Take a look at your “high-yield” savings account. Today you’re lucky to see 1% annual percentage yield (APY) on a savings account. While that could change in coming months – the Federal Reserve is expected to raise its benchmark rate in 2017 – you’re probably not going to see big changes in savings accounts.
That doesn’t mean your savings account is useless. The best savings account is the one you work into your financial situation so you’re more likely to reach your goals. Before you decide that putting your money in savings isn’t worth it, here are some ideas for how to make the most of your cash savings.
Looking for yield
Even the highest interest savings account isn’t going to offer you much in terms of yield. If you want the best chance at getting a little extra, you may need to make some concessions.
Higher account minimum
If you are willing to overlook the $0 account minimum, it’s possible to squeeze a little extra yield out of many savings accounts. Some banks, like EverBank, offer higher yields – as long as you are willing to put a lot more into the account.
There are plenty of banks that offer tiered systems. Technically, you enjoy a $0 account minimum. However, you might not get the best rate unless you keep more money in the account.
Certificates of deposit (CDs)
Sometimes the best savings account is a CD. With a CD, you have the chance to lock in yields that are higher than what you can get with a regular savings account.
The downside to this type of high-yield savings account is that you are penalized if you withdraw the money before the CD matures. You have to be willing to let the bank have your money for a longer period of time if you want the higher yield.
Money market accounts
Another type of account with higher interest is the money market account. You usually end up with a rate that is linked to current money market rates. The safest money market accounts are still FDIC-insured.
Money market accounts offer higher yields because they are linked to low-risk bonds and other relatively liquid instruments. Usually, there are account minimums and you might be subject to fees. Double-check to see if this type of account makes sense for you. If you’re not careful, the fees can offset any advantage from a higher yield.
If you can’t find what you want at a bank, consider heading to a credit union. In general, you’re going to find the highest interest savings account at a credit union. The National Credit Union Administration (NCUA) tracks comparisons between credit unions and banks. On average, credit unions offer higher yields on their deposit products.
Is looking for yield worth it?
In the long run, it might not be worth it to look for yield from savings accounts. Most major banks have similar rates, so jumping around might not make sense.
After all, is there such a big difference between receiving 0.95% APY and 1.00% APY? Say you put $10,000 in a savings account. At the end of one year, you have earned $95 in interest with a 0.95% APY. With 1.00% APY, your one-year interest payment adds up to $100. That’s a difference of $5. How much time did you spend doing the research to chase that yield? If you spent more than half an hour, you “made” less than minimum wage.
It’s probably not worth the trouble. Instead, you’re better off focusing on the why behind your savings account.
Access and liquidity for emergencies
The best savings account is one that offers access and liquidity. You keep money in cash because it’s easy to get to. You don’t have to wait for a stock trade to settle. It’s not tied to your home.
Your savings account is about being able to access your money when you need it. And because it’s cash, it’s instantly negotiable.
This is why a high-yield savings account is great for your emergency fund. If you run into a problem, you can immediately get the cash for a car repair or to replace a major appliance. For short-term emergencies, a savings account makes a lot of sense. Your short-term emergency fund is where a savings account can really shine.
Short-term savings: safety
Your savings account can also be useful for short-term goals, like saving up for a large purchase or a vacation. You don’t want to risk losing a chunk of capital that you know you want to use in the next couple of months.
If you are saving up for a family vacation, you don’t want to risk a market event happening just before you liquidate your shares to pay for your trip. Most short-term savings goals, from an expensive new computer to a down payment on a car, are accomplished in a few months – and you want to know your money is safe.
Choose a savings account that is insured by the FDIC or NCUA, and you won’t have to worry too much about losing the capital. Plus, you know you don’t have to worry about losing your principal to the vagaries of the stock market.
Don’t use a savings account for long-term wealth building
While a savings account can be great for short-term goals and emergencies, it’s not a good idea to rely on them for long-term wealth building.
Even the best savings account comes with inflation risk. The yields you receive just can’t compete with rising prices over time. Plus, 1.00% APY just isn’t enough of a return to help you reach your retirement nest egg goals. You’d never live long enough for dollar cost averaging to be effective at those low yields.
A savings account has its place and can be a great tool as you build financial freedom and manage your money. However, it’s important to understand the limitations of savings accounts so you can better integrate them into a holistic financial plan.
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|Lender||Rates (APR)||Loan Amount|
|1 Includes AutoPay discount. Important Disclosures for SoFi.
2 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
|7.39% - 29.99%||$1,000 - $50,000|
|5.37% - 14.24%1||$5,000 - $100,000|
|8.00% - 25.00%||$5,000 - $35,000|
|4.99% - 16.24%2||$5,000 - $50,000||Visit Citizens|
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|5.25% - 14.24%||$2,000 - $50,000||Visit Earnest|