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Expert Advice: Why Do I Need a High Yield Savings Account?

By Carla Fried

  • PUBLISHED August 01
  • |
  • 4 MINUTE READ

As one of the first places people begin to build wealth, savings accounts are the foundation of financial security. A savings account gives you the peace of mind that you’ll be able to pay for life’s unexpected expenses. In addition to serving as a rainy-day fund, savings accounts can be a smart way to set aside money for short-term and long-term goals, such as a car or home down payment.

Many people start out with a standard savings account. But these accounts typically earn a tiny amount of interest—and you can even potentially lose money over time on your deposit if you factor in inflation, which may outpace a standard savings account interest rate.

To gauge how hard your savings account is working for you, the first thing you need to know is your annual percentage yield (APY), based on the interest rate applied to your savings, and which considers the positive impact of compounding interest. By offering a higher APY, a high yield savings account can help you reach your goals faster, as the chart below shows.

A higher-than-average APY on your savings doesn’t mean you have to cut corners on other important features. A high yield savings account should provide easy access to your money through an ATM withdrawal or online transfer. And choosing a high yield savings account that is backed by the Federal Deposit Insurance Corp. (FDIC) adds an important layer of protection. You should also check to see if the account you are considering requires a minimum balance or charges a monthly fee.

The APY you earn on a savings account can change from time to time, based on what is going on in the general economy. When the Fed raises interest rates, your bank may increase the APY on its savings accounts. And when rates are falling, the APY for a savings account may also fall.

But no matter the trend in rates, a high yield savings account will typically pay you more interest than standard savings accounts—and grow your wealth faster.

This chart is titled "Savings Math: How a Higher Yield Translates to Dollars." The national average interest rate is 0.07%, while Synchrony's interest rate is 1.65%. This creates more gowth. For a $5,000 depost in one year, with the national average the value would be $5,004, but with Synchrony it would be worth $5,077. Over three years the same $5,000 would be worth $5,011 with the national average and $5,236 with Synchrony.

Carla Fried is a freelance journalist specializing in personal finance. Her work appears in the New York Times, Money magazine, Consumer Reports and CNBC.com.

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