You’ve worked hard for your money and now you want to put it to work for you. If the stock market gives you palpitations and you don’t want to tie your money up in CDs, consider a high yield savings account.
A high yield savings account, especially if you can find one without a minimum balance and no service fees, can be a great choice for those who are risk averse but want a better return than a traditional savings account offers. A high yield savings account can be especially helpful for those anticipating a large upcoming expense, such as future homebuyers, vacation planners or those who want an .
Pros
A benefit of high yield savings accounts is that you typically receive a much higher interest rate (referred to in bank lingo as APY or annual percentage yield) than you would with a traditional savings account. And these deposits are risk free. Deposits at most banks and credit unions are insured by the federal government (check that your bank or credit union has FDIC insurance), unlike investments in the stock market.
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Additionally, with a high yield savings account, you can access your money whenever you need it, whereas CDs lock your money for a set time, often 12 months to 60 months. And unlike CDs, with a high yield savings account you can deposit money as often as you wish.
Cons
Be aware that high yield savings accounts might have much lower returns than higher risk investments. Also, interest rates for high yield savings accounts are variable and could fall depending on the (though you won’t lose what you’ve deposited). Note also that some banks may restrict withdrawals to a set amount per month. So you can’t use your savings like a checking account.
If you struggle to pay your bills each month, a high yield savings account might not be the right choice for you. You may want to work with a banking specialist to review your budget and help you determine how much you can afford to save each month.
Ready to open a high yield savings account?
Your current bank might not offer the best rate, so shop around. Online banks might offer better rates than brick-and-mortar banks due to lower overhead. Along with comparing interest rates, compare any fees or restrictions imposed by each bank you’re considering.
Once you’ve chosen your bank, you’ll need to fill out an application and then fund your account. If you connect your checking account and your high yield savings account, you can transfer funds more easily and you can even set up repeating monthly transfers, so you are building your nest egg consistently.
Here is a list of several high yield savings accounts for you to consider, provided by Bankrate.
How to calculate what you can save
To plan for a short-term goal, you can use this formula to figure out how much you can earn from interest.
Interest = principal x rate x time.
For example, if you deposit $10,000 with an APY of 5% over one year, you’ll earn $500 in interest, so you’ll have $10,500 in one year.
If you make regular deposits to your high yield savings account, you’ll have even more money at the end of your term. So using our example above with an initial deposit of $10,000 and 5% rate, if you add $100 per month, at the end of one year you’ll have $11,739.50!
To use the compound savings calculator from Bankrate, click .
High yield savings accounts can be ideal for those who want to save risk free to meet their short-term savings goals. Just remember to do your homework when considering a bank, as rates are competitive.