What have you done for your future today? That’s probably not an easy question for you. We tend to focus more on the present than our future. It’s natural. We all do it. But it’s an important question, one that you should ask—especially when it’s for your financial future. A high interest rates savings account could be the answer you’re looking for.
Save for Your Future
Savings accounts let you put away your cash while you earn money on the balance. Having your money in a savings account is safer than keeping it in a drawer or the coffee can in your pantry. Plus, you’ll earn money by keeping it socked away at a bank.
A traditional savings account is a basic bank account where you deposit your money and earn interest on the amount deposited. The main benefits of savings accounts are that your money is held safely in the bank and grows over time as the money earns interest. One of the most attractive benefits of a savings account is accessibility. You can get your money out when you need it.
High Interest Rates Savings Accounts
You may be wondering, “What is a high interest rates savings account?” They have similar features of a traditional savings account in that they pay interest on your balance held in a bank. But a high interest savings account differs in the rate of interest paid on your balance. Banks pay you more interest in a high interest account, as the name suggests.
You’ll find a very competitive market for high interest savings accounts. There will be differences among banks in the interest rate you earn on your money, the minimum balance deposit, and the fee structure.
Having a good understanding of high interest savings accounts before you open an account is a good move for your financial well-being.
So remember that a high interest savings account pays you more interest than does a traditional savings account for keeping your money tucked away at the bank. And banks fiercely compete to have you deposit your money with them. Because of this stiff competition, and the rise of online banking, the quantity of high interest rates savings accounts has boomed. And that’s good news for savings-wise customers like you.
How Earning Interest Works
Perhaps you’ve heard the saying, “Let your money do the work for you.” Sounds good. But what does it mean, and how can you get your money to do your work for you?
There are two basic types of interest paid: Simple interest and compound interest. Simple interest is calculated on the principal or total amount of money you deposit in an account. It does not consider the amount of interest you earn on your money. Compound interest, however, takes into consideration the principal (your deposit) and the interest you make on the account. As a result, compound interest calculations produce higher account values (more money in the bank).
Since high interest rate savings accounts pay interest based on the annual percentage yield, they are compound interest accounts. You earn money on your deposit and on the interest the bank pays you. That’s having your money work for you.
Annual Percentage Yield (APY)
The interest rate you earn on a high interest rates savings account is called the annual percentage yield, or more simply, APY. This interest rate is how much you make in interest over 12 months in a high interest savings account (banks use APY for other types of accounts, like bonds or certificates of deposit (CDs)). It assumes you do not add to or withdraw money from your account. Banks publish this rate and let you compare the interest you’ll earn on your money in your account.
When banks post the APY for high interest rates savings accounts, it makes it easy for you to compare the rate to other banks for the same kind of account. That gives you, the saver, plenty of opportunities to find the best savings rate. That means that when comparing banks that offer high interest savings accounts, the APY is one of the first items to consider. So let’s look at an example of the APY. Suppose a high interest savings account currently pays a 2.2 percent APY. If you open an account with a $1000 deposit (or principal) and keep your money in the account for a year without adding or withdrawing money from the account, you’ll have $1022 after 12 months. That’s $22 of interest earned from the simple fact that you’ve left your money untouched in a high interest rates savings account for a single year.
Down the Line
Now, if you leave it in the account for five years and the APY stays at 2.2%, you’ll have earned a total of $115 in interest. Your initial deposit of $1000 would have grown to a balance of $1115. Your $1000 principal has increased by the monthly payment of interest. This money adds to your balance, and the APY is calculated on this new, higher balance. The result is compounding of interest. You’ll have made your money work for you.
APY is Variable
High interest rates savings accounts are an excellent alternative to traditional savings accounts since you get a boost in the interest rate on your balance. But keep in mind that the APY is subject to change at any time. This potential change is known as a variable rate. All high-yield savings accounts base their APY on another rate, which itself is subject to change. For more information on this topic, be sure you read the information on the federal funds rate.
How Interest Rates Are Established
Interest rates are one of the fundamental drivers of our economy. They determine how much it costs to borrow money and how much you’ll earn in interest.
High interest savings accounts pay interest based on a fundamental interest rate set by the US government known as the federal funds rate. A central committee meets regularly and considers the health of the economy to determine if they need to raise or lower the federal funds rate. If the economy is charging ahead and thriving, the committee may raise the basic interest rate to keep inflation in check.
The basic concept of raising the federal funds rate is that it makes it more expensive to borrow money. Less money will be available in the economy, and fewer goods and services purchased. The cumulative effect of less money in the economy reigns in spending and keeps prices from spiraling up and out of control. You can see the opposite effect in a stagnant or low growth economic environment. Lowering the federal funds rate puts more money in the economy, igniting growth.
When the federal funds rate goes up, other rates go up as well, including high interest savings account rates (the annual percentage yield). When interest rates fall, the annual percentage yield of high interest rates savings accounts will drop, too.
