Building your savings and keeping your spending under control is the foundation for a strong financial future. But when you invest in a low-yield savings account, you’re leaving money on the table.
While it’s important to invest in assets that can generate long-term returns like stocks, you can also boost your savings with high-yield savings accounts (HYSAs), many of which pay more than 4% annual percentage yields (APYs).
Why your bank may still be paying you almost nothing
Not all savings accounts are created equal. All allow you to keep money, and most accounts are Federal Deposit Insurance Corporation (FDIC) or National Credit Union Administration (NCUA)-insured, depending on whether you do business with a bank or credit union. However, big banks tend to have little incentive to raise their APYs, since many customers will stick with their bank even if they don’t offer the best rates. The national average savings account rate was just 0.38% APY as of May, according to the FDIC. Meanwhile, a recent study from Chime found that the average American has been with their bank for 17.6 years.
If you do some digging, you can find banks with over 4% yields on their HYSAs. Even a 2% or 3% APY will grow your wealth faster than most traditional savings accounts offer.
Ultimately, the money you keep in a low-yield savings account is free money in the bank. Financial institutions may use your deposits as part of their wider business. They can use deposits to take out loans at higher rates than they offer to customers with savings accounts.
How much money can be left behind
The difference between a 0.38% APY and a 4% APY may not seem significant after a few months, but when you compound it over many years, the gap widens quickly. If you have a $5,000 balance in an account with a 0.38% APY, you’ll earn about $19 a year. However, that same balance yields $200 if the account has a 4% APY. Similarly, a $25,000 balance yields $95 per year at 0.38% APY compared to $1,000 per year at 4% APY.
HYSAs are not set in stone. They tend to fluctuate based on when the Federal Reserve raises or lowers rates. However, a 4% APY savings account probably won’t drop to 0.38% APY anytime soon. Check out Money’s list of the best savings accounts to find accounts that offer more than what you’re currently earning.
What to check before switching savings accounts
Before committing to an account with the highest advertised yield, check whether the higher APY applies to your entire balance or if it’s limited, such as to the first $5,000 of your balance.
Yield is a major factor when choosing an account, but it is not the only one to consider. The bank account must be FDIC- or NCUA-insured and you must check the payments. The monthly maintenance fee can offset some of the HYSA benefits. It should also be easy to withdraw money from a checking account to use your money as needed.
You will usually get the highest rates with online banks as they have less overhead than traditional banks. However, you should check whether the online bank has strong customer support and whether you appreciate going to a physical branch to resolve issues that arise.
