Why You Should Invest in Bank Accounts with High-Interest Rates
Wednesday, Apr 5 2023
If you’re looking to grow your savings, a high-yield account could be ideal for storing your money while also earning interest safely. Whether building an emergency fund, saving for a vacation, wedding, or another item, it can help you reach your financial goals. These accounts typically have a higher yield than traditional accounts.
Start your journey by learning the basics of a high-yield account. How do bank accounts with high-interest rates work? What features differ from other bank and credit union accounts? And which type is best for you?
What is a High-Interest Bank Account?
A high-interest account, also called a “high-yield account,” offers above-average interest rates. Meaning the more you deposit into your account, the more you earn. Aside from better returns, high-yield accounts allow your money to grow risk-free.
As you compare bank accounts, you’ll want to know:
- How much interest will you earn?
- What are the minimum balance or deposit requirements?
- Are there any fees you’ll need to pay?
- How easily can you access the money if you need it?
- What penalties are there for early withdrawals?
- Are there any tax benefits associated with the account?
Evaluating high-interest bank accounts means looking at their features and how they can help you meet your financial goals. These accounts are best used for shorter-term goals and aren’t a good fit for retirement savings.
High-interest account options to consider:
- High-Interest Checking Account. A high-yield checking account works like a standard one but offers higher interest. Like a traditional checking account, you can write checks, deposit money, and access your money for everyday transactions. Certain banks and credit unions also offer benefits like e-statements, unlimited transactions, and remote deposits.
- Money Market Accounts. Money market accounts are unusually versatile, providing the benefits and features of savings and checking accounts. Deposits are easy to make and unlimited, and you can make electronic withdrawals. Certain money market accounts offer tiered interest rates, which provide the best rates for higher balances. Some money market accounts also include a debit card and check-writing privileges.
- Certificates of Deposit. Certificates of deposits, or CDs, are savings products in which you earn interest on a lump sum of money for a designated period. When you purchase a CD, you agree to keep your cash in the account for a predetermined time. In return for the commitment, you earn interest. When the CD matures, you can withdraw your savings or roll it into a new one. CD terms typically range from 30 days to 60 months, with longer periods providing higher interest rates and withdrawal resulting in a penalty. Each bank and credit union establishes a minimum deposit required to open a CD.
Opening a high-yield account is simple. The financial institution will typically need basic information such as a Social Security Number, government identification like a driver’s license, and contact information.
Why You Should Invest in Bank Accounts with High-Interest Rates
You ultimately want to judge any investment by its return rate or how much money it makes you. You want your money to work for you. The main benefit of bank accounts with high-interest rates is you’re earning more than if your money were in a traditional account.
When considering high-yield accounts, you’ll want to understand the account’s annual percentage yield or APY. APY is your rate of return from deposits you make into the account annually. It is a formula that considers the effect of interest rates and how often it compounds to produce a more accurate projection of returns. The higher it is, the faster your money grows.
Two factors impact APY: interest rates and compounding interest.
Interest rates are categorized as simple or compound. Simple interest is “simple” to calculate. You multiply your balance by the interest rate.
Let’s say you have $2,000, and the bank or credit union offers an interest rate of 2%. Multiply $2,000 by 2%, which equals $40. If you don’t touch your money by the end of the year, your account balance will be $2,040.
Interest rates can change and are partly affected by what the Federal Reserve is doing. Generally, interest rates on accounts increase when the Fed raises the federal funds rate. But if the fed rates decrease, the opposite will happen.
If your account compounds interest, your money will grow faster. Compounding multiplies money at an accelerated rate because you’re making interest on your interest. A crucial part is understanding how frequently your interest will compound. Depending on the account, interest can be compounded daily, monthly, or annually. The more often your money compounds, the more you can earn.
Take our example from above, where you earned $40, making your new balance $2,040. Let’s say your high-interest account compounds interest annually. After the first year, your balance is still $2,040. But in the second year, your bank or credit union is applying 2% to $2,040, meaning you will earn $40.80 instead of $40.
What to Look for in a High-Yield Savings Account
Once you decide on a high-yield account, do your homework. Knowing your options will help you find an investment that’s a good fit and maximizes your earnings. Differences in interest rates and fees can impact your earnings, so you’ll want to shop for options.
Look for and compare:
- Interest Rates. High-yield accounts pay more than the national average interest rates. Given the difference between rates, the increase in earnings is significant. How much interest does the account currently pay? Is it a standard or introductory rate? Certain accounts will specify the advertised rate is only available for an initial period. You’ll also want to ask if there are minimum or maximum balance thresholds for earning the promoted rate.
- Required Initial Deposit. How much money will you need to open a high-yield account? If you’re just getting started with saving, choose a bank or credit union that allows accounts with smaller amounts of money. You’ll also want to understand how to access the cash should you need to withdraw funds.
- Minimum Balance Required. Note minimum balance requirements. How much money are you required to keep in the account? Because you’ll incur fees or invalidate your expected interest rate, you’ll want to know and be comfortable with always meeting the minimum threshold. Banks and credit unions may tie rates to your balance, and others offer the same APY across all balances.
- Fees. Fees eat away at the interest you earn. Certain financial institutions charge monthly fees but will waive them if you meet a minimum balance. Review the fee schedule to understand what the account might cost. Check if monthly maintenance fees, minimum balances, or other fees exist. If so, are there ways to avoid them? Also, what is the bank’s fee if you exceed the federally mandated limit of six-monthly withdrawals?
- Compounding Frequency. Compounding allows you to earn interest on your interest. Banks and credit unions can stipulate daily, monthly, quarterly, semiannually, or annual interest compounds. Look for banks or credit unions with frequent interest compounding. It can help your money grow and boost your returns.
Invest in a High-Interest Account with FFCU
The best high-interest accounts can help you grow your money faster and help meet your short-term goals. It offers the safety of federal insurance and higher yield. For more information on bank accounts with high-rates, contact Focus Federal Credit Union.