To get a better idea of how these variable rates affect savings, you can look back at historical interest rates to see what your deposit would have earned.
More Money in Savings
A high interest savings account may pay an APY of one to two percent more than a traditional savings account. Suppose a conventional savings account pays 0.09% on your balance. A high interest savings account might pay interest at 2.2%, which is nearly 25 times higher than that traditional savings account. The APY of high interest rates savings accounts typically outpaces money market accounts and certificates of deposit (CDs), as well.
Better interest rates can make a big difference in the growth of your savings. In a traditional interest-bearing savings account at 0.09% interest, a $1000 initial deposit would earn $4.50 in interest over 12 months. If you start a high interest savings account with the same $1000 initial deposit, at 2.2 percent interest over the same 12 months, you’ll have earned $115 interest. That’s more than $100 more than a traditional account!
We’ll go over more of the details—fees and withdrawals—of high interest savings account below. For now, it’s enough to appreciate that a high interest savings account pays more interest than a traditional savings account, money market, or certificate of deposit (CD).
An Account with a Purpose
High interest rates savings accounts are an excellent way to save money for a purpose, whether it’s a down payment for a house or a new car, or to have cash stashed for those unexpected emergencies. To keep financially healthy, starting with a money-wise objective in mind can help you reach your goals.
Traditional checking accounts are excellent for paying bills and going shopping, but for your savings, it pays to put your money into an interest-bearing savings account. And keep in mind that some financial objectives, such as saving for retirement or college, have specific types of accounts geared towards those goals.
Your Emergency Fund
We all have unexpected expenses come up. Your washing machine breaks, your car needs a new transmission, you have to pay a medical bill, or you need a flight to visit a relative in need. These expenses may be unexpected, but having money to pay for them doesn’t need to be puzzling.
That’s why having easy access to a savings account is a fantastic tool for your financial health and peace of mind. Think of that $375 for a plane ticket to visit your relatives in need, or that $600 for a new washing machine. These are urgent, do-it-now expenses that you’ll need to pay for right away. In both cases, you’ll want to have money quickly accessible. A savings account gives you access and pays interest. This makes it more attractive than a checking account (and it’s a much better option than charging to a credit card). And if you don’t have an unexpected expense pop up, you’ll continue to earn interest on your savings. That’s letting your money work for you!
Starting Point
A good rule of thumb is to have three to six months of money in your emergency fund to cover necessities like mortgage or rent, food, and medical expenses. We all have different incomes and expenses, so set aside an amount you believe is sufficient for your specific needs.
If you don’t have an emergency fund already, put money away regularly, and establish one. A high interest rates savings account is a good place for your emergency fund since you can get your money out when you need it. Plus, you’ll earn interest on the balance while it’s in the bank.
Inflation
Rising prices affect everyone as more money is needed to buy goods and services. As a saver, inflation has a direct impact on your money.
Take, for example, your weekly supermarket trip. Say you spent $100 for a weekly supermarket trip 25 years ago and pushed your cart out full of milk, eggs, vegetables, and the rest of your groceries. As the prices of those same goods rise, you would pay more for them over the next quarter of a century. In historical terms, inflation was around 2% over those 25 years, meaning that now you would need nearly $175 for the same basket of groceries. It’s just like a balloon that grows in size when it’s filled with air. That’s why, when prices rise, we call it inflation.
We’ve had a relatively low historical inflation environment around 2% a year over the past decade. When you consider that inflation rate over a more extended period, you’ll pay more for the goods you buy with your money.
Suggested Reading: Inside the Pros & Cons of 5/1 ARM Rates
What This Means for You
Let’s look at an example with a higher inflation rate. Say you need a new washer and dryer that is $1000. You could buy it today for $1000 and be on your way to fresh laundry. Suppose instead that you were to buy the same washer and dryer 12 months later at an inflation rate of 2%. Then, the new washer and dryer would cost you approximately $1200. At a hypothetical 8% inflation, you’d need $1800 for the set. The lesson here is that inflation can take away from how far your dollars go, a concept called purchasing power.
Purchasing Power
Purchasing power is how much you can buy with your money at any point in time. Today you can go to your local supermarket and buy a five-pound bag of self-rising flour for three dollars.
But as prices rise from inflation, you can no longer buy the same bag of flour for three dollars. Instead, say a year later, and with inflation rising prices 2%, your three dollars will only get you four pounds of flour. Your purchasing power has decreased due to inflation.
Inflation and Your Savings
You may be wondering how inflation relates to your savings account. Inflation reduces the overall return on your savings. Take an inflation rate of 2%. If your money grows at an interest rate of 3%, the return on your savings would be lower than the 3% interest rate. Because you can buy fewer goods due to inflation at 2%, your real return on your money would be around 1%.
