How to Find the Best High Yield Savings Account

A savings account is a safe place to store your money, and by placing your money in a savings account, it will grow over time. When you put your money in a savings account, you are lending your money to your bank or credit union, and they can use this money to make loans to other customers. Currently, interest rates are very low, so the amount of return you will receive for placing your money in a savings account is also low, but if you shop around you can find more attractive rates from online banks as well as brokerage accounts. Most banks and credit unions require a low initial deposit to set up a savings account, and most do not charge a monthly maintenance fee if you retain a certain deposit level. Saving accounts are offered in different amounts of 10K saving account, 25K saving account, and 50K saving account.

What is a Savings Account?

A savings account is a deposit account held at a bank or credit union that pays an interest rate. The interest rate that is paid is modest and fluctuates with market interest rates. Many financial institutions require that you keep a minimum monthly average to avoid fees and receive a specific interest rate. Additionally, checks are usually not provided with savings accounts and the money that you place in a savings account at a bank, credit union or broker are insured. This means if the entity that offers you a savings account falls into bankruptcy, you will not lose your money.

Banks are generally insured by the Federal Deposit Insurance Company.  Brokerage firms are insured by SIPC. This protection for cash and securities insured by SIPC provides up to $500,000 of protection for brokerage accounts held in each separate capacity. Credit unions are insured by National Credit Union Administration.

Advantages of Savings Accounts

A savings account is advantageous because it pays interest and helps compound your savings. While the interest is moderate, it can add up over time. Savings accounts are the most liquid form of investment allowing you to withdraw your cash at any time. It is much more difficult to withdraw your funds from a Certificate of Deposit, bond or stock investment.

Disadvantages of a Savings Account

While the liquidity of a savings account is a benefit, the availability of your funds makes it very easy to spend the money on everyday items. Additionally, savings accounts nearly always pay lower interest rates than other interest-bearing accounts such as CDs or treasury bills. If you are looking for a long-term investment, where you do not need access to your funds, you might be better served with an investment with a higher rate, where your money is going to compound and produce a higher return.

How to Use a Savings Account?

A savings account is a place to save for a rainy day as well as earn interest as a benefit. If you are wondering how much money you should keep in a savings account, you should consider your monthly costs, and calculate the amount of money you would need to cover your budget for 3-6 months. This will provide you with a cushion if you need money for an emergency. The liquidity provided by a savings account will allow you to access your funds quickly when you need it the most. While some financial advisors believe you should have more in your savings account, several believe that any excess should be placed in a higher yielding investment account or used to pay down debt.

How do You Open a Savings Account?

You can either visit a brick and mortar bank or open up an account online. To deposit money you can have it debited from the checking account if the account is linked, or go to the bank and deposit a check. If you are opening an account online, you can wire the fund, link a different account, or send a check to an address that the financial institutions designate. When you withdraw funds from an account, you can go to the physical bank or any ATM machine that will allow withdrawals. You can also have a check sent back to you.

Adding Funds to Your Savings Account

One of the most desirable ways to add to your savings is to consistently add funds. If you have the type of job that provides you with a consist paycheck (every 2-weeks or every month), you can set up a direct deposit, adding a specific amount to meet your goals. If your work environment does not have a direct deposit option, you could consider setting up an automatic debit from your checking account into your savings accounts on a regularly scheduled basis. If you are targeting funds that equity 3 to 6-months of bills, then once you reach this level, you could consider setting up your savings account with a link to an investment account. Remember that your savings account produces returns but with rates, at historically low levels a saving is not the most efficient place to attain a long-term investment.

Saving Account Minimum Balance

A minimum balance is the minimum average balance that you must keep in your account to receive the return from your financial institution. Many times, your financial institutions will penalize you if you do not keep the average minimum balance in your account for the entire month. A penalty could include a reduction in your interest rate, to a lower non-preferred level.

Best Savings Account Rates

Some online savings accounts are offered in tandem with bonuses. For example, Discover, which is a large credit card provider, has a banking arm. They offer a bonus of $150 for a $15,000 initial deposit, which is equivalent to 1%, which means you can nearly double your return over the course of a year with a sizeable deposit. For $20,000 they will give you a bonus of $200 dollars. You can also open up multiple accounts, which will allow you to receive this amount (1%) bonus for every account that you open from $15,000 to $20,000. These bonuses come and go so look out for them.

If you are looking to place money in a credit union, they also have online insured savings accounts that offer attractive deals.

To find the best rates, you can use FX Empire best saving account rates comparison tool.

Savings Rates Levels are Not Guaranteed

There is a drawback associated with putting your money in a savings account which is that the savings rate is not guaranteed for a specific length of time. The benefit you enjoy of having the ability to withdraw your money at any time comes with some drawbacks. Nearly every savings account that you open with says that the issuer can change the interest rate at any time.

This issue is important for multiple reasons including how it will affect your return. If the interest rate is cut in half, you could experience a return that is half of what you expect. Rates will always change with the market. This means that if the Federal Reserve increases interest rates that banks can loan to one another than you should expect the rate you receive to eventually rise. Alternatively, if the Fed lowers interest rates, the savings rate that you are receiving will likely fall.

What can be more concerning is that banks use high-interest rates as a marketing tool. If you are looking only online for the highest rate, you might run into a new bank that boosts its savings rate to elevated levels to attract new customers, only to drop the rate once customers open their accounts. While this is not the case for every bank, it is something to keep an eye on, especially if your goal is to experience the highest interest rate possible.

What is APY?

The APY (the average percentage yield) is the interest rate you receive from your bank, on an annualized basis. This rate is the rate that you earn on every dollar but does not tell you the amount that you will earn on your account over the course of a year. This is because the APY does not take into account the compounding effect of interest rates.

What is APR?

The APR (annual percentage rate) reflects the interest paid on a savings account and describes the rate that you will receive which includes compounding.

What is Saving Account Compounding?

Compounding occurs when the value of an investment increases because of the earnings on an investment. With a savings account, you are earning money because you are receiving interest. When you earn interest your money grows and you now have more money to receive interest on. This exponential growth occurs because of the total growth of an investment. So, you are not just adding to your savings account because you are depositing funds, you are also adding to the account with yield. This has a compounding effect which enhances the yield and is captured by the APR

Compounding Example

The APR is a realization of the time value of money is also referred to a compound interest. For example, suppose a $10,000 savings account investment with 2% yield. At the end of year one, assuming only one yield payment, the total invested would be $10,200. Next, assume that in the second year, the investment earns another 2%. In year two, the total balance of $10,200 would earn 2%, ending with a value $10,400. The extra $4 of growth is due to the $200 earning of year one also growing at 2% in year two, along with the principal.

Compounding is a very important part of generating investment gains, and once you reach savings account financial goals, you can consider looking for an investment account that will provide you will larger yields, which can generate robust compounding gains.

Summary

A savings account is an interest-bearing account that allows you to safely put aside money for a raining day. Most savings accounts do not provide checking capabilities, and many have a minimum which needs to be maintained to allow you to receive the advertised yield. Savings accounts are one of the most liquid accounts that provide a return, but with that liquidity comes a low return on your investment. Savings accounts at banks and credit unions are regulated by the FDIC which provides insurance on your account of up to $250,000 per account. Many financial analysts believe that you should use your savings account to grow a financial buffer that is equal to 3-6 months of your living expenses, and once you have achieved this goal, you should look for an investment account, which will allow you to generate higher returns. You need to be cognizant that a bank or credit union can change the interest rate that they pay on a savings account at any time, and some new banks offer a teaser rate, which moves lower at some point in the future.

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