[mks_toggle title=”Where to Listen” state=”close “]
Before I get started on this week’s topic, I wanted to let you all know about an award that I’ve entered and I’d be so grateful if you all could help me win by voting for me! The PLUTUS Awards is an annual award honoring financial literacy creators. I’ve put this podcast under Best New Personal Finance Podcast as well as Best Generational Financial Literacy Content. It would be an honor to win this and have my podcast shared with more people! I do this podcast to share what I wish I had known about finance before being an adult and I want others to benefit from what I’ve been doing. Click here to vote for me – the link for my podcast is already filled out so all you need to do is put in your own personal info! Please only vote once as IP addresses will be monitored. Voting ends on July 15th. Also, make sure that you follow PLUTUS on social media – they have great financial content that I think you’d like. And make sure you vote for other financial creators on other topics! I know I’ll be voting for PPC Ian, Our Rich Journey, and The Minority Mindset! Thank you all so so much for your constant support!
What is a High Yield Savings Account?
Last week I hope you all learned a lot about traditional Savings accounts. This is the bread and butter of savings and always a great place to start! I also wanted to add one thing I forgot to mention about Savings Accounts. My brother reminded me of this. Make sure you are depositing money into this account at least once a year. There is a yearly amount you should be putting in so your account isn’t closed for inactivity. Depending on the bank, they can also keep the money that is in that account! This is just something to be mindful of.
This week we are talking about High Yield Savings Accounts. They are similar to a traditional personal savings account but very different at the same time.
So what is a high yield savings account? A high yield savings account is a savings account that pays about 20-25 times the national average of interests compared to a traditional savings account.
High Yield savings accounts are a newer concept because they really evolved with the internet. You see, High Yield savings accounts are with digital banks. No brick and mortar banks I’ll have one – such as Bank of America. These digital banks are able to pay a higher interest rate than traditional banks because they don’t have that overhead of having to rent a building, pay employees to sit in the building, and any of the paperwork needed to run a bank.
If you remember from last week’s episode that traditional savings accounts have a very low interest rate. If we take the national average of 0.10 percent and you have 5,000 in savings, you’ll only receive $5 in interest. In a high yield savings account, you can get a bank with as high as 2 percent, so you could earn $100! This is a huge difference.
Picking a High Yield Savings Account
When picking a high yield saving account you want to have similar considerations to traditional savings account such as how much you need to open an account, any fees, how to waive those fees, the interest rate, and withdrawal limit. For a high yield savings account, I also believe that the app and website that they have to play a huge role since their services are fully online.
I want to compare a few different types of high yield savings accounts to explain what you should consider.
The first bank I’m looking at is Ally Bank – I use Ally bank for all my long-term and emergency fund savings. I am partially biased towards Ally since I use them, but after doing all my research I’ve found that they are the best. There is no minimum balance required or monthly maintenance fees for Ally. This is a huge advantage. You can open up an account for $50 and truly open that account and not have any fees. I also like that Ally Bank has a feature called buckets. I have two buckets – one for my short-term financial goals and one for my emergency fund. It’s an easy way to put different amounts in different financial goals, all while in the same bank account. Ally Bank has an interest rate of .5%, compared to .05 to .01 percent at traditional saving accounts. I will go into the history of the interest rates of high yield savings accounts in the positives and negatives of these types of accounts, but this is still a great rate! Like all savings accounts, there is a 6 withdrawal limit. With any withdrawal over 6, you will have to pay $10. Like I’ve said, plan your withdrawals for the month – you should try to withdraw your month altogether so you are never close to your monthly limit – never pay for anything you don’t have to.
Let’s compare this to the American Express high yield savings account. Similar to Ally, there is no minimum amount needed to open an account and there are no monthly fees. There is a 9 limit withdrawal limit for American Express, so a bit higher than any of the other accounts we have looked at, but this shouldn’t be a huge consideration since you should plan for withdrawals.
You can google other high yield savings accounts if you want to do some comparisons. You should always check if this bank account is FDIC insured, which protects your money. If having a digital bank account worries you, this FDIC insured should give you peace of mind since all banks are FDIC insured.
I always like to share the positives and negatives of different types of accounts so you all can make the most informed decision when it comes to your finances.
Like I’ve mentioned before, high yield savings accounts have a higher interest rate than traditional savings accounts. This is a huge positive because your money will be able to grow a bit more, but still be in a safe, reliable account that is low risk.
Many high yield savings accounts also have no minimum required and no monthly maintenance feed, which is really great! This allows for a low barrier to entry for anyone to start a savings account without having to worry about having enough money in that account and without worrying about accruing any fees.
Like all things finance, there are negative aspects to any type of account that you can have. It’s good to know the negatives so you can make the best decision for yourself. These negatives might be a deal-breaker for you or they might not matter to you at all.
I’ve found that high yield savings accounts tend to fluctuate on their interest paid more than traditional savings accounts. When I first got my Ally Bank account, my interest rate was 2.2%. It is now at 0.5%. Still better than the 0.05% at any traditional bank, but going from 2.2% to 0.5% is tough! The Fed controls the rates and there has been a lot of change this past year which makes it fluctuate. So while you might have a high rate for a bit, it will change.
High Yield Savings accounts are also all virtual which makes your money a little less liquid than traditional savings accounts. With a traditional savings account, I can drive to the bank and pull out the cash if I need it that day. With a high yield savings account, I can’t do that. I need to initiate a transfer to your checking account and then in a day or two, you can withdraw your money. I personally don’t have any issues with this since I plan any withdrawals anyways. I know that if I need $100 to pay for something unexpected I can initiate a transfer, wait a day to two days, then I will have the cash. It’s just good to know
How to Use a High Yield Savings Account
If you are in high school and college, you may not find high yield savings account to be the best option for you unless you have long-term saving goals. Let’s say you are 16 and you want to start saving for a new computer and for college. The money for a new computer would be great in a traditional savings account. The money for your college tuition would be better off in a high yield savings account since your money has more time to grow with the higher interest and because you don’t need the money as soon as you do for your computer. However, if the minimum required to open an account or to not have any maintenance fees for a traditional savings account poses an issue for you then a high yield savings account could be a better option for you since they typically have no minimum required to open an account or any maintenance fees.
If you are a working adult, I suggest you use a high yield savings account for two things – long-term saving goals and your emergency fund. You might be saving up for a house or car in the future and the money you are saving for that would do well in a high yield savings account. We’ve talked about emergency funds before, but as a quick referrer, an emergency fund is your monthly cost of living (the amount you need to live your basic needs in life, like housing, food, transportation, and so on) for a certain amount of time. You want to have anywhere from 3 months to 6 months or even a year of emergency funds depending on your life and situation. A high yield savings account is a great place for an emergency fund since this money will only be used in dire situations. You can let your money grow in a lower-risk savings account while also having the liquidity of a traditional savings account.
When it comes to saving money, there are a lot of things to consider. Making a clear financial plan is so important to help you choose the type of savings accounts to have. You’ll hear me say that a lot in this savings unit.
Once you know what your goal is, you can make the right decision for yourself. Maybe a high yield savings account is exactly what you need. Maybe a traditional savings account is better for you right now. Or maybe you find that using both will be the best option!