Making the switch to a high-yield savings account is one of the easiest ways to grow your savings. Not only can you earn a higher interest rate, but you can better protect your future purchasing power too.
A few years ago, I never put much thought into my savings account. I thought simply having one, and one that had some money in it, was a financially responsible move.
In fact, before I went on my year-long trip backpacking around Australia, the only consideration I gave my savings account was to have enough for 15 months of student loan payments to be auto-deducted. All I worried about was having enough for those payments, I wasn't concerned about the interest that was being earned, or the service fees being charged.
My savings account was at the same bank as my checking, and it earned a whopping 0.01% annually. If I went under $300 I would be charged a $5 monthly service fee. This is quite typical for traditional banks.
Seeing the pennies (and sometimes just a single penny) my bank credited my account monthly felt more offensive than anything else.
And when the time came and my savings account went below $300, seeing that $5 service fee really hurt. It's like a kick in the ribs from your bank when you're already down. Yes, I know I’m broke, do you really need that $5 too?!
At the time I didn't realize I was leaving money on the table and that there were better options out there.
A couple years ago, I found out what a high-yield savings account was.
A high-yield savings account gives you a much better interest rate than traditional banks, and currently you can find institutions offering over 2% annually, often with no account minimums or service fees. A lot of these banks are only online, which means they have a lower overhead cost when it comes to operating, which in turn, means better rates are available for their customers.
Now, a high-yield savings account is something I recommend to everyone. Whether it's where you keep your emergency fund, or where you keep your savings for a large goal, like a down payment for a home or money earmarked for a special trip.
If you can earn more on your money that is just sitting there, why wouldn't you?
Especially if you plan on growing your savings account over a period of years, or plan on leaving a lot of cash there indefinitely as an emergency fund. We might feel safe and secure when we have a significant savings account, but when that savings account is earning less than a percent annually, it's actually not doing you many favors in terms of inflation.
Inflation is when the cost of living increases, and it is normally so subtle that we hardly notice it, but inflation actually increases 2-3% a year on average. This means you need more dollars today than you did 10 years ago to buy the same goods, and you will need even more to buy those same goods 10 years in the future.
If your cost of living is increasing consistently, and your savings account isn't keeping up with inflation, you are actually eroding your future purchasing power.
Protecting the value of your money is crucial, especially if the funds are going to be in your savings account for a long time. You worked hard to earn, and save your money! This is why looking for a savings account that provides a higher interest rate is so important.
The two high-yield savers I have are with Synchrony (currently 2.15% APY) and Ally (recently dropped from 2.1 to 1.9% APY), and opening them online took less than 10 minutes. *I'm not affiliated with either company, just recommending from personal experience. I also can't guarantee any rates, they might be different depending on when you read this!
Is it worth it? Uh, yeah.
Let's say you have $10,000 saved, and you contribute $100 each month for 10 years.
At the bank with 0.01% APY, you end up with...
$22,015, with $15.96 being the amount you earned in interest.
But if you were earning 2.15% APY instead?
You end up with $25,730, with $3,730 in earned interest.
THREE THOUSAND SEVEN HUNDRED AND THIRTY DOLLARS.
In this scenario of saving $100 a month, that extra $3,730 in interest in the high-yield account is equal to more than 37 months of saving. That’s 3 years and one month longer that you would have to save in in the account earning 0.01% in order to reach $25,000 in your account.
Earning a better interest rate isn’t just about keeping up with inflation, it’s about maximizing your money to reach your goals sooner.
And there are even places out there offering more than 2.15%
So, if you are still in the 0.01% club, go do yourself a favor and research a better place for your cash. And remember, compounding interest is not known for rewarding those who procrastinate, so the sooner you make the switch, the better your accounts will look.
Remember, you and your money are worth more than 0.01%!