Inflation, therefore, erodes your purchasing power by raising the price of goods.
To keep ahead of the rising inflation rate, the interest rate you earn on your money should be higher than the inflation rate.
Withdrawals
Saving money and earning interest on your money in the bank is a great idea to reach your financial goals. But when you need that money, you’ll need to make a withdrawal.
You can typically make up to six withdrawals per statement period in your savings account. After six withdrawals in a single statement period, the bank can restrict your ability to take money out.
The idea of a savings account is to save and grow your money rather than withdraw it. The withdrawal limits are imposed by federal government regulations to keep your withdrawals to a minimum and in line with the objective of a savings account.
Grow Your Money
The idea behind a savings account is to have a safe place to grow your money. So adding to your balance with regular deposits is common among savers.
Let’s say you’ve decided to put away $100 a month into the account after you first opened it with a $1000 deposit. After a year, you would have earned $34 in interest. Keep going with the $100 monthly deposit, and after five years, you’ll have made $450 in interest alone!
Keep in mind that savings account fees reduce your total return. These examples, for simplicity’s sake, haven’t factored in any such fees. Also, remember that interest rates change, and this illustration assumes the interest rate stays the same over the entire period.
Liquid vs. Illiquid Assets
Accessibility is one of the critical advantages of high interest rates savings accounts. Getting your money quickly when you need it is called liquidity. Generally, the more liquid an asset, the more easily and quickly you can get your money without a loss in value. Cash is considered the most liquid of all assets. The cash in your checking account, for example, can be accessed quickly without a loss in value.
An illiquid asset is harder to sell quickly or would result in a loss to you. The accessibility of your money in an illiquid asset is lower because there are fewer buyers who are willing and able to buy the asset from you. An example of an illiquid asset is real estate.
If you consider the money in a checking account versus owning a parcel of land, you’ll see the stark differences between liquid and illiquid assets. The checking account is already in the most liquid of assets, cash. In contrast, the parcel of land may take days, weeks, months, or years to convert into cash (i.e., only once someone is willing to buy it). Money in a savings account is also considered as cash, the most liquid of assets.
Savings Account vs. Certificate of Deposit
Compared to a certificate of deposit (CD), your savings account has greater accessibility. When you put money into a CD, you cannot get your deposit back before the end of the holding period without incurring a penalty. If you have a 12-month CD and want to get your money back before the year period is over, you’d pay a penalty of three months’ worth of interest, for example.
Your high interest savings account offers much better accessibility since you can take your money out when you need it. And under most circumstances, you can withdraw any amount you need, when you need it.
As mentioned earlier, however, you have to consider that high interest rates savings accounts have limits to the number of times you can withdraw your money in a statement period. There may be fees associated with withdrawals the bank considers excessive. These are essential points to consider.
Savings Account vs. Money Market
High interest savings accounts may look very similar to you to money market accounts. Both pay interest on your deposits. They’re also both federally insured by the Federal Deposit Insurance Corporation (FDIC).
Like a high interest savings account, money market accounts are limited to no more than six withdrawals per statement period. This rule is necessary to comply with federal regulations that keep intact the purpose of both savings accounts and money markets.
Taxes on Interest
Interest earned in your high interest rates savings account is taxable. That’s no different than money earned on other interest-bearing accounts or investments. Be sure to speak with your tax professional and know what the tax implications are for your high interest savings account.
Risk vs. Return
An appealing benefit of a savings account is that the money you put into the account is not going to lose value (except for any fees). Thus, your money is very safe from losing value compared to riskier alternatives such as company stock, bonds, or real estate. In other words, a savings account affords you with the relative safety of the money you put into the account. which is called the principal. You are guaranteed to get the money back you put into the account without losing any money.
Fluctuations
With an asset like corporate stock, the price of the stock fluctuates, and sometimes wildly. Fluctuations occur for many reasons (company news, a new product driving strong earnings, moves in the general stock market, and so on). The chance of getting all your money invested in the stock is less likely, therefore riskier. But with this risk, you have a chance of a higher return, all other things being equal to a savings account. This relationship, taking an opportunity for a higher return with a greater possibility of losing money, is called risk versus return. Remember, the more risk, the higher the potential return, and the less risk, the lower the possible return.
The risk in high interest savings accounts is minimal compared to owning company stock, real estate, or precious metals. As mentioned earlier, you cannot lose any of the money you put into a high interest savings account. However, there is a possible downside to this risk-reward relationship with high interest rates savings accounts. With the lower risk and lower potential return, there’s the potential of not earning enough interest to outpace inflation. In other words, you’d be giving up the potential to earn better returns with other financial products.
Is Your Account Protected?
The Federal Deposit Insurance Corporation (FDIC) protects high interest savings accounts against bank failure. (You most likely already have FDIC protection on your checking account). This means that if the bank where you have your high interest rates savings account fails (a highly unlikely scenario), your account is protected against loss up to $250,000.
You do not need to ask for or apply for FDIC insurance for your high interest savings account. FDIC insurance automatically covers these categories: checking and savings accounts, money market accounts, and certificates of deposit (CD). Each account category is limited to $250,000 insurance. This account category tool can help you find out if your accounts fall within the $250,000 limit. You can find out if a bank is covered by FDIC insurance by looking for the FDIC sign inside a branch or on the bank’s website.
Before you open an account, make sure your bank is FDIC insured and that you don’t have over $250,000 in any account category. Then you can know that your money will be covered by FDIC insurance.
Minimum Deposit
You want your money to work for you by earning as much interest as possible. A high interest savings account provides that opportunity. Additionally, you get the guarantee that you will not lose money by putting it into the account. Plus, you have access to your money when you need it. These features and benefits are available to you as long as you meet the minimum deposit amount in a new high interest savings account.
To open a high interest rates savings account, banks have a minimum balance required value for a deposit. These minimum balance values can range from as low as $0 to over $10,000. Minimum balance deposit amounts are posted online and inside local brick-and-mortar bank branches, as well. You’ll find that in many cases, the higher the APY offered, the greater the required minimum balance deposit to open the account. Be alert for high interest rates savings accounts that have a very low minimum balance deposit and high APY. They may come with higher monthly fees.
Fees
While banks are fiercely competing for your savings dollars and want your money in their bank, don’t forget that they are in the banking business for profits. You’ll find that many banks charge a monthly maintenance fee to cover the costs of administering your account. These fees are required to be disclosed by the bank. They are typically a nominal monthly amount. However, over the long-term, they may erode the growth of your high interest savings account.
The good news about fees on high interest rates savings accounts is that you may be able to avoid them altogether. Higher balances usually result in lower or even waived fees. Some banks will also waive the monthly fee if you have another account at the bank, like your checking account. Be alert for high interest rates savings accounts that have no monthly fee. They may reduce your APY if your balance falls below a certain threshold.
That’s why it pays to know what’s out there that’s right for you before you open your account. Each bank has its own fee schedule, so understand what fees, if any, you’d be paying before you open your account. Understanding the features and benefits of a high interest rate savings account helps you become a well-informed money saver.
How to Open a High Interest Rates Savings Account
It pays to do the legwork before you open your account to get the highest rate for your money. You can find hundreds of high interest savings account offers. A good place to start is your local bank or credit union. Yours could be the bank where you already have your checking account or one of the many online-only banks.
Account Holder
To be the primary account holder, you’ll need to be 18 years or older. For minors (under the age of 18), consider opening a custodial account geared toward young savers. Typically, these custodial accounts for minors have smaller minimum balance deposits to get a youngster started. Starting a savings account helps build the savings habit of putting away money. It also provides more time for savings to grow from the interest earned on the account.
Before You Open an Account
Remember to consider these items before opening the account:
- Annual Percentage Yield (APY) or Interest rate
- Fees
- Minimum Balance Deposit
- FDIC Insurance
What You’ll Need for the Application
Before you start your online application, you’ll need the following:
- Social Security number
- Birthdate
- Mailing address (no post office boxes)
- Email address
- The funding source for your new account
Online-Only Banks
You’ll find that online-only banks pay a higher interest rate than traditional brick-and-mortar banks. They don’t have the overhead expenses associated with building maintenance, meaning they can pay you more for your money. Online banks have the benefit of a nationwide customer base. Traditional brick-and-mortar banks are limited to serving only in the area where their branches are located. (However, this has been somewhat curtailed by conventional banks that also offer online banking.)
If you want to get the best rate available, an online-only bank is typically the place for your high interest savings account. Most online savings accounts can be opened in as little as 10 minutes. Yes, you read that right. And you don’t even need to step foot inside a bank branch.
Traditional Brick-and-Mortar Banks
If you’re uncomfortable having your savings in a bank that you can’t visit and have your heart set on a brick-and-mortar bank, call around or visit your local branch and ask for the best high interest rates savings rate.
You may need to go to a branch to open your savings account if you’re opening the account with many thousands of dollars. You may also need to do it in person if you have problems with your credit report.
If you do choose to open the account where you already have a checking account (either online or brick-and-mortar), the account opening process is quick and easy. The bank already has your account information, so opening the account may only involve filling out a simple online form.
Think About Your Financial Future Today
When you’re looking for a place to save money that pays more interest than a traditional savings account or money market account, look for a high interest savings account. They offer higher interest payments and the same accessibility as conventional savings accounts. Be financially knowledgeable and make sure a high interest savings account aligns with your financial objectives. If it is, you’ll have another piece of your financial act together, and that makes for better financial health.
Do you already have a high interest rates savings account? If so, with what bank? Have you enjoyed your experience with them?
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