Using High-Yield Savings Accounts to Reach Your Goals

There was a time when all savings accounts paid interest rates that could net you a nice return, and every kid had one as a means to save for their future. These days, traditional savings accounts don’t pay much interest. However, there’s still a way to keep your money safe, have access to it as needed, and earn a higher interest rate than other accounts might offer.

And that’s a high-yield savings account, which could very well offer you the perfect combination of features. But of course, there are still pros and cons involved. 

High-Yield Savings Accounts 101

As the name suggests, a high-yield savings account offers a higher rate of return than a traditional savings account. In fact, according to Investopedia, a high-yield savings account can provide an annual percentage yield (APY) of 10 to 25 times higher than the national average. 

These accounts might even offer APYs that rival long-term deposit products like certificates of deposit (CDs). The additional benefit is that a high-yield savings account gives you access to your money when you need it, whereas CDs are locked in for a set term.

Like other savings accounts and CDs, a high-yield savings account is considered a safe place to keep and grow your money. If you’re risk averse with a relatively conservative investing style, this can be a very attractive feature. And even if you like to play the stocks, a high-yield savings account is a great place to keep your emergency fund so you can increase that safety net as you invest in riskier assets.

The main drawback is that you won’t likely earn as high a return as you might with more volatile investments, because you’re trading safety for earning potential. In addition, you may be limited as to how many withdrawals you can make each month when you compare it to a checking account.

What Makes a High-Yield Savings Account Safe?

High-yield savings accounts are federally insured to protect your money. At banks, they’re insured by the Federal Deposit Insurance Corporation (FDIC), and at credit unions, they’re insured by the National Credit Union Share Insurance Fund (NCUSIF).

However, there are limits to that protection. Like many other types of accounts, high-yield savings accounts are insured for up to $250,000 per account owner, per insured bank or credit union. So having multiple accounts at the same bank — for example, a CD and a high-yield savings account — doesn’t double your coverage. But making one of them a joint account, or adding a beneficiary, does add up to another $250,000 per beneficiary in protection to that account.

High-Yield Savings Accounts vs Traditional Savings Accounts

Savings accounts, whether high-yield or not, require an initial deposit that you’ll earn compound interest on. And as you add more funds to the account, you earn interest on that money as well.

Of course, that interest will be higher with a high-yield savings account as opposed to a standard account. As a trade-off, a high-yield savings account often has a minimum amount you need to deposit when opening your account, whereas traditional savings accounts tend to have a low minimum deposit requirement, if any.

The minimum deposit for high-yield savings accounts can range from a few hundred to a few hundred thousand dollars. And if you want to earn the stated APY, you may also have to keep your daily balance at a certain minimum or deposit a specified amount each month.

A jumbo high-yield savings account requires a larger minimum deposit than other high-yield accounts — usually $100,000 or more. But typically that higher minimum also nets you an even higher interest rate.

There may also be fees associated with a high-yield savings account, like a monthly maintenance fee if you don’t keep at least the minimum required balance. These types of fees aren’t always charged on a traditional savings account, or they might be much lower.

Top Uses For a High-Yield Savings Account

High-yield savings accounts offer the best of both worlds: a higher interest rate, like a CD, but more flexible access to your money, like a standard savings account. They make a great companion strategy to either a risk-averse or risk-seeking investment strategy.

And because of their earning power, security and flexibility, you can use high-yield saving accounts to accomplish certain financial goals better than most other financial products.

Store money you’re not investing

Whether you’re temporarily holding funds between ventures, or storing them to hedge your bets against risky investments, a high-yield savings account is a great place to keep and grow your money.

Create an emergency fund

Your emergency fund needs to be accessible when you need it, so keeping that money in a CD wouldn’t make sense. And it needs to be safe, so investing it would be pretty risky. If you weigh all your options, a high-yield savings account is usually the best place for an emergency fund.

Start a college or vacation fund

If you’d like to send your child or grandchild to college, a high-yield savings account is a great way to grow those funds as the kid grows up. It’s also a good way to save for that overseas vacation you’ve always wanted to take.

Save for a home, car, or life event

If you want to upgrade your home or car, or save for a life event like a wedding or graduation, a high-yield savings account ensures a return on your money without the possibility of losing value and reducing your purchasing power.

Plan a property renovation

If you need to upgrade your home, renovate your kitchen, expand the floor plan to accommodate an aging parent or new child, or just add a pool to the backyard, you’ll need easy access to your finances. And until you’re ready to pull the trigger and make a payment, your money can earn interest.

Finance a passion

Some things are “wants” rather than “needs,” but they can still benefit from good savings strategies if they mean a lot to you. So whether you plan to buy that exotic pet you always wanted, the perfect designer handbag, or a luxury watch, your high-yield savings account can get you there faster.

The bottom line is if you’re looking for a safe, secure place to deposit your money — but you still want to be able to access it when you need it and earn a good return on it when you don’t — then a high-yield savings account checks all the boxes.