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What Is a High Yield Savings Account?

4/5/2021

If you have a checking account, then chances are high that you also have a savings account as well. Most people like the idea of having their money sit, earn interest, and grow over time. It doesn’t matter if you’re working class or part of the top 1%, everyone needs to save for a rainy day. However, with the national average interest rate for traditional savings accounts hovering between 0.04-0.07%, there’s no better place to park your cash than a high yield savings account. Whether you’d like to reach a short-term goal like going on a vacation at the end of the year or saving up for down payment on a home, you can hit your targets much quicker. Since these accounts may also be insured by the government, they are some of the safest investment options. But what is a high yield savings account, and how can you make the most of this type of savings account?

High Yield Savings Account Basics

Simply put, a high yield savings account is a bank account that earns depositors a significantly higher interest rate than a traditional savings account. On average, these high-interest rate savings accounts pay between 15 and 25 times the national average interest rate for traditional savings accounts. Checking and standard savings accounts can offer interest rates as low as 0.01%, which isn’t much different from stuffing money under your mattress.  In the past, people would hold these two accounts at the same bank to make quick and easy cross-transfers. However, with the introduction of online banking, it’s now easier to shop around for better deals. Cashero for example, offers a high yield savings account that offers an average return of up to 5%, which is up to 100 times higher than you’d make on a regular savings account.

The difference between these figures becomes significant and much easier to appreciate once you put them into real-world scenarios. Choosing a high yield savings account means a better return on your money. For example, if you have a $5,000 emergency fund stashed up in your traditional savings bank account with a 0.05% annual percentage yield (APY), you’ll have $5,0002.50 at the end of the year—an interest of only $2.50. If instead, you store your cash in a high yield savings account with a 5% APY, you’ll have $5,250—a difference of $247.50. The gap widens even more over time if you make monthly deposits to boost your emergency fund. One trade-off to earning higher yields is you may have to open an account in a separate institute than your daily checking account. If you were used to having both accounts at the same place, this setup might be a bit awkward at first. The benefits, however, more than cover for the inconvenience.

Why Open a High Yield Savings Account?

While opening an account may sound enticing, a high yield savings account isn’t a cure-all investment opportunity. Ideally, you should make this account part of a more comprehensive financial portfolio. Before you open an account, it’s vital to consider how a high yield savings account will complement your other investment vehicles. You may also need to evaluate some of your foreseeable liquidity needs and determine how much cash to keep in the savings account. Using our previous emergency fund example, you’d need to consider your monthly financial requirements and target up to 6 months’ worth of savings in your account.

If you’d like to save for a home down-payment, then naturally you’d rather keep your cash in an account where it’ll accumulate. Home loans typically require a 5% down payment, which may go up to 20% if you’d like to avoid private mortgage insurance. This means to buy a $150,000 home you’d need to save between $7,500 and $30,000. Saving up this amount of money can take a while, but socking funds away in a high-yield savings account can help you hit your goal faster.

Going on a vacation abroad may sound like something that only millionaires can afford. Fortunately, a high yield savings account can help you tick off a few destinations from your bucket list. Decide where you’d like to go, determine how much you need, and start making deposits to your account. For example, you may want to spend $10,000 on a trip to the Caribbean in 12 months.  You’d only need to make an initial deposit of $1,000 then save around $750 per month in a high yield savings account with a 2% APY. That number moves down even further when you save with Cashero, where you can earn up to 5% APY.

Choosing a High-Yield Savings Account

Not all high yield savings accounts are created equal, so shopping around the marketplace for the best deals is key. Slight differences in return rates, service fees, and the fine print can make a world of difference in the long-term. Here are some aspects you need to consider when choosing a high yield savings account.

Return Rate

Since the primary objective for opening a high yield savings account is to get the best returns from your reserved funds, it only makes sense to go for the best rates. When it comes to saving accounts at banks, rates are largely controlled by the Federal Reserve, so your options for competitive returns may be limited. It’s also important to consider whether the current interest rate is standard or promotional. Banks may raise their interest rates to attract new depositors, so you should verify how long the current APY will subsist. Banks also stipulate whether the interest is compounded per day, month, quarter, semiannually, or annually. More frequent compounding will significantly increase your annual yields. Compounding, however, only matters if you’re comparing yearly interest rates. With APYs, compounding will already have been taken into account.

With Cashero, you can check your accrued interest in real time, within the app, so you can watch your money work for you.

Withdrawal Options

Before you open a high yield savings account, it’s important to consider how soon and how often you may need to access your money. Some financial institutions that offer the best interest rates may not provide checking accounts or ATM cards. As such, you’ll be limited to making electronic transfer withdrawals only. Traditionally, what is known as Federal Regulation D limited the account holder to making only 6 withdrawals per month. This limit includes phone and online transfers, overdrafts, and debit transfers. Some banks may also have their own withdrawal rules. You should, therefore, dive into the details and consider the impact that such limits may have on your saving objectives. However in recent months there have been some changes to this regulation, so it’s key to do your research and see how this may affect you.

Since Cashero does not operate in the same manner as a traditional bank, we aren’t beholden to the same financial regulations. That means we don’t limit our customers to the number of withdrawals they can make over the course of the month. We believe your money belongs to you, so you should be able to use it when, and how you want to.

Minimum Balance Required

With most high yield savings accounts, you need to deposit and maintain a certain minimum balance to earn a high APY or avoid high service fees. The minimum deposit and minimum balance can range from as low as $1,000 to well over $15,000.  You therefore, have to feel comfortable with these amounts and make sure they fit well into your overall investment plan.

But with us things are different, there are no minimum balance limits with Cashero. We offer our high APY regardless of your current financial status. Because everyone deserves the chance to build a strong financial life.

Fees

As we mentioned before, some high yield savings accounts may require you to stay above a particular balance threshold to avoid high service fees. At some banks, these monthly maintenance fees may devour all your interest earnings. Withdrawals exceeding the mandated monthly limit may also attract penalties. With other banks, you don’t have to pay monthly fees or penalties. You may however, still have to pay for other charges, such as wire transfer and overdraft fees.

The Bottom Line

Whether you’d like to put some excess cash aside and watch it grow, or you want to set up an emergency fund for a rainy day, high yield savings accounts provide high returns and excellent liquidity. This type of account isn’t the most common, which is why some people may ask what a high yield savings account is. While you can receive as low as 0.01% interest with a traditional bank account, high yield savings accounts can have an APY as high as 5%, when you save with Cashero. Just make sure you do your homework and choose an option that meshes well with your overall financial goals.

Content Disclaimer:
As of the date of publication, the information contained on this page is deemed to be factually accurate for all terms of conditions, features, and fees. Changes made to Cashero’s terms of conditions, features, or fees after the publication of this content may not be accounted for.

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The Cashero App is now available for download in both the Apple App Store and Google Play Store, though not all features are currently functional. The expected launch date for full-functionality is September 2021.