A Quick Story:
My inspiration to cover this topic came from a recent conversation I had with my cousin. We were talking about personal finance and I asked him where he keeps his emergency fund. When he told me he kept it in a savings account with his primary bank, I asked him why he didn't use a high-yield savings account. He had no idea what I was talking about…
When I told him that he could be earning over $1,000 in additional interest per year, he opened an account that night and moved all his money over.
To illustrate the point, below is a simple, hypothetical breakdown of how much more you could be earning given where rates are today.
It made me realize how many other people out there don't know about this…
Let's get into it.
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Did you know banks have been robbing you…
Well, not literally, but kind of. With an average interest rate of less than 0.35%, in a period where interest rates seem to be climbing towards Everest, the average traditional bank savings account kind of feels like robbery, doesn’t it?
A quick look at the chart below says it all. While interest rates have risen dramatically across the board (think mortgages, car loans, Treasuries…), the interest rate of traditional bank savings accounts has barely moved.
So how can you participate in this higher interest rate environment?
*High Yield Savings Account enters chat*
What is it?
A High Yield Savings Account is a type of savings account that offers better-than-average rates on deposits. And today, better-than-average means 10-15x greater (that's not a typo).
Checking Account Interest Rate: 0.00%
Traditional Bank Savings Account: 0.35 - 0.50%
High Yield Savings Account: 4.00 - 5.00%
Let’s break it down.
The Pros:
The interest rate you can earn on a high-yield savings account is 10-15x what a traditional bank savings account offers. Today the average rate for a high-yield savings account is between 4-5% vs. 0.35% for a traditional bank savings account. Checking accounts do not pay interest.
High Yield Savings Accounts are FDIC insured up to $250K. This means that these accounts are risk-free up to $250K, so you don't have to worry about bank failings…
You are not taking on more risk to earn this higher rate. It's just like a traditional bank savings account. But because most firms that offer high-yield savings accounts are online-only, their overhead is lower and they can afford to pay this higher rate.
You can easily move cash into and out of these accounts electronically.
The rate you earn on these accounts fluctuates with the general interest rate environment, meaning that as rates rise the interest rate you earn should also increase. NOTE: This also means the rate you earn will fall as rates fall, too.
Limitations:
High Yield Savings Accounts do come with some limitations which, in my opinion, don’t matter, since this is meant to be an account for you to save money, and not a checking account to use for daily banking purposes.
These limitations include things like:
No ATM withdrawals
No ability to link credit cards or online shopping accounts. Again, this shouldn’t matter to you because this is meant to be a SAVINGS account, not a spending account.
To open one of these accounts, you typically need to work with an institution outside of your normal banking relationship because many won’t offer these types of accounts. This is also fine - there are plenty of reputable financial institutions that offer these accounts with FDIC insurance up to $250K.
What Should You Use It For?
Given these accounts function as savings accounts (no checking account features), they should be used for that purpose. They are perfect for things like an emergency fund or a general savings account where you plan to keep cash and won’t need to access it regularly.
Conclusion:
A High Yield Savings Account is a no-brainer. And they’ve exploded in popularity as rates have risen - just do a quick Google search and see how many articles are out there…
You earn considerably more than a standard checking or savings account, take on no additional risk, are FDIC insured, and can sleep easy knowing your cash is working harder for you.
These accounts are ideal for pools of cash you don’t plan to touch and will allow you to benefit from higher interest rates.
Below are two of the more popular options out there, which I personally use. I’ve included my personal referral links which offer an interest rate boost - up to 1.00% more - for a set period of time, usually a few months. If you’re going to open one up, you might as well use it. Disclosure: I will also earn a boost as a result of you using my referral link.
I'm here if you have questions. Go and make yourself some money :)
Wealthfront - https://www.wealthfront.com/c/affiliates/invited/AFFA-PPSS-QRPZ-G9W8
Marcus by Goldman Sachs - https://www.marcus.com/share/MIC-7QI-8BD4
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