What is a high-yield savings account and how can it help you? Here’s what to know
As the Federal Reserve paused its hikes on interest rates in mid-June, some high-yield savings accounts are offering interest rates over 5%.
Let’s get into what a HYSA actually is.
A high-yield savings account is a type of savings account that grows your money faster than traditional accounts, often through online-only banks without heavy overhead costs, according to NerdWallet.
The annual percentage yield — how much money you can make off your money — is much higher with these accounts.
These accounts are often recommended for emergency funds and short-term savings goals. But they may not be the best long-term investment play.
You can better keep up with inflation by investing your money, but that comes with risks. Any HYSA you consider should be insured by the Federal Deposit Insurance Corporation, which insures up to $250,000.
Why are rates high?
The highest rate you can earn right now is 5.12% at CFG Bank. That’s compared to the national average APY for savings accounts of 0.40%.
Rates are up right now because of ripple effects from the Federal Reserve. The Fed raises or lowers how much it costs to borrow money and in the last year, they’ve raised rates 10 times. Banks tend to pay more interest as a result so they can stay competitive, according to Bankrate.
How can compound interest help?
These higher rates help you the most over time thanks to compound interest.
For example: If you put in $1,000 at 5.12% and don’t contribute anything else, it’ll have grown to $1,052.53 by the end of the year. If you stuck with an interest rate of .4%, you’d gain just $4.
Let’s say you want to save $20,000 in the next 10 years. You have $500 to use as your principal, an interest rate of 5.12%, (Note: Interest rates are always changing, so this high may not last) and it compounds daily.
By the end of the 10 years, you’ll have contributed just $15,058 but have met your $20,000 savings goal thanks to the power of compounding interest.
Basically: The earlier you can start saving, the better.
And if you want to try the math yourself, check out this compound interest calculator from the U.S. Securities and Exchange Commission.
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This story was originally published June 17, 2023 at 2:00 AM with the headline "What is a high-yield savings account and how can it help you? Here’s what to know."
