Lower interest rates on credit cards and loans are good news for borrowers. But you may have noticed the money in your savings account isn’t earning the interest you hoped for.
With recent rate drops, you may be wondering if a high-yield savings account is worth it. High-yield savings accounts collect more cash than traditional savings accounts — but what about a CD or money market account (MMA)? Should you put money in a high-yield savings account?
High-yield savings accounts are typically the best choice. Here’s why.
Is a high yield savings account worth it?
Earnings on high-yield savings accounts are hovering at about 1% APY. The average interest rate in September 2020 on standard savings accounts is just 0.05% for balances below $100,000, as reported by the Federal Deposit Insurance Corporation (FDIC).
Despite the recent rate drop, high-yield savings accounts are still a safe option to grow your money. They are FDIC-insured or NCUA (National Credit Union Administration)-backed for deposits up to the allowable limit at FDIC-member banks.
According to Credible, some brick and mortar bank branches offer high-yield savings accounts but most are only available from online banks.
High-yield savings accounts are often a better choice than a CD or MMA for a few reasons:
- They offer a higher APY than traditional savings and some MMAs
- You can access your money up to six times per month (unlike a CD)
- You don’t have to maintain a minimum account balance like with an MMA
- You won’t pay monthly maintenance fees or early withdrawal penalties
You can find the best high-yield savings account offers via Credible. Credible can tell you each financial institution’s minimum account balance requirement, APY and whether an account is available in-person, online-only, or both.
High-yield savings vs. CDs vs. money market accounts
High-yield savings accounts, CDs, and MMAs each have advantages and drawbacks. Here’s everything you need to know about each savings account option.
What is a high-yield savings account?
High-yield savings accounts pay you higher interest or APY on your deposits. They function much the same as a traditional savings account, but because of compounding interest and a higher APY, your money grows faster.
For instance, if you deposit $10,000 in a savings account at the national APY of .05%, you would earn just $5 in one year. However, if you instead put that same $10,000 in a high-yield savings account that earns 2%, you’d make $200.
One of the biggest drawbacks is the limitation of six withdrawals or transfers per month. Anything over six, and you’ll pay a fee and risk having your account closed. However, due to the coronavirus pandemic, the Federal Reserve Board has temporarily suspended this rule. You can now make an unlimited number of transfers or withdrawals without being charged fees.
If you’re looking to save even more cash, then opening up a high-yield savings account is a good bet. Let high yield savings accounts do the work for you.
Pros of high-yield savings accounts:
- Higher APY than traditional savings accounts
- FDIC-insured
- Up to six withdrawals or transfers per month
- Compounding interest
Cons of high-yield savings accounts:
- Rates can go up or down and are determined by the federal funds rate
- Six withdrawals or transfers per month without penalty
What is a CD?
A CD, certificate of deposit, is a lump sum you deposit into a bank or credit union that stays in your account, untouched, until it reaches maturity. A CD pays higher interest rates than many savings or money market accounts, they offer a guaranteed rate of return, and CDs are a lower-risk investment than stocks or bonds. Unlike high-yield savings accounts that allow you to make additional deposits or up to six withdrawals per month, if you withdraw money from your CD before the pre-arranged date, you’ll likely face a penalty.
Pros of CDs:
- Higher APY than savings accounts
- Banks offer many terms to choose from
- Rates are fixed at the time of deposit
- FDIC-insured
Cons of CDs:
- Money remains untouched for an agreed-upon time
- Early withdrawal penalty in most instances
What is a money market account?
MMAs generally pay higher interest rates than traditional savings accounts. They also often include a debit card and check-writing privileges. They are a bit less flexible than a regular checking account and require you to deposit a certain amount of money to open your account as well as maintain a minimum balance. Like high-yield savings accounts, MMAs are insured by the FDIC.
Pros of a money market account:
- Competitive interest rates if you maintain a high minimum balance
- FDIC insured
- Checking writing and debit card privileges
- Easy access to your money
Cons of a money market account:
- Limited to six transactions per month
- Monthly maintenance fees
- You must maintain a minimum balance
- Interest rates can be low unless you maintain a high balance
How does interest work on a high yield savings account?
High-yield savings accounts are closely tied to the benchmark rate or federal funds rate, set by the Federal Open Market Committee (FOMC). The federal funds rate is the interest rate that banks and credit unions use when borrowing and lending balances to other banks and credit unions overnight.
High-yield savings account rates go down when the Federal Reserve lowers the federal funds rate. When the Federal Reserve increases rates at a future date — which they will likely do — high-yield savings account rates should increase also.
Compound Interest
High-yield savings accounts compound interest. That means you’re not only earning interest on the principal balance but also on the interest you’ve already earned over a certain length of time, usually monthly or quarterly. Over time, the increase in earnings can add up, even when interest rates are at their lowest.