Earn 1,500% More Interest with a High-Yield Savings Account
Are you still earning 0.23% in your checking and savings accounts?
You might be missing out on a few percentage points of interest each year. High-Yield Savings Accounts offer around 4% annual percentage yield (APY) each year, while Money-Market Funds are paying just over 4% in interest.
Consider ditching your checking and savings accounts for a higher-interest account to keep better pace with inflation with your cash reserve.
Interest-Rate Changes
One silver lining of the Federal Reserve raising interest rates recently involves higher interest rates being offered by banks and money-market funds.
With inflation still at around 6% each year, you actually have to earn this amount in interest in order to preserve your purchasing power. If you don’t, the cost of goods and services increases more quickly than the interest you are earning on your cash which is synonymous with losing money.
Most savers should have between three and six months of living expenses saved in their emergency fund or “cash reserve.”
This money should be very accessible (liquid) and not necessarily tied to the volatility of the stock market. After all, you don’t want to sell out of a declining investment just because you need cash for a broken furnace or any other unexpected expense.
If your cash reserve is still sitting in your traditional checking and/or savings accounts, it might be in your best interest to explore a high-yield savings account or money-market fund to boost your interest rate.
High-Yield Savings Accounts
The interest rate on high-yield savings accounts, which are usually offered by online banks, increased from 0.55% to over 4% in the last year.
This is over 1,500% more than the average 0.23% annual interest paid in a traditional savings account, according to the Federal Deposit Insurance Corporation (FDIC).
Hypothetical $40,000 cash reserve
If you keep $40,000 in your emergency fund, you might be earning $92 per year in interest at your traditional bank with a 0.23% interest rate.
Alternatively, you could be earning $1,600 per year on the same $40,000 cash reserve with a 4% interest rate in a high-yield savings account.
That’s nearly 17 times more interest!
Many reputable online banks—including Ally Bank, Synchrony Bank, Citi, Marcus by Goldman Sachs, CIT Bank, etc. offer high-yield savings accounts with around 4% in annual interest.
Most banks do not charge fees within these accounts and have very low (if any) minimum initial-deposit requirements.
These accounts are very liquid, and you can typically withdraw your money within a day’s notice, as compared to CDs, for example, which require a minimum holding term.
In addition, these accounts, like with your traditional checking and savings accounts, are FDIC insured.
After taking advantage of high interest-rate offerings with Series I Savings Bonds, investors may look to high-yield savings accounts if the interest rate on I Bonds decreases.
Money-Market Funds
If you have investment accounts at a custodian like TD Ameritrade, Betterment, Schwab, Fidelity, etc., you can also explore money-market funds as a very safe, high-interest bearing investment.
This will allow you to take advantage of higher interest rates without the need to open a new high-yield savings account at a potentially new bank at which you may not already have an account.
Money-market funds are ultra-safe, highly liquid, fixed-income investments offered by asset managers such as Schwab, Vanguard, Fidelity, etc.
Holding a money-market fund in your investment account is similar to holding a cash balance with the investment custodian, however, you will likely earn between 3% and 5% interest on your money-market fund.
Unlike with a high-yield savings account, you will usually need to wait just a few days to access your cash in a money-market fund, depending on your investment custodian electronic-transfers policies.
In addition, money-market funds are not FDIC insured like with high-yield savings accounts, however, most investment custodians offer similar SIPC coverage on these funds.
Do you have questions about making the most of your cash reserve? Reach out to me at Ben@coveplanning.com or schedule a free consultation call.
Sign up for Cove’s Build Your Wealth Newsletter to stay informed with the latest personal finance insights!
Ben Smith is a fee-only financial advisor and CERTIFIED FINANCIAL PLANNER™ (CFP®) Professional with offices in Milwaukee, WI, Evanston, IL and Minneapolis, MN, serving clients virtually across the country. Cove Financial Planning provides comprehensive financial planning and investment management services to individuals and families, regardless of location, with a focus on Socially Responsible Investing (SRI).
Ben acts as a fiduciary for his clients. He does not sell financial products or take commissions. Simply put, he sits on your side of the table and always works in your best interest. Learn more how we can help you Do Well While Doing Good!
Disclaimer: This article is provided for general information and illustration purposes only. Nothing contained in the material constitutes tax advice, a recommendation for purchase or sale of any security, or investment advisory services. I encourage you to consult a financial planner, accountant, and/or legal counsel for advice specific to your situation. Reproduction of this material is prohibited without written permission from Ben Smith, and all rights are reserved. Read the full Disclaimer.