Not all savings accounts pay the same interest. Here is how to make sure your savings are earning what they should.
The Interest Rate Gap
Traditional bank savings accounts often pay interest rates near zero — 0.01 to 0.05 percent annually. At these rates, $10,000 in savings earns $1 to $5 per year. High-yield savings accounts, available through online banks and some credit unions, frequently pay 4 to 5 percent — meaning the same $10,000 earns $400 to $500 per year. The difference in interest earned over 5 years on a $10,000 balance: roughly $25 versus $2,500. This difference requires no risk and minimal effort to capture.
High-Yield Savings Account Basics
High-yield savings accounts are FDIC-insured up to $250,000 per depositor — the same federal protection as traditional bank accounts. They are offered primarily by online banks, which have lower overhead costs than brick-and-mortar institutions and pass these savings through to depositors as higher interest rates. Opening one typically takes 10 to 15 minutes and requires only basic personal information and an initial deposit.
What High-Yield Accounts Are Not For
High-yield savings accounts are not appropriate for money you need daily access to (use checking for that), money you need in more than 5 years (that money may be better in investment accounts with higher long-term growth potential), or money you cannot afford to have briefly unavailable (online bank transfers sometimes take 1 to 2 business days). Within their appropriate use case, they are clearly superior to traditional savings accounts for essentially everyone.
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