Tag savings accounts

High Yield Savings Plans Rock

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I am a huge fan of high yield savings accounts, and have been using them for about ten years now. Why? Because they offer enticing yields, FDIC insurance for up to $250,000 per banking institution (make sure that the banking institution is FDIC insured), and enable people to set aside money for things like emergencies without much effort. In addition, the funds are completely liquid and accessible within a matter of days after a transfer has been initiated.

Anyone who is still holding onto high savings account balances in traditional banks is honestly doing themselves a disservice, since the national average yield in such accounts averages 0.46%. Compare this with high yield online savings accounts, some of which exceed a 5% APY (annual percentage yield). Even when percentage rates drop after the Fed rate drops, online high yield savings accounts will always trump traditional savings accounts.

I strongly believe that a high yield savings account is the best way to set aside an emergency fund, which all people should have. An emergency fund which will cover 3 to 6 months (more if you can actually put more into the fund) of fundamental expenses will serve as an insurance plan, should any unforeseen events occur which disable your usual income stream. At this point, I have enough money in my emergency fund to cover 6 months of expenses, and I still add a small amount every month to continue to grow the balance.

Can You Handle A $1,000 Emergency?

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I stumbled upon sobering news from the Bankrate Emergency Savings Report, which reported that only 44% of Americans would be able to cover a $1,000 emergency if it arose. The remaining group of Americans would do the following (according to the December 2023 Bankrate report):

“35% would borrow money, including 21% who would finance with a credit card and pay it off over time, 10% who would borrow from family or friends and 4% who would take out a personal loan.”

It turns out that over 20% of Americans have no emergency savings set aside, leaving them completely unprepared should they experience a significant financial loss such as termination of employment. Another staggering report from Bankrate is that more than one-third of Americans have more credit card debt than emergency savings. Granted, more than half of the U.S. population according to the poll has more emergency savings than credit card debt, but the mere fact that such a large portion of Americans is saddled with significant credit card debt is sobering.

If you are someone who either has no emergency savings, or an insufficient amount to cover at least 3 months of regular expenses, it would be a good idea to focus on putting even a small amount of money into a high yield savings account in order to build up your emergency fund. It’s a good idea to get into the habit of depositing money into an emergency fund at least once a month, especially if you automate it. This way, you are protecting yourself by fattening up your emergency fund on a regular basis. Make sure to steer clear of traditional bank savings accounts, since the average yield on such accounts is 0.59 percent APY.

Where To Invest Your Money Right Now

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If you have money invested in traditional bank savings accounts, you’re doing yourself a major disservice, because the average APY (Annual Percentage Yield) is currently at 0.23% according to CNET’s sister site Bankrate. In startk contrast, high yield online savings accounts from sites such as CIT Bank offer APY’s over 4% (CIT Bank’s current rate is 4.85% APY for balances of $5,000 or more). I have parked emergency funds and other savings into high yield savings accounts for about 8 years now, and would never consider putting my money into the paltry savings vehicles which traditional banks offer.

Let’s take the APY rates of 0.23% and 4.85% to provide a comparison between traditional savings accounts and high yield onling savings accounts. If $1,000 is invested in an account earning 0.23% APY, the account balance after 12 months will be $1,002.30, while $1,000 invested in an account earning 4.85% APY will have a balance after 12 months of $1,048.54. I’m sure anyone would be happier with having an additional $48 at the end of the year as opposed to $2!

Another investment alternative which actually has slightly higher yields than high yield savings accounts is a certificate of deposit (CD), but the downside is that the funds are locked up for a designated period of time. If you have money which you are willing to set aside into a CD, you might want to consider this investment vehicle. At least with a high yield savings account, you can withdraw funds rather quickly without penalty should the need arise. Some individuals who are accustomed to brick and mortar banks and traditional ATM machines won’t like this option, but I am sure that eventually, physical bank locations will go the way of the dinosaur, so it makes sense to get used to performing transactions online.

The other thing to consider is that the APY at online banks which offer high yield savings options can and does frequently fluctuate. However, accounts at such institutions are FDIC insured for up to $250,000, a comforting fact when trying to figure out how to protect one’s savings in these tumultuous financial times. At the very least, high yield savings accounts provide a means by which one’s money can keep pace with inflation.