As the name suggests, a high-yield savings account pays more than the average garden variety savings account. In fact, many high-yield accounts pay 10 times the national average. Whether you’re looking to build an emergency fund or save for a special occasion, now’s a good time to take advantage of higher-than-average APYs.
With financial institutions competing for your business, it didn’t take long to come up with six banks paying more than 5% on high-yield savings accounts.
Data source: Information compiled by author from bank websites.
There are two types of interest rates: Fixed and variable. A fixed interest rate remains the same and will not change, no matter what’s going on with the economy as a whole. You’re married to that rate from the day you sign on. We see these most often with things like fixed-rate mortgages and personal loans. Savings accounts, however, are variable-rate accounts.
A variable rate can change at any time and often without warning. That means the APY you sign up for may not be the rate you earn the entire time your funds remain in the account. On the bright side, having a variable rate does not necessarily mean the APY will drop. If the Federal Reserve raises the federal funds rate, your rate could also increase.
Note: The federal funds rate is the interest rate at which banks loan money to other banks. Any time you hear of the Federal Reserve raising interest rates, it’s actually the federal funds rate that was raised.
Is it safe to open an account at a bank I’ve never heard of?
Gone are the days of brick-and-mortar-only banks. Today, you have options, including online banks and financial technology (fintech) companies. Nearly all financial institutions choose to be federally insured. For example, banks are insured by the Federal Deposit Insurance Corporation (FDIC). Credit unions are insured by the National Credit Union Administration (NCUA). And fintechs offering high-yield savings accounts partner with FDIC-protected banks.
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FDIC and NCUA coverage insures accounts for up to $250,000 per share owner, per account ownership category.
In other words, a small FDIC or NCUA-insured bank or credit union offers the same protection for your money as big, established banks.
Note: To learn if your deposits are insured, contact your financial institution and ask about its coverage, or check one of these tools:
Is there any way to lock in my interest rate?
If you’re interested in locking in a rate for a specific period of time, you may want to consider opening a certificate of deposit (CD). A CD is another type of savings account, and like a checking or savings account, is FDIC or NCUA insured.
In exchange for a fixed rate, you promise the bank or credit union that you will leave your money in the account until the term expires. The term may be anywhere from three months to several years. If you withdraw the funds before the term expires, you will likely be hit with a penalty for early withdrawal.
There’s no time like the present to harness the power of compound interest to grow your savings account. It’s one of the easiest ways out there to earn passive income.
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