Interest rates on savings accounts have gotten more competitive in recent years, but you may not notice if you bank with an older institution that has many physical branches but few online offerings.
Online banks are leading the charge of offering higher annual percentage yields (APYs) on accounts to attract customers. Here’s why, and how you can benefit.
The rise of the HYSA
Online banks can offer higher interest rates than more traditional banks because they have fewer overhead costs, such as the cost of hiring employees at and operating a physical branch. While many traditional banks have also boosted their rates, those rates generally remain behind those at the best online banks.
While savings accounts usually come with higher interest rates than checking accounts, which often don’t offer any interest at all, those savings rates could be as low as 0.01%. Enter high-yield savings accounts (HYSAs), which are what banks and credit unions call their accounts that offer significantly more interest on savings. Some HYSAs offer 4% APY or higher.
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When it comes to banking, loyalty often doesn’t pay off. Finding a more competitive savings account can bring in hundreds of additional dollars each year. For example, storing $10,000 in a savings account with a 0.01% APY or a HYSA with a 4% APY would result in either $1 in interest for the year or $400. Add the fact that inflation chips away at our savings over time and you can see why HYSAs provide a much larger benefit over traditional savings accounts.
However, it’s important to keep in mind that interest rates are variable, meaning that banks and credit unions can change them at any time. Financial institutions tend to take direction from the Federal Reserve, so when the Fed cuts interest rates, interest rates on savings accounts are likely to come down too.
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How to take advantage of HYSAs
Financial advisors tend to recommend keeping enough money in an emergency savings account in case of the unexpected — like losing your job — to cover your expenses for three to six months. A HYSA is a good place to keep this safety net, since it lets you access your funds right away but your money continues to grow.
Retirees may want to capitalize on HYSAs by moving enough cash into them to cover one to three years of expenses, since they might need a bit more of a cash buffer due to no longer having a paycheck. And HYSAs can be the right place for anyone to keep savings for short-term goals, like a new car or vacation, since you don’t want to risk losing that money in the stock market during near-term fluctuations.
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How to assess your savings options
When you’re looking to open a new savings account, do your research as the terms and conditions may make one significantly more appealing than another. For example, some online banks offer their highest advertised APY on only a portion of a balance. To find the best HYSAs, consider the minimum opening deposits, minimum balances required to earn the advertised APY and fees.
For some people, a certificate of deposit (CD) or money market account may make more sense. CDs tend to have higher interest rates and allow you to lock that rate in for a certain time period, but you usually cannot withdraw money from that account without incurring a penalty fee. These accounts only make sense for storing money that you will not need until the end of the term, which typically range from three months to five years. Money market accounts often offer checking-like abilities, including checks and a debit card.
