online and transfer your funds into the new account. Leave enough funds in your old account to cover any outstanding payments or pending transactions.
If you have direct deposits or automatic payments set up with your old bank, make sure to update this information with your new bank.
The bottom line
A high-yield savings account offers a hassle-free method to keep your money consistently growing. By researching the best rates, you can avoid missing out on the opportunity for a significant boost to your savings.
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