Saving money is an essential part of achieving your financial dreams, whether you’re aiming to purchase a new car, go on a dream vacation, or buy your first house. We often use savings accounts to help us achieve these goals. But not all savings accounts are created equal. Do you know what the interest rate is on yours? And do you know what you could be earning with a high-yield savings account (HYSA)?
In today’s financial landscape, it’s crucial to understand the benefits of a high-yield savings account and the disparities that exist in the banking industry. This is especially important now, as the Federal Reserve has inflated our money supply and drastically increased rates over the past few years.
Let’s dive into what a high-yield savings account is, how it can help you reach your savings goals, and the importance of scrutinizing your own bank’s interest rates. After all, who doesn’t want a few hundred extra dollars per year?
The Power of High-Yield Savings Accounts
A high-yield savings account is a financial tool that offers savers a higher interest rate compared to traditional savings accounts. These accounts provide a safe and secure place to park your money while earning a more competitive interest rate. This, in turn, accelerates the growth of your savings, making it easier to reach your financial goals.
These accounts are largely no-risk, meaning your account balance won’t drop if the stock market takes a hit. But a HYSA is not a brokerage account.
With a brokerage, the account holder picks securities on the stock exchange. Over time, the investments tend to go up, but they could go down for a time, too. But with high-yield savings accounts, you earn interest on your balance without that risk of losing your money.
While savings accounts don’t have the same rates of return that securities like index funds and mutual funds do, each have their place. Savings is for shorter-term goals, while investments are for long-term goals like retirement.
Additionally, high-yield savings accounts will generally be at FDIC-insured institutions. Meaning if the bank fails, like Silicon Valley Bank did, the FDIC will cover each depositor up to $250,000 worth of deposits.
Types of Savings Goals for Your HYSA
High-yield savings accounts are great vehicles for individuals who have certain savings goals in mind.
Here are some examples of savings goals that high-yield savings accounts are optimal for:
- Emergency fund: An emergency fund needs to be liquid and accessible. But it also must increase as your life’s expenses increase, and as inflation erodes the value of our currency. The HYSA helps you do both.
- Car Purchase: Saving for a new car is easier with a high-yield savings account. The higher interest rate means your money grows faster, requiring you to contribute less over time to meet your down payment or purchase price goal.
- Vacations: Dream vacations often come with hefty price tags. A high-yield savings account can make saving for your dream getaway more attainable by increasing the interest on your savings.
- House Down Payment: For those aiming to buy a house, a high-yield savings account can be a game-changer. It allows you to accumulate a more substantial down payment. This reduces the amount you need to borrow and could potentially improve your mortgage terms.
The Dark Side of Many Banks’ “High-Yield Savings Accounts“
While the HYSA offers substantial benefits, not all banks and credit unions genuinely deliver on their promises of higher interest rates. Many financial institutions still offer paltry rates, often below .1%.
Some advertise high rates, but then have astronomical balance tiers to earn those rates. (Think over $50,000 or more).
To illustrate the difference between the HYSA rate and the pitiful rate, consider the following example.
Let’s say you deposit $10,000 into a high-yield savings with a 4% interest rate (a common rate in 2023). After one year, you would have $10,400. That’s $400 in free money just for letting it sit in a particular bank’s HYSA.
On the other hand, if you deposit that same $10,000 into a traditional savings account with a meager 0.01% interest rate, you only earn $1 in interest over the same period.
That’s really not an interest rate, in my view. It’s an insult rate. The disparity is abundantly clear.
Odds are, the bigger your bank, the smaller the interest rate will be. If you’re at one of the mega banks, log in and check your APY (annual percentage yield). You may be shocked at just how small it is.
The Banking Industry’s Double Standard
The banking industry is known for charging obscenely high interest rates on credit cards, often nearing 30% these days. Meanwhile, those same banks frequently offer pitiful interest rates on customers’ savings accounts.
This practice is frustrating, given the fractional reserve banking system, where banks use our deposits to provide loans for products like home and auto loans.
While banks profit from lending out our money at significantly higher rates, they only offer a tiny fraction of those gains in interest to their customers. This is why we as consumers need to be aware of how our money is working for us at our bank (or, how it isn’t working).
Put Your Money to Work in a High-Yield Savings Account Now
In light of these disparities, it’s essential that we make informed decisions about where we save our money. Don’t settle for the status quo. Demand better from your bank. And if you can’t get a fair market interest rate, be willing to walk away and go to an institution that better appreciates its customers.
Consider the merits of alternatives, such as online banks and local credit unions. These institutions often offer more attractive interest rates on savings accounts.
The HYSA is a powerful tool for achieving your financial objectives, whether they involve savings goals like emergency funds, cars, vacations, down payments, etc. It’s time we get better from our financial institutions and have our money work harder for us.
Ready to take control of your financial freedom journey? Book a free Discovery Session with me today and start your path toward a brighter financial future.