"When I was 24 I had a “come-to-Jesus moment” where I realized I desperately needed to get my finances together if I wanted to make it in the adult world. I had racked up a ton of credit card debt, had no budget system to speak of other than looking at my account to see if I had the funds before swiping my card (and sometimes not even that), and had absolutely zero savings. I was in dire straits, to say the least.
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So when I finally got it together (read: found and stuck to a budgeting system that works for me, paid off my credit card debt, and started building a comfortable savings), I started looking for ways I could do more with my money. I was contributing to my 401k and Roth IRA and still wanted to build my emergency fund before I thought about investing. That’s when I stumbled upon the easiest way to add money to your liquid (i.e. cash) savings account without even trying: a high-yield savings account.
Below, I’m breaking down everything you need to know about high-yield savings accounts so you can decide if opening one is the right move for you. Spoiler alert: the expert I tapped for additional insight believes EVERYONE should have one.
What is a High-Yield Savings Account?
You probably already have a savings account tied to your checking account, so when I say you need a high-yield savings account, I understand if you’re a bit confused. The primary difference between a savings account offered by say, Chase or Bank of America (or whatever institution you bank at), and a high-yield savings account is the amount of interest these accounts earn.
For example, a regular Chase savings account yields a 0.01% APY (the amount of money Chase gives back to you for keeping your savings account with them), but a high-yield savings account can return between 3-5% every year (note: these rates change based on the federal reserve’s interest rates, but are always significantly higher than a standard savings account). If you had $10,000 in your Chase savings account, you’d get back $1 for the year, but with a high-yield CIT Bank account (which has a 4.75% APY at the time of writing) you’d get $475 back. That is a 47,400% increase in earnings you don’t even have to lift a finger for.
What are the Benefits of a High-Yield Savings Account?
By definition, a high-yield savings account is going to earn you more money than a standard savings account will. That alone earns them a giant check mark in the pros column when deciding what type of account is right for you. Per Allocca, “With a high-yield account, you earn more interest on the savings you already have compared to a traditional savings account. If you have short-term cash reserves for an emergency fund or other saving goal, a high-yield account is a more efficient choice.”
Additionally, Allocca calls high-yield savings accounts “inconvenient in a good way” because they force you to actually think about putting money into your savings. “This forces you to be intentional about moving money into it and taking money out of it,” says Allocca. Transferring money between your accounts isn’t as easy as pressing a few buttons in your Chase app (which makes it all too easy to dip into your savings and hold yourself back from your goals). Instead, your savings account will be slightly more inconvenient to access, tricking your brain into thinking that money is not for spending… until you reach the goal you’re saving for, that is.
Are There Any Risks to a High-Yield Savings Account?
When I asked Allocca if there were any cons to choosing a high-yield savings account over a standard one, she really couldn’t think of any. “The only one that comes to mind is that there are transfer limits – most accounts only allow you to transfer money up to 6 times each month so you just need to be cognizant of that,” says Allocca. If you ask me, all this does is tie back to what Allocca said about being intentional with your savings. And that’s never going to be a con in my book.
High-yield savings accounts seem like a cheat code (and yet another thing we should have been taught about in school), but there really are very few, if any, downsides to having your cash savings in one. These accounts are all federally insured up to $250,000, which means in the unlikely event your chosen bank fails, your money is safe.
How To Make The Most of Your High-Yield Savings Account
Once you’ve decided to move your savings into your high-yield savings account of choice (I rely on Nerd Wallet to help me with such decisions), you might be wondering what you do next. It’s as simple as consistently transferring the money you are already saving (or want to start saving) into your high-yield account. My husband and I have automated transfers set up so that each month money goes into our account without us having to think too much about it.
Once you’ve set up your account and started saving, it’s time to define your goals and start working toward them. Allocca and I both use Ally for our high-yield accounts and love the different “buckets” they allow you to put your savings into. These buckets allow you to work towards several different goals at once. My buckets change depending on my current goals, but there’s always an emergency fund at minimum. Back when we were planning our honeymoon, my husband and I had a “Honeymoon” bucket that we used to set aside money specifically for our trip. Now, we have a “Home Improvement” fund as we save for various projects around our house.
When it comes to setting your own goals I recommend taking a good hard look at your finances and identifying what you need to tackle first. Back when I was 25, I started small by simply building an emergency fund I could fall back on should the worst happen (car problems, job loss, etc.) and then started saving for other things once I was comfortable with that amount (like a European vacation, a down payment on a new car, that expensive purse I’d been eyeing… you get the idea).
When it comes down to it, everyone’s goals and financial situation are different, but the one thing none of us should be doing is leaving money on the table. With a high-yield savings account you’ll reach your goals that much faster thanks to the extra, basically free money in your account.