In an era of economic uncertainty and fluctuating interest rates, people constantly seek ways to maximize their savings and make the most of their hard-earned money. High-yield savings accounts have emerged as a popular financial tool, offering attractive interest rates and potential benefits.
These accounts are designed to help individuals grow their savings faster as long as they have a minimum amount of money in their accounts. However, like any financial product, it has advantages and disadvantages that should be carefully considered before opening one of these high-yield savings accounts.
What is a high-yield savings account?
A high-yield savings account is a type of savings account that usually offers a higher interest rate than a traditional savings account. This means you can earn more money on the funds you save in the account. Online banks and credit unions often offer high-yield savings accounts and may have different features and requirements than traditional ones.
Some high-yield savings accounts may have minimum balance requirements or limit the monthly withdrawals you can make. It’s essential to compare different high-yield savings accounts to find one that suits your needs, so you can generate income simply by having money in your account.
Can I generate income in a high-yield savings account if I have no money in it?
The interest rate charged on a high-yield savings account is calculated on the balance in the account. The more money you have in the account, the more interest you can earn. If you have no funds in your account, there will be no balance on which the interest rate can be applied, so you will not generate income.
10 Best high-yield savings accounts 2024
More and more banks and online financial institutions are offering high-yield savings accounts. We have selected the 10 best banks with the highest Annual Percentage Yield (APY). If you are thinking about creating one of these accounts, you can be informed about the earnings you will obtain and the percentages corresponding to the APY of each company.
[wpdatatable id=375]What is an example of the APY formula?
The Annual Percentage Yield (APY) formula calculates the total amount you will earn on an investment or savings account over a year, considering compound interest. The APY formula is as follows:
APY = [1 + (r/n)] ^ n – 1
Where:
- “r“: Annual interest rate in decimals.
- “n“: Number of compounding periods in a year.
- “t“: Number of years.
To illustrate the formula, let’s assume you have a high-yield savings account with an annual interest rate of 2.5% (0.025) that compounds monthly (n = 12). Plugging these values into the APY formula, it would look like this:
APY = [1 + (0.025/12)] ^ 12 – 1
APY= (1 + 0.00208) ^ 12 – 1
APY= (1,00208^12) – 1
APY= 1.0253 – 1
APY= 0,0253 > 2,53%
How much will $10,000 make in a high-yield savings account?
You must know the bank’s annual interest rate to calculate the earnings on $10,000 in a high-yield savings account. Suppose your account’s annual interest rate (12) is 2.5%. To calculate earnings, you can use the following simplified formula:
- Earnings = Principal ($10,000) x 2.5% (Interest rate).
Thus, out of $10,000 per year, you would earn 2.5% of that amount, i.e., the earnings on the high-yield savings account would be $250 per year.
Benefits of high-yield savings accounts
The interest rates and benefits associated with high-yield savings accounts are not standardised across financial institutions and can be influenced by market conditions.
This is why it is essential to research and compare offers from different banks to identify the best option that suits one’s financial needs and goals. Taking these steps can help ensure the most favourable terms and maximise the benefits of your high-yield savings account.
Advantages
Among the advantages of high-yield savings accounts, we can mention the following:
- Higher interest rates: High-yield savings accounts are an excellent option if you want to increase your savings and grow your money faster. High-yield accounts offer significantly higher interest rates than conventional ones, which means your savings will accumulate more interest over time.
- Higher Yield: High-yield savings accounts offer a significant advantage over standard savings accounts because they offer higher interest rates, meaning more money can be earned on your savings. This benefit is beneficial if you’re saving for long-term goals.
- Easy access to funds: While high-yield savings accounts typically boast more attractive interest rates, they usually do not compromise on the accessibility of your funds. You can withdraw and transfer funds at any time, allowing you the flexibility to manage your savings as you see fit.
- Security: Like standard savings accounts, high-yield savings are often backed by FDIC protection or similar guarantees. Your savings will be protected up to certain limits if the bank experiences financial difficulties.
Disadvantages
If you wonder if can you lose money in a high-yield savings account, and if high-yield accounts are risky, the answer is yes. High-yield accounts can offer higher interest rates than traditional savings accounts, which can be attractive to investors seeking to maximise their returns. However, certain dangers and disadvantages are associated with any form of investment.
You must consider these risks and carefully evaluate your financial goals, risk tolerance and liquidity needed before opting for a high-yield account:
- Although high-yield accounts generally offer higher interest rates, there is no guarantee of a positive return because financial markets are volatile and can experience fluctuations, which could result in a loss of principal.
- Account restrictions may impact the frequency or number of withdrawals. If you need quick access to your funds, you may encounter limitations and penalties for early withdrawals.
- In some cases, these accounts may be backed by less well-known or less solid financial institutions and, therefore, less reliable. There is a potential risk that the underlying financial institution may default on its obligations, which could lead to the loss of the deposited funds.
- Even though interest rates on high-yield accounts may exceed the inflation rate, there is still a risk that inflation will outpace the account’s yield.
References
- Tamplin, True. “Annual Percentage Yield (APY) | Definition, Formula, & Example.” Finance Strategist, Finance Strategists, 8 June 2021, https://www.financestrategists.com/banking/apy/?gclid=CjwKCAjwyqWkBhBMEiwAp2yUFiM-AQtfvydnCLep632sMYbbtSukmDYefXpMdDSDzL7rhp5M2tSJdBoCoo8QAvD_BwE.
- “The 10 Best High-Yield Savings Accounts for June 2024 – Up to 5.01% APY | Fortune Recommends.” Fortune Recommends, https://fortune.com/recommends/banking/best-high-yield-savings-accounts/.