If you already have a checking account or savings account with a brick-and-mortar bank, you may not think that opening a high-yield savings account is worth the effort. But opening a new account can pay off in three big ways:
1. You’ll get the best savings account interest rates
When you stash your money in a savings account, you expect it to grow over time. But you might be surprised if you use a regular savings account. According to the Federal Deposit Insurance Corporation (FDIC), the national average annual percentage yield (APY) is just 0.21%.¹
Know the difference: APY on a bank account refers to the interest you’ll earn while APR on a credit card refers to the interest your pay.
Imagine you save $1,000 in a savings account with that average interest rate. After five years, your account would increase to $1,010.55. That’s right: you’d only get $10.55 in interest over five years.
High-yield savings accounts, on the other hand, offer a much higher rate of return. For example, if you opened a high-yield savings account with a 2.00% interest rate and deposit $1,000, your balance would grow to $1,105.08 over five years. With the higher rate, you’d earn more than $105 purely from interest!
These calculations assume you don’t make additional deposits into your account.
| Savings Account | High-Yield Savings Account | |
|---|---|---|
| Interest Rate | 0.21% | 2.00% |
| Initial Deposit | $1,000 | $1,000 |
| Term | 5 years | 5 years |
| End Balance | $1,010.55 | $1,105.08 |
| Total Interest | $10.55 | $105.08 |
2. You’ll build better savings habits
Why open a high-yield savings account? The potential to earn higher interest may be the motivation you need to start regularly putting money into savings.
And having money set aside is important. Life has a habit of sneaking up on you at the worst times — whether your car gets a flat tire on your way home or your dog gobbles your socks and needs surgery. Unfortunately, many of us are not prepared for these emergencies when they happen.
According to the Federal Reserve, 32% of Americans wouldn’t be able to pay for a $400 emergency with savings.2 Instead, they’d have to borrow money or use a credit card, or they wouldn’t be able to cover the cost at all.
Opening a new high-yield savings account and setting up automatic contributions can help you cover these emergencies. Even if you only deposit a few dollars each week, you can start building a safety net that you can rely on when times are bad.
3. You’ll reach your goals faster
What’s the problem with only having a checking account or stashing cash in an envelope under your mattress?
The money is too accessible. If a sale pops up or a new must-have phone launches, you may be tempted to spend outside your budget. But thanks to federal regulations, you can only make six “convenient” withdrawals from a savings account per month. This limit makes it more challenging to reach into your savings when you want to splurge.
A regular savings account may help you stay focused on your goals, but you’re not doing all you can to maximize your savings. Sure, you’ll earn interest with a basic account, but growth will be slow.
A high-yield savings account helps you reach your goals faster – whether you want to save for an emergency fund (go you!), splurge on a European vacation, or put a down payment on a house